What is Regulation A+ and how does it apply to crowdfunding for real estate?

Regulation_A+

Crowdfunding for real estate equities is on the rise. According to Ian Formigle, Chief Investment Officer at the CrowdStreet real estate crowdfunding site, the volume of the deal has declined by 70% due to the pandemic since mid-March 2020; however, investor demand for such deals has increased by 50%. On the numerous crowdfunding sites, there are an estimated 330,000 investors, and that number will only expand into the future.

Many of these crowdfunding sites rely on a 2016 Jumpstart Our Business Startups (JOBS) Act regulation titled Regulation A (or Reg A+), which democratizes access for smaller retail investors and non-accredited investors to such types of deals. Where before most of these larger commercial real estate deals were only open to private equity firms and family offices, now they are being sold to people like you and me on these equity crowdfunding platforms.

Here’s an outline of the JOBS Act’s Regulation A+, the pros and cons of this crowdfunding bill, and how real estate investors will want to get on with the action.

What is Regulation A (A+ Regulation)?

‘Regulation A is a crowdfunding exemption from registration for public offerings. Regulation A has two offering levels: Tier 1 for offerings up to $ 20 million over a 12-month period; and Tier 2 for offerings up to $ 50 million over a 12-month period. Companies may choose to proceed under Tier 1 or Tier 2 requirements for offerings up to $ 20 million.’

In short, Regulation A+ reflects an expansion of the JOBS Act of 2012. Title IV was introduced in 2015, also known as Regulation A+, which offers an exception for firms to sell securities to accredited and non-accredited investors. Whereas previously you had to be an approved investor to take part in these types of deals, it is now open to all. That is why many terms a “mini IPO” of Regulation A+.

Going through an IPO and offering a security of equity as a public company needs a number of reporting and regulatory barriers to contend with. Regardless of this investment constraint, the provision of a Regulation A+ is something businesses make better use of.

Typically speaking, if you plan to raise more than $20 million and want to sell the opportunity around the U.S., the best choice is a Tier 2 bid. Whereas, if you have a large presence in the state and just expect that you need to collect locally, then Tier 1 is better because it has less burdensome reporting standards.

Here are some statistics of Regulation A+, directly from the SEC 2020 report, entitled Regulation A Lookback Report and Limit Review Analysis:

Offers Closed and Ongoing:

  • As of December 2019, 183 issuers have earned $2.446 billion.
  • On average $13.4 million for each bid.
  • It includes Tier 1 $230 million, and Tier 2 offers of $2.216 billion.

Offerings Tried, Not Closed:

  • Searched for $9.095 billion through 382 eligible offerings.
  • Total $23.8 million for each bid.
  • It involves looking for $759 million across 105 qualified Tier 1 offers and finding $8,336 billion across 277 qualified Tier 2 offerings.
What is Regulation A+ and how does it apply to crowdfunding for real estate?
SourceImage: The SEC

As you can see, offerings in Tier 2 are far more common than those in Tier 1.

Directives for Action A +

“Regulation A+ regulations established two-tiered deals, each with slightly different requirements. “Tier 1” deals may not exceed $20 million over a twelve-month period and “Tier 2” offers may not exceed $50 million over a twelve-month period.

-SEC

In a 12-month period, issuers of a Regulation A+ offer are permitted to make public offers of up to $ 50 million in equity. An Issuer can also make general solicitations and advertising to both accredited and non-accredited investors. There is an approval procedure, and before any application is made, the SEC must approve an issuer.

Testing the waters: According to the SEC guidelines, an issuer may use various marketing materials to “check the waters” to ensure that there is ample interest in the investment offering before officially filing for an exemption from Regulation A +. That said, there are clear rules relating to this clause and during this process you can not receive any funds. It ‘s critical that you consult your member of the legal team on these kinds of issues.

Timeframe for regulation A +

The time frame around a Regulation A+ proposal can vary , but in general, here’s the cycle from start to finish:

  1. Additional process of initial “Air Monitoring.”
  2. Draft offering statement (DOS) to be sent to SEC for approval.
  3. Approval and modifications as needed for filing of notices.
  4. Regulation Given for certification.
  5. Beginning of offering under Regulation A (solicitation and ads permitted).
  6. Total Fundraising.
  7. Continuous Tier 1 or 2 reporting criteria following positive boost.
What is Regulation A+ and how does it apply to crowdfunding for real estate?
Source: SEC-SEC

Class 1 and 2 Reg A +

Regulation A+, as you know, has two levels and critical differences exist between them.

Tier 1 bid: You can sell up to $ 20 million in equity over 12 months, but the Tier 1 issuer must pass a state-coordinated financial review. Reporting and regulatory provisions still remain ongoing. Tier 1 issuers must request an exit report (Form 1-Z19) on completion of or termination of an bid. Tier 1 issuers must also receive state-by – state approval in the States in which they sell. Usually a state securities law applies to a Tier 1 bid.

Tier 2 offering: You can set up $50 million in equity over 12 months, but the conditions for a Tier 2 issuer are up-front and on-going audit and reporting. However, there are limitations to how much money non-accredited investors can bring into the security: more than 10 percent of the annual income of the investor, or net worth, each year.

There are also audited financial standards and ongoing reporting required for an offering under Regulation A+ Tier 2. This tier also contains a Blue Sky Laws Preemption. This eliminates an issuer ‘s obligation to register in each State in which they sell the security.

There’s the misconception that if you’re investing $20 million or less, you ought to meet Tier 1 requirements for the deal. That’s not exactly the case. You can be below the $20 million mark, and still meet Tier 2 rules, a common choice given this option’s Blue Sky Law preemption. While the ongoing monitoring and auditing criteria for Tier 2 are more rigorous, the preemption of the Blue Sky Laws makes the approval process simpler during the initial phases.

The starting line is

Real estate developers and investors will utilize online equity crowdfunding platforms to raise capital for ventures and investments under the new Regulation A+ guidelines. There are variations about which Tier is selected and how much you can raise β€” it has been proposed that a transaction should be worth at least $4 million to go that path β€” but ultimately, Regulation A+ can be a unique way for real estate developers to raise money.

Considering the technicality of the issuance and procedure of a Regulation A+, it is important that the legal team be involved early and frequently to ensure that you proceed correctly.

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