Changes In Using SEC Rule 506 For Commercial Property Investment


With lender credit to commercial property remaining shy and sluggish years after the housing bubble, it’s more important than ever to be aware of investment capital options for commercial property transaction finance.  The act of raising capital by the offering of securities for such transactions or projects is highly regulated and rightly so, but changes are afoot in key regulations and might provide ways forward for property deals that would otherwise be held up for lack of access to capital markets.

[DISCLAIMER: Remember: nothing you read at The Source is to be construed as legal advice!  Obtain experienced securities counsel before using any technique regulated hereunder.]

What is Rule 506?

Under the Securities Act of 1933, any offer to sell securities in the US must either be registered with the United States Securities and Exchange Commission (SEC) or meet certain qualifications to exempt them from such registration.  These exemptions for registration requirements are described in SEC Regulation D, or “Reg D”.  Some companies are allowed under Reg D to sell securities without having to register the offering with the SEC, which can make access to capital markets a possibility for companies not able to bear the costs of SEC registration.

A reading of the Reg D text spells out what the purpose behind the regulations are – to ensure, among other things, that offers to sell securities are limited to investors meeting certain criteria of “sophistication” and “wealth” and “accreditation”.   These and other key terms have specific meanings in the regulations and need to be very well-understood before offers of securities are made.  Further, such offerings have been historically prohibited from being “general solicitations” announced with “general advertising”.  It’s these prohibitions concerning communications and solicitations that are changing.

The JOBS Act Relaxes Regulations For The First Time In 80 Years

On April 5th, 2012, President Obama signed into law the Jumpstart Our Business Startups (JOBS) Act, which is the first relaxation in Reg D in its over eighty years as a law. In response, SEC has proposed amendments to offerings under Rule 506  that include:

To implement Section 201(a) of the JOBS Act, we are proposing to amend Rule  506 to provide that the prohibition against general solicitation contained in Rule 502(c)  shall not apply to offers and sales of securities made pursuant to Rule 506, as amended,  provided that all purchasers of the securities are accredited investors and the issuer takes  reasonable steps to verify that the purchasers are accredited investors. In addition, we are  proposing to amend Form D, which is a notice required to be filed with the Commission  by each issuer claiming a Regulation D exemption, to add a check box to indicate  whether an offering is being conducted pursuant to the proposed amendment to Rule 506 that would permit general solicitation.

Broadly speaking, private placement just got easier.  Could this relaxation of regulation open up capital markets in significant amounts? A study of SEC’s own data and that of Thompson New Issues says that in 2011, the estimated amount of capital (including both equity and debt) raised in Rule 506 offerings was $895 billion, compared to $984 billion raised in registered offerings.  The answer appears to be a qualified yes.

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21. November 2012 by Wayne Grohl
Categories: commercial lending, Credit | Tags: , , , , , , | 12 comments

Comments (12)

  1. This is great info. I have avoided numerous investments I could have done by selling stock in an LLC because of the securities license requirement. This will make us some money 😉

  2. This information could also be helpful to many residential agents out there. I’m seeing more and more small investment portfolios being created and offered by folks who have never even heard of Rule 506. While most are probably legal, we all benefit by promoting awareness of potential risks.

  3. I believe this will help to “jump start” investment in commercial real estate especially since many investors are nervous about the stock market. The big question is what a sponsor will have to do to verify that the purchasers are accredited investors.

    Most investors will NOT provide a compreshensive net worth statement or past tax returns.

    Will the SEC allow an investor’s financial advisor or accountant to provide a simple letter attesting to the “sophistication” and “wealth” of a potential investor?

  4. The JOBS act can be a significant factor in the recovery of our economy. Statistically, the vast majority of jobs are created at the small-business level, and its’ the creation of jobs that is necessary to sustain any recovery. I echo Scott Lodde’s comments that most Investors wont provide the necessary statements and prior-years tax returns to establish eligibility as “accredited investors”, many stating they simply have too many other investment options available, they dont need to provide such documentation and run any risk of identity theft problems.

  5. Even with this ‘relaxation’ there are still numerous issues that a syndicator needs to address prior to jumping on the band wagon. I believe it would behoove anyone considering syndication to take advantage of the training offered by a specialist in this arena. In today’s litigious environment, one can’t afford the risk of being found in violation of the Securities Act because they thought putting together an investment offering was no big deal.

  6. Good to see NAR has info for investment portfolios. I had previously only thought of it for residential sales.

  7. Seems to be another overly complicated method to improve CRE lending/liquidity. Maybe a more straightforward and simple approach for the mid-sized investor of portfolios would be something to assess. Liquidity is still very tight.

  8. This sounds like something that may help. Need to get legal opinion and see some deals get done. The days of syndication and the 1980’s are a faint memory.

  9. A general solicitation appears to be a great idea, especially since the screening process is still there. There is a lot of money out there waiting to be invested. It would be very difficult for a syndicator to know every investor who might have enough disposable income to satisfy Reg D’s selection criteria. Let’s get some new investors in the game.

  10. This information is most helpful.

    Time is so short that sorting through topics via blogs, emails while responding to daily demands from incoming and ongoing business becomes a juggling act. By highlighting and featuring pertinent information that impacts my profession from a reliable source is greatly appreciated.

    It is like reading a headline (getting the jist of the subject), then making a notation in my daily calendar’s to do list and carving out time reading/researching to build a knowledgebase about the pertinent topic.

    Greatly appreciated. Thanks.

  11. Great info! NAR must continue its efforts to move this forward. This would be a great workshop topic for NAR Mid-Year Meetings.

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