Raising Capital Through Reg A and Reg D Offerings

Today’s challenging financial landscape means many real estate developers have had to get creative to fund new construction projects. Credit markets have tightened, lending standards generally are tougher, and bank loans might not be available—or suitable—given the rise in interest rates over the past year and a half. As a result, developers increasingly are looking for alternative financing tools to bring their projects to fruition.

In recent months, we have seen growing interest among real estate companies in raising capital through exempt offerings under Regulation A and Regulation D of the Securities Act of 1933. These regulations allow private companies to sell stock to investors without going through the time and expense of a full public offering.

While Reg A and Reg D exemptions are available to companies of all industries and sizes, they’re most frequently used within the real estate sector. In fact, real estate investment has accounted for 69 percent of all capital raised under Reg A, and one in four Reg D issuers was a non-investment-fund real estate company last year, according to congressional data.

Real estate generally is well-suited to Reg D-exempt offerings because the associated costs tend to be lower than traditional lending expenses, and unlimited capital may be raised. Additionally, in recent years REITs and residential rental programs have successfully used Reg A to source capital as a less-expensive alternative to full registration with the SEC in the wake of JOBS Act reforms.

For many developers, Reg A and Reg D offerings are an attractive alternative to traditional forms of debt and equity financing, but they are not without their legal and procedural complexities. Any offering under a Reg A or Reg D exemption would still need to be compliant under SEC regulations, including anti-fraud rules, and Reg A offerings must be approved by SEC staff. Both Reg A, Tier 2, and Reg D, Rule 506(c) resulted from the JOBS Act, allowing companies to cast a wider investor net by advertising and speaking directly to investors with no prior relationship.

Regulation D offerings

Under Regulation D, Rule 506(c), real estate companies may raise an unlimited dollar amount from verified accredited investors, including individuals with $200,000 in income ($300,000 in income with a spouse or spousal equivalent), or $1 million in net worth, or business entities with all accredited investor owners.

While these investors are not required to be pre-existing relationships nor friends and family of the real estate venture or its principals, the company must take reasonable steps to verify the investors’ accredited status from a service or the investors’ financial advisors, attorney, or accountant. The company must also consider the following:

• There are no specific business or financial informational requirements to conduct a Regulation D, 506(c) raise other than transparent disclosure of material risks of the investment. 
• Capital investment packages may be issued as equity (both common and preferred), debt, option or hybrid/units securities. The success of these structures is highly dependent on the appetite of the investor group viewing the investment and presentation of the opportunity by the commercial real estate management team.

Regulation A offerings

A real estate company making a Regulation A, Tier 2 offering of securities must file an offering statement with the SEC that includes disclosure about business operations, the price per share of the securities being offered, capitalization, dilution of the investors, management qualifications and compensation, and two years of audited financial statements. Developers can quietly test the waters of investor interest in a potential capital raise by requesting a non-public review by SEC staff or asking prospects for indications of interest. 

Under Reg A:

•  REITs are permitted to qualify securities under a template used by public company REITs to register securities in large commercial registered offerings.
• Once the offering statement is qualified by the SEC, the REIT (or non-REIT real estate business) may maintain a continuous offering for up to two years or longer at a fixed offering price, which may be increased or decreased with a review by the SEC.
• As part of a Tier 2 offering, the company is required to file annual, semiannual, and current reports that are scaled to benefit earlier stage companies and are less stringent than full SEC reporting company disclosures.

If the company wants to extend the duration of its offering for more than a year, it must file a post-qualification amendment with the SEC, as is required any time a fundamental change is made to either the offering or the business.

Given today’s high-interest-rate environment, many developers must continue to be creative in how they finance projects. Companies are highly encouraged to engage with experienced securities legal counsel during the capital-raise planning stages to evaluate their options and any pitfalls well before the preparation of offering decks or discussions with potential investors.

Rebecca G. DiStefano is a shareholder in Greenberg Traurig’s Miami office. She concentrates her practice in U.S. and cross-border capital markets, securities regulation, and corporate finance. Brett Dembrow is a member of Greenberg Traurig’s Corporate Practice in Miami. He focuses his practice on general corporate and capital markets matters.