What is Regulation A+ and how Does it Apply to Real Estate Crowdfunding?
Brad Cartier
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Real estate equity crowdfunding is on the rise. According to Ian Formigle, Chief Investment Officer at real estate crowdfunding site CrowdStreet, since mid-March 2020, deal volume has declined 70% due to the pandemic; however, investor demand for those deals increased 50%. There are an estimated 330,000 investors on the various crowdfunding platforms, and that number will only increase into the future.
Many of these real estate crowdfunding sites rely on a 2016 Jumpstart Our Business Startups (JOBS) Act regulation titled Regulation A (or Reg A+), which democratizes access to these types of deals for smaller retail investors and non-accredited investors. Where before most of these larger commercial real estate deals were available only to private equity funds and family offices, now they’re offered on these equity crowdfunding portals to people like you and me.
Here’s an overview of Regulation A+ from the JOBS Act, the pros and cons of this crowdfunding legislation, and whether real estate investors should try to get in on the action.
What is Regulation A (Reg A+)?
“Regulation A is a crowdfunding exemption from registration for public offerings. Regulation A has two offering tiers: Tier 1, for offerings of up to $20 million in a 12-month period; and Tier 2, for offerings of up to $50 million in a 12-month period. For offerings of up to $20 million, companies can elect to proceed under the requirements for either Tier 1 or Tier 2.”
—The Securities and Exchanges Commission (SEC)
In short, Regulation A+ is an evolution of the 2012 JOBS Act. In 2015, Title IV was initiated, also referred to as Regulation A+, which provides an exemption for companies to sell shares to accredited and non-accredited investors. Whereas before you needed to be an accredited investor to participate in these types of offerings, it’s now available to all. This is why many term Regulation A+ a “mini IPO.”
Going through an IPO and issuing an equity security as a public company requires dealing with a myriad of filing and regulatory hurdles. Due to this investment limitation, a Regulation A+ offering is something companies are using more.
Generally speaking, if you need to raise over $20 million and want to market the opportunity across the U.S., a Tier 2 offering is the best option. Whereas, if you have a strong state presence and only anticipate needing to raise locally, then Tier 1 is best as it carries with it fewer burdensome reporting requirements.
Here are some Regulation A+ statistics directly from the SEC’s 2020 report, titled Regulation A Lookback Study and Offering Limit Review Analysis:
Closed and Ongoing Offerings:
- As of December 2019, $2.446 billion was reported raised by 183 issuers.
- Average of $13.4 million per offering.
- This includes $230 million in Tier 1 and $2.216 billion in Tier 2 offerings.
Sought Offerings, Not Closed:
- $9.095 billion sought across 382 qualified offerings.
- Average of $23.8 million per offering.
- This includes $759 million sought across 105 qualified Tier 1 offerings and $8.336 billion sought across 277 qualified Tier 2 offerings.
Click to enlarge
ImageSource: SEC
As you can see, Tier 2 offerings are a lot more popular than Tier 1.
Regulation A+ guidelines
“Regulation A+ rules created two tiers of offerings, each with slightly different requirements.“Tier 1” offerings may not exceed $20 million in a twelve-month period and “Tier 2” offerings may not exceed $50 million in a twelve-month period.”
—SEC
Issuers of a Regulation A+ offering are allowed to make public share offerings of up to $50 million in a 12-month period. An Issuer is also allowed to conduct general solicitation and advertising to both accredited and non-accredited investors. There is an approval process, and the SEC must qualify an issuer prior to any solicitation being made.
Testing the waters: According to the SEC guidelines, an issuer is able to “test the waters” using various marketing materials to ensure there’s enough interest in the investment offering before officially filing for a Regulation A+ exemption. That said, there are specific rules associated with this clause, and you cannot accept any funds during this phase. It’s critical that you consult with your legal team member on these types of matters.
Regulation A+ timeframe
The time frame around a Regulation A+ offering can vary, but generally speaking, here’s the process from beginning to end:
- Optional initial “testing the waters” phase.
- Draft offering statement (DOS) for notice filing to SEC.
- Approval and amendments as needed for notice filing.
- Regulation A qualification granted.
- Beginning of the Regulation A offering (solicitation and advertising allowed).
- Fundraising complete.
- Ongoing reporting requirements for Tier 1 or 2 following successful raise.
Click to enlarge
Source: SEC
Tier 1 and 2 for Reg A+
As you know, Regulation A+ has two tiers and there are critical differences between each.
Tier 1 offering: You can sell up to $20 million in equity over 12 months, but the Tier 1 issuer has to pass a state-coordinated review of financials. There are also ongoing reporting and compliance requirements. Tier 1 issuers have to submit an exit report (Form 1-Z19) following a completed or terminated offer. Tier 1 issuers also need to obtain state-by-state approval in the states they are selling in. A state securities law typically applies to a Tier 1 offering.
Tier 2 offering: You can set up to $50 million in equity over 12 months, but there are up-front and ongoing audit and reporting requirements for a Tier 2 issuer. Further, there are limits placed on how much money non-accredited investors can put into the security: the greater of 10% of the investor’s annual income, or net worth, per year.
There are also audited financial requirements and ongoing reporting needed for a Regulation A+ Tier 2 offering. This tier also contains a preemption on Blue Sky Laws. This removes the requirement for an issuer to register in each state that they sell the security in.
There is the misconception that if you’re funding $20 million or below, you have to follow Tier 1 offering guidelines. That isn’t the case. You can be below the $20 million threshold and still follow Tier 2 guidelines, which is a popular choice given the Blue Sky Law preemption of this option. Although the ongoing reporting and auditing requirements for Tier 2 are more stringent, the Blue Sky Laws preemption makes it an easier approval process during the initial phases.
The bottom line
Under the current Regulation A+ guidelines, real estate developers and investors can leverage online equity crowdfunding platforms to raise capital for projects and developments. There are nuances to which Tier is chosen and how much you can raise — it has been suggested that a deal should be worth at least $4 million to go this route– but overall, Regulation A+ can be a unique capital-raising strategy for real estate investors.
Given the technicality of a Regulation A+ issuance and process, it is critical to involve your legal team early and often to ensure you are proceeding correctly.
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