To raise funds for projects in all sectors of commercial real estate, syndicators continue to rely heavily on Rule 506 of Regulation D (“Reg D”) of the Securities Act. This is only natural: As a private placement exemption, Reg D offers substantial advantages. Syndicators, for example, can advertise and raise an unlimited amount of capital even as they avoid the headaches associated with both state and federal securities registration and oversight.
However, there are some restrictions here: The investors investing in the offering must be accredited—a high-net-worth individual, a bank, a savings and loan association, a preexisting business partnership with assets in excess of $5 million, etc.—as defined by Rule 501 of Reg. D.
Last year, however, congressionally mandated rule changes took effect that give syndicators the ability to leverage Tier 2 of Regulation A+ (“Reg A+”) to raise up to $50 million for new projects—and without the burdensome state oversight previously associated with predecessor “Reg A.” Moreover, the revamped exemption gives syndicators a green light to raise this capital from unaccredited investors, by definition a much larger pool.
Why the change? While the former version of the exemption (Reg A) was designed for small startups to raise some initial capital, it was limited to $5 million and sat underutilized for decades. Eager to encourage capital formation and business expansion—and cognizant of the demand for alternative investment vehicles—Congress took a second look at the clunky structure of Reg A and set about transforming it into a tool that could actually be useful for syndicators. Since the rule change took effect last spring, companies have been leveraging Reg A+ to raise millions of dollars from unaccredited investors.
Under what circumstances, then, should syndicators explore their options vis-à-vis Reg A+? And for which entities does this rule make the most sense?
First, a few basics about the final rules. Reg A+ includes two distinct tiers of offerings: Tier 1 is for offerings of securities of up to $20 million in a 12-month period, with not more than $6 million in offers by selling security-holders that are affiliates of the issuer. Tier 2 is for offerings of securities of up to $50 million in a 12-month period, with not more than $15 million in offers by selling security-holders that are affiliates of the issuer. Syndicators will likely be most interested in Tier 2 because of its higher offering cap. Moreover, Tier 2—while subject to additional disclosure and ongoing reporting requirements—provides for the preemption of state securities law registration and qualification. This is not the case for Tier 1, which remains subject to “blue sky review.”
To be sure, established real estate syndicators with solid distribution networks might have no need to reach unaccredited investors and so will likely be content to continue to rely on Reg D. However, syndicators who are newer to capital raising might be eager to tap into the opportunity represented by this alternative investment vehicle. Simply put, unaccredited investors are easier to bring in the door, and there are more of them out in the marketplace looking to invest their money. Accordingly, even a syndicator with a nice Rolodex of investors and/or broker-dealers might find it strategically useful to leverage Reg A+ just to tap into the large unaccredited market.
Reg A+, in other words, is an option quite worth exploring.