Commercial Investment Real Estate is the magazine of the CCIM Institute, the leading provider of commercial real estate education. CIRE covers market trends, current developments, and business strategies within the commercial real estate field.
Issue link: http://cire.epubxp.com/i/206598
506(b) have been a source of great confusion, misinterpretation, and a signifcant impediment to funding their real estate transactions. Te new Rule 506(c), which allows syndicators to advertise their real estate oferings, eliminates that obstacle and provides new opportunity for CCIMs and other commercial real estate professionals. The New Rule 506(c) Solution Under Rule 506(c), real estate syndicators can advertise to anyone as long as they only accept accredited investors in their oferings and comply with the rest of the Rule 506(c) provisions. However, there are strings attached. Issuers of Rule 506(c) oferings must demonstrate that they are "reasonably assured" that all investors are accredited. Te SEC has ofered some nonexclusive methods to verify an investor's accredited status, which include: • reviewing fled tax forms for the past two years and written assertions from the investor(s) that the income is expected to continue; • reviewing brokerage house or bank statement balances or tax assessments and third-party appraisals of real estate holdings and liabilities through an investor's credit report; • obtaining a written confrmation from a securities broker-dealer, registered investment adviser, licensed attorney, or certifed public accountant, who asserts having taken reasonable steps to verify an investor's accredited status within the past three months; and • using repeat investors: there is an exemption for investors who have previously invested with an issuer as an accredited investor. What You Need to Know • There is a new Rule 506(c) that allows you to advertise securities offerings to anyone, effective September 23, 2013, providing the issuer is "reasonably assured" that they only sell securities to accredited investors. It will be legal for you to advertise accredited-only offerings; but you should work with qualified securities counsel to ensure you understand and comply with the requirements of the new Rule 506(c) exemption. • Most of our clients tell us the bulk of their Rule 506 investors are sophisticated, and that many of them are investing via their self-directed IRAs. The original Rule 506(b), which prohibits advertising, requires demonstration of a pre-existing relationship before making offers, and allows investors to self-certify their financial qualifications, will still be the rule of choice for issuers who want to include sophisticated investors in their offerings. So for many issuers, it will be business as usual. • Despite what you may have heard, advertising of crowd funding deals that offer a return on investment is not currently legal, and no legal matching services for crowd funding deals currently exist. The SEC rule governing crowd funding is undergoing public comment and most likely will not be effective until early 2014. 40 November | December | 2013 "Bad Boy" Prohibitions Te SEC also adopted amendments to existing rules 501 and 506 to implement Section 926 of the Dodd-Frank Act, also efective September 23, 2013, to be known as Rule 506(d). Tese amendments disqualify certain convicted felons and other "bad actors" from claiming a Rule 506 exemption. Bad actors are def ned as persons who have been convicted of, or are subject to, a ceaseand-desist order, injunction, or disciplinary order issued by certain federal f nancial regulatory agencies or the Postal Service. If these events occurred before the efective date of September 23, 2013, these individuals may still operate under Rule 506, but mandatory disclosure of such disqualifying events is required. Te SEC has proposed other amendments to Rule 506(c) oferings, including requiring additional Form D flings for presale, frst sale, and closing notices of securities; fling of additional information about the issuer, marketing methods to be used, additional legends, and disclosures; and temporarily submitting written ads to the SEC prior to use. Te SEC is taking public comment on these amendments and the fnal rule could be issued by year-end. Clarifying Crowd Funding However, none of these rulings should be confused with crowd funding, which is completely unrelated to Rule 506. Crowd funding is a diferent funding scenario authorized in a separate part of the Jobs Act (Title III). Te premise is that investors will be able to invest as little as $1,000 for oferings advertised through SEC-authorized funding portals. To further confuse matters, the media and certain promoters have hijacked the term crowd funding to describe Rule 506(c) oferings conducted on the Internet. Despite Internet and news reports to the contrary, the SEC has not approved crowd funding. On October 23, 2013, the SEC met and the commissioners voted to submit for public comment the proposed rule that will authorize crowd funding. Te public comment period is 90 days. Afer that, the SEC will determine if revisions to the proposed rule are required and vote on a fnal rule. Te rule becomes efective 60 days afer it is published in the Federal Register. Crowd funding will probably become a reality during frst quarter 2014. However, according to the SEC's own website, until the fnal rules are efective, all crowd funding oferings are unlawful. While the changes authorized in the Jobs Act are exciting, many have yet to be implemented. Commercial real estate professionals involved with group investing should proceed with caution and verify information heard in the media and on the Internet through the most reliable source: www.sec.gov. Kim Lisa Taylor, Esq., is a California and Florida licensed attorney with practice areas in real estate investment and securities law. Contact her at kim@syndicationlawyers.com. Gene Trowbridge, Esq., CCIM, is a California licensed attorney, senior CCIM instructor, and author of "It's a Whole New Business," on real estate syndication. Contact him at gene@genetrowbridge.com. A version of this article previously appeared in Personal Real Estate Investor. Commercial Investment Real Estate