As the CEO of a crowdfunding for real estate company, I’ve been closely following the new securities regulations, namely Title II of the JOBS Act. This piece of legislation legalizes “general solicitation”, or marketing for private securities for the first time in decades. Specifically, Title II of the JOBS Act lifts the ban on general solicitation for private securities relying on a Rule 506 exemption – excluding certain private offerings from SEC registration requirements. As a result, once the final rules becomes effective, not only will companies experience greater ease in reaching potential investors, but accredited investors also will benefit with greater exposure to investment opportunities.
Particularly for real estate crowdfunding websites, such as Realty Mogul, the new rule opening up general solicitation will result in a series of impactful changes including:
1. Marketing – Real Estate companies will not have to be so secretive about their investment offerings. In the past, they were only allowed to share information regarding a transaction with investors who they had a prior, pre-existing relationship with. Now, they will be able to share all of the deal metrics, including location, type of property and even yield projections to any investor. More meaningful and factual information about the offerings can be advertised with general solicitation, which is exactly what investors want to know.
2. Creative Advertising– Similar to being able to advertise more information about the offerings, companies can also be more creative about how to get the message to new audiences. New ways of advertising include billboards or even a skywriter directly above the property that is being purchased.
3. Added Transparency – With additional marketing comes additional transparency. Historically, the private real estate investment market was a highly fragmented market that was completely non-standard. By marketing transactions, investors will have more data and transactions to compare to one another. They will be able to see the differences across geographies, property types, and real estate companies.
Despite the benefits to general solicitation, companies must meet additional regulatory requirements when engaging in a Rule 506(c) offering. Companies relying on the Rule 506 exemption already have to file a Form D Notice of Exemption with the SEC within 15 days of a sale, but now companies raising funds through general advertising must file a Form D at least 15 days before they begin publicly advertising and amend that Form D to give notice of the end of the offering within 30 days of completion.
Lastly, it is important to note that the SEC did not change any of the requirements in regards to allowing non-accredited investors. Rule 506 exemptions remains limited to only those investors who satisfy the criteria as an accredited investor. The onus is on the companies to meet the heightened diligence requirements and verify the accredited investor status of a natural person by reviewing copies of IRS forms, for example.
Ultimately, the final rule will change the way private companies raise capital and hopefully stimulate the entrance and growth of many new real estate companies. The expectation is that once general solicitation takes effect, real estate investment companies using crowdfunding for real estate will experience a tremendous growth in their investor bases because they can eliminate the barriers to reaching those investors.