The technological revolution continues to change the real estate landscape. Crowdfunding sites, for example, have begun to exert an impact on the sources of financing for private syndications. In addition, the digitization of regulatory filings submitted for these unregistered private offerings has now made information about them much more accessible.
Since most private deals are done under the Rule 506 exemption under Regulation D of the Securities Act, there are still some limited government filings required. A recent survey of this data, following up on an earlier study by the same researchers, provides some interesting information about private capital generally and about real estate syndications in particular.
The point confirmed by these studies is the huge size of the private capital markets. Capital raised through private Reg D offerings alone is more than twice as large as the amounts raised through public equity offerings, and is about equal to the amount raised via public debt offerings. Also, Reg D offerings occur with far greater frequency than any other method; no other offering method was used even a tenth as much.
In 2012, well over $20 billion in real estate was sold through Reg D offerings; the actual amount is difficult to determine, since there is no requirement for companies to report the final sum raised and private equity firms likely report their capital raises separately. During the four-year period from 2009-2012, there were 5,617 separate Reg D offerings for real estate specifically.
Number of initial (new) offerings during the period 2009-2012 by issuer type (1)
There were 1,900 real estate-related Reg D offerings in 2012; the only more active specified industry groups were technology and health care, although nearly a quarter of issuers don’t specify an industry in their filings. The new trend toward the crowdfunding of private real estate transactions could well lift that figure a good degree higher.
Rule 506 offerings accounted for 99% of the amounts sold through Reg D, even where issuers could have claimed a Rule 504 or 505 exemption based on a small offering size. This confirms that the pre-emption of Blue Sky laws allowed under Rule 506 since the passage of the National Market Securities Improvement Act in 1996 is of great value to issuers.
Although Rule 506 allows for the participation of some non-accredited investors, they only participated in only about 14% of the offerings done in the last few years. The vast majority of investors were accredited -- persons of a certain income level or net worth. This data tends to show that the restrictions of the new Rule 506(c) offerings – limiting participants only to accredited investors if the offering has been the subject of general solicitation – will be of only limited practical significance.
The total number of investors in Reg D offerings remains small, however. A little under 50,000 investors participated in real estate transactions, and only about 235,000 investors were involved in transactions of all types -- and this number probably double-counts a lot of repeat investors. Over half of the offerings involved less than ten investors, and the median number overall was only four.
These last figures point to the opportunity over which equity crowdfunding platforms are salivating. A recent government study indicates that there could be as many as 8.5 million households with over $1 million in net worth (excluding home equity), which would qualify them as accredited investors. Crowdfunding platforms such as Realty Mogul have emphasized how crowdfunding can serve as a “democratizing” element in broadening the investor base for private offerings. From the figures provided in these recent studies, it would appear that even the accredited investor market itself is vastly underserved – and that crowdfunding platforms might well prove to be “game changers” in the private equity industry.
(1) Baugess, Scott and Ivanov, Vladimir: “Capital Raising in the U.S.: An Analysis of Unregistered Offerings Using the Regulation D Exemption, 2009-2012,” July 2013.