NEW YORK CITY-A small change in the federal securities laws contained within the Jumpstart Our Business Startups Act and for which the Securities and Exchange Commission proposed a new Rule 506(c) under Regulation D on Aug. 29, 2013 will change the way in which real estate investments are sold and financed because it allows for the nationwide advertising and sale of interests in real estate and mortgages without the need for the sponsor to register the offerings with the SEC. The Jobs Act and Rule 506(c) suggest that it does not matter whether the real estate is a security if it is only sold to accredited investors.
Previously, the sale of investments in real estate where someone else was making the decisions were considered securities and, except for limited exemptions, the sponsor would be required to go through the time and expense of a filing with the SEC and complying with the subsequent reporting requirements for public companies, which made it very difficult for investors to invest in single properties. The JOBS Act provided relief from these marketing limitations because it permits sponsors to treat the real estate interests as securities, that do not need to be registered with the SEC (other than submitting a simple Form D).
Rule 506 is a long-standing and much-used exemption that offers a safe harbor from the registration requirements of the federal Securities laws allowing issuers to sell unregistered securities to an unlimited number of "accredited investors" and a limited number of "non-accredited investors". Accredited investors are defined as having a net worth in excess of $1 million or net income above $250,000 a year for an individual or $350,000 a year for a married couple. This exemption has been used extensively in Private Placements but it prohibited the general solicitation or advertisement of securities in Rule 506 offerings. Thus, issuers needed to have some pre-existing relationship with potential purchasers before conducting a private placement, which created a significant limitation on its use.
Proposed Rule 506(c) permits the general solicitation and advertisement of a Rule 506 offering, as long as all ultimate purchasers are accredited investors. By removing the ban on general solicitations, companies do not have to rely solely on existing relationships for funding. A wider audience of investors can be reached via the Internet, seminars and other platforms. Additionally, placement agents and finders can also use Rule 506(c) to advertise securities through a diverse range of mediums. Furthermore, individuals who conduct Rule 506(c) offerings are not required to register as brokers or dealers, which further reduce the cost and complexity of the offering. Finally, although the JOBS Act eliminates the need to register these securities with the SEC, sponsors would still need to comply with the Blue Sky Laws of the various states.
Rule 506(c) will enable a sponsor or developer in one city to advertise the ability of investors to purchase interests in a property or a pool of properties in that city or across the country and the world and thereby permit investment choices other than through REITs and similar large investments.
Stuart Saft is a partner at Holland & Knight. The views expressed in this column are the author's own.
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