On June 19, 2015, real estate developers have a new avenue for raising funds. They no longer have to knock on banks doors and pay interest and provide personal guarantees, sign commercial documents pledging their homes, real estate or their business equipment, comply with Regulation D and Rule 506, or use their own finances. They can issue stock or partnership interests directly to the public without every investor having to be “accredited.”
The JOBS Act directed the SEC to adopt rules adding a class of securities exempt from the registration requirements of the Securities Act for offerings of up to $50 million of securities within a 12-month period. In March of 2015, the SEC finally released its final rules to comply with the JOBS Act.
The new rule is commonly referred to as Regulation A+ and divides offerings into two tiers: Tier 1, for securities offerings up to $20 million; and Tier 2, for offerings up to $50 million. Tier 1 offerings are not fully exempt offerings and they still remain subject to registration under state securities laws. Therefore, Tier 2 offerings are the subject of this article.
Tier 2 issuers are required to include audited financial statements in their private placement memorandum and file annual, semiannual, and current reports with the Commission. Generally, purchasers in Tier 2 offerings must either be “accredited investors” or be subject to certain limitations on their investment. An accredited investor most commonly is a person who has a net worth in excess of $1,000,000 or income exceeding $200,000 in each of the two most recent years with a reasonable expectation of the same income level in the current year. For those individual investors who are not accredited investors, they will only be able to purchase an amount of securities that is not more than ten percent of the greater of their annual income or net worth.
The ongoing burdens for engaging in a Tier 2 offering are less burdensome than being a “public company” under the 1934 Exchange Act. The issuer will have to file electronically annual and semiannual reports and any material current reports. To stop reporting, the issuer can file a Form 1-Z exit report after completing reporting for the fiscal year in which an offering statement is qualified by the SEC, so long as there are less than 300 holders of the securities.
The issuer can terminate the offering at any time by filing a Form 1-Z exit report after completing reporting for the fiscal year in which an offering statement was qualified, so long as the securities of each class to which the offering statement relates are held of record by fewer than 300 persons and the offering and sales process is no longer being conducted.
If you or your current company are interested in developing new commercial real estate or residential communities and are not eligible for a $50 million line of credit or loan, but you are confident in your pitch to individual investors or private equity firms, this new regulation may be appropriate for you. Alternatively, there may be other private or public securities offerings that fit your needs such as Regulation D or engaging in a PIPE.