Come June 2015 we’re likely to begin seeing the equity crowdfund promoters take to the air with the latest sexy offering. The Exchange Act of 1933 has been upgraded by the release of the new Regulation A+, boosting the previous Regulation A+. Offerors are now able to raise up to $50 million in a 12 month period, up from the previously allotted $5 million. It’s what’s being dubbed as the “mini-IPO,” replacing some of the more onerous and costly capital raising options for micro-cap companies. One sector particularly likely to reap the benefits of the new SEC ruling is the market for real estate investing.
Real Estate Crowdfunding
As one of the fastest growing areas for crowdfund investing, real estate’s rise is likely byproduct of a number of features. First, real estate offers a collateralized investment. An investment that can be securitized, like real estate, allows investors to recoup at least a portion of their investment should things go south. Second, unlike startups, obtaining a measurable return from real estate, while not entirely easy, is often considered more doable than starting, growing and eventually cash-flowing something as complex and untried as a software company.
Real estate crowdfunding, like other forms of debt/equity offerings, can get highly creative and can be used for anything from development funding to the purchase of existing cash-flowing properties. It can be used in the acquisition and/or development of both residential and commercial buildings. In the case of Regulation A+ crowdfunding, I expect offerings to range across the map from large-scale commercial development projects to growth in single family unit development and/or acquisition with a specific niche in mind.
Unlike public company offerings, Regulation A+ offerings have a bit more flexibility from a structure standpoint. For instance, all public companies must be formed as a registered C-Corp (typically in NV, DE or WY), but Reg A+ filings allow for a bit more latitude in structure and can include Limited Liability Companies (LLCs), S-Corps or C-Corps. The choice of which structure is right for a particular deal may depend on both the capital stack, the waterfall payouts, the investors themselves or the legal and/or tax implications of a non C-corp structure. In many instances, I would expect separate entities to be created as vehicles for the crowdfund campaign itself. And while the C-corp is likely to continue to be the default, we’re likely to see other structures used as well in this process.
The Rules & Regs
Nothing of true value comes freely. The costs to play vary depending on whether a company is offering Reg A+ securities according to Tier 1 or Tier 2. While Tier 2 requires a bit more scrutiny and cost, including a GAAP or PCAOB audit, it also has huge benefits over it’s lower Tier 1 counterpart for one very important reason: qualified Tier 2 Reg A+ offerings preempt the state-by-state Blue Sky requirements. That’s finance-speak for avoiding the regulatory burden of registering securities on a state-by-state basis–which can be a resource-intensive proposition. This has lead many to cry foul as Tier 1 offerings under $20 million have been pegged as a non-starter for most lower middle-market firms. In their efforts to create more liquidity for smaller business, the SEC has created an even greater barrier for the smallest among us. For more information on the full rules and regulations, the SEC website is a great resource.
In real estate, some of the Tier 1 restrictions may prevent some of the smallest firms from gaining greater access to capital. But I expect the established real estate firms to begin using Regulation A+ when the law is fully implemented in a couple of months. If done effectively and in accordance with the law, we may likely see a new wave of growth in the capital markets and likely a boom in expansion and development in stronger real estate markets.