When engaging in real estate projects, “OPM” is often the mantra, which means other people’s money. This refers to leveraging capital outside of your own to achieve the objectives of your project. In many cases, if you are using OPM, there is a good chance you are selling a security. If you are selling a security, you must register that security or have an exemption from registration.
Regulation A is a relatively newer exemption, and because of the extensive reporting and other regulatory requirements, Regulation A is not a heavily used exemption for retail real estate securities offerings. However, each situation is unique, and there are real estate professionals who complete their capital stack through investments received from the Regulation A exemption. Depending upon your timeline, investor avatar, capital needed, and other variables, Regulation A could be a good exemption option for your real estate projects.
Let’s learn more about it.
What Is Regulation A?
Regulation A is an exemption that allows public offerings to go unregistered (although that does not mean there are not still regulations, filings, and other obligations) if they meet certain requirements. Under Regulation A’s two-tiered system, companies are allowed to raise up to $75 million in a 12-month period from all investor types: accredited, sophisticated, and investors that do not fall into either of those categories.
Even more, while there are certain guidelines and rules, Regulation A offerings allow for general solicitation, and there is no pre-existing relationship requirement for investors and the issuer. Because of this, Regulation A is often referred to as the baby IPO (initial public offering). However, another reason it is referred to as the baby IPO is because of the extensive administrative lift that is necessary to undertake a Regulation A offering.
While there are some initial planning duties you will perform, one of the initial items you will want to start early is a financial audit as audited financials are a requirement. Additionally, there will be numerous disclosures and other legal documents necessary. The ball really starts rolling once the issuer files its offering statement with the SEC. Once it is filed, the SEC will review the documentation and may have questions or additional information that is needed before the SEC qualifies the offering.
To be clear, when the SEC qualifies the offering, it simply means that the documentation provided meets the SEC’s minimum requirements for this type of offering. It specifically does not mean that the SEC endorses the issuer, the offering, or the project, and the issuer should ensure not to allude that that is the case.
Once the offering statement is filed, but before it is qualified, there are certain marketing activities that are allowed — however, you should use caution and ensure that you work with a professional to help you comply with the nuanced requirements. Once an offering has been qualified, the issuer should only provide written offering materials, which must include a copy of your most recent offering circular that you filed with the Commission for your offering.
Offering statements have to have certain documents (as required by Form 1-A) and any material information included along with them. Information and documents required are information about the issuing company and its principal executive officer, financial and banking documents, outstanding securities, certification of issuer’s eligibility, and information about the securities to be offered. An issuer must also declare any unregistered securities that it may have sold and other exempt offerings that it engaged in.
Regulation A Characteristics
In Tier 1, the issuer is allowed to raise up to $20 million within a 12-month period. Because Tier 1 offerings have a lower maximum investment amount, it has arguably fewer limitations and maintenance requirements. Tier 1 typically only requires an exit report at the end of the offering as opposed to annual and semi-annual reports required in Tier 2. Investors are allowed to invest as much as they like into a Tier 1 business, as there are no limitations to the investment amount, nor any limitation on the investor type.
One thing to note about a Tier 1 Regulation A offering is that it does not preempt state securities laws, which means the issuer may need to navigate the securities laws of each individual state.
In Tier 2, a company can have up to $75 million in offerings during any 12-month period. Tier 2 offerings have more restrictions and even limitations on the amount one can invest if they are not accredited investors and the securities will not be listed on a national securities exchange.
The main limitation that unaccredited investors will face is that they will be limited to a maximum investment of 10% of their income or 10% of their net worth. Tier 2 requires annual, semi-annual, and exit reports.
As the saying goes, there are many ways to skin a cat (but to be clear, we shouldn’t be skinning cats), and similarly, there are many exemptions that could be used to help you achieve your goals. If you have enough runway and time leading up to your project, and raising up to $75 million in a 12-month period from all investor types (accredited, sophisticated, and otherwise) sounds good to you, Regulation A might be an exemption worth exploring for your next undertaking.
About the Author:
Nic McGrue is a tenured professor of law and the founder of Polymath Legal PC. At Polymath Legal PC, Nic helps real estate investors lawfully raise capital allowing them to generate passive income while creating generational wealth.
The views and opinions expressed in this blog post are provided for informational purposes only and should not be construed as an offer to buy or sell any securities or to make or consider any investment or course of action.