Real Estate Companies Still Favor Rule 506 Offerings | JD Supra

Real Estate Companies Still Favor Rule 506 Offerings | JD Supra

A musician seeking funding to produce a recording of Bach’s music on the accordion has caught the attention of many on a popular crowdfunding site. While the accordion is not typically associated with Bach’s music, this musician’s recording showcased the instrument’s unique qualities. However, upon further investigation, it was discovered that several accordion players have previously performed Bach’s music, making this musician’s album less innovative than initially thought.

In the world of real estate, sponsors also strive to be innovative, exploring opportunities like crowdfunding and online selling platforms. However, according to the Securities and Exchange Commission (SEC) Small Business Advocacy Office (SBAO) Annual Report, most sponsors still rely on familiar securities exemptions when selling real estate securities. The report also highlights potential limitations to future access to Rule 506(c) on online real estate securities platforms due to changes in the accredited investor decision.

The article goes on to discuss the various securities law exemptions available for real estate securities. Rule 506(b) of Regulation D, which prohibits general advertising and solicitation of investors, has been the most commonly used exemption in the past. Rule 504 allows general solicitation but imposes a dollar limit and requires compliance with state securities laws. Rule 506(c), adopted in 2013, allows public advertising but restricts sales to accredited investors. Regulation CF (Reg CF) enables equity crowdfunding but has limitations on the types of companies that can use it. Regulation A (Reg A+) provides a streamlined registration process but involves SEC review and higher costs.

The SBAO Report provides data on capital raised by small businesses, including real estate businesses. It reveals that Rule 506(b) remains the preferred choice for capital raises among small businesses, with Rule 506(c) gaining less traction. Rule 504 and Regulation CF offerings have raised smaller amounts, while Regulation A offerings have seen limited usage.

The article explores why Rule 506(b) offerings continue to dominate, citing their ability to raise unlimited funds at a reasonable cost without SEC or state review. Rule 506(c) offerings, although allowing public advertising, can only be sold to accredited investors, which may deter some investors due to the need for verification of their accredited status.

However, the number of accredited investors is increasing, and the article discusses the factors contributing to this growth. It also mentions concerns raised by the National Association of State Securities Administrators (NASAA) regarding the ability of newly accredited investors to protect their assets.

The article concludes by drawing a parallel between the Bach example and the SEC’s dilemma regarding the accredited investor definition. It suggests that the SEC’s decision on whether to tighten or expand the definition will impact the popularity of Rule 506(c) offerings and the accessibility of real estate investments to a wider range of individuals.

2 thoughts on “Real Estate Companies Still Favor Rule 506 Offerings | JD Supra

  1. In conclusion, despite the introduction of Regulation CF for equity crowdfunding, real estate companies continue to favor Rule 506 offerings due to its flexibility and ability to raise capital for a wider range of investment opportunities. This trend suggests that real estate companies value the established framework and potential benefits of Rule 506 offerings over the newer exemption of Regulation CF.

  2. In conclusion, despite the introduction of Regulation CF for equity crowdfunding, real estate companies still prefer Rule 506 offerings due to their flexibility and ability to raise capital efficiently. This trend indicates that Rule 506 offerings continue to be the preferred choice for real estate companies looking to raise funds for their projects.

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