Regulation A+ is a potentially attractive way for real estate developers to raise up to $50 million for specific projects by selling debt or equity to the public without having to meet all of the requirements of a traditional initial public offering.
Several investment platforms for real estate development allow developers to market investment offerings to investors. At least two platforms, Fundrise and Groundfloor, have launched Regulation A+ offerings to raise capital, and the SEC has approved two of the Groundfloor offerings (a third was filed November 19). In fact, the second Groundfloor offering was approved in just 22 days from the date the offering statement was filed. Groundfloor claims to be the first real estate lending marketplace open to non-accredited investors. Fundrise claims to be the first online real estate investment available to anyone in the United States regardless of net worth. Below is a description of Regulation A+ and summaries of the types of real estate development offerings using Regulation A+ to raise capital.
Amended Regulation A, effective June 19, 2015 (Regulation A+) allows issuers to make public offerings up to $50 million in a 12-month period using general solicitation of, and advertising to, accredited and non-accredited investors. The issuer must file an offering statement and the offering circular with the SEC, which the SEC must approve (a “qualification”) before any sales can be made. Issuers are permitted to “test the waters” with potential investors to see if they are interested before filing with the SEC.
Securities sold under Regulation A+ are not restricted securities and can be freely sold by non-affiliates. Offerings over $20 million in a 12-month period (“Tier 2”) are exempt from state registration and qualification requirements. Offerings below $20 million in a 12-month period (“Tier 1”) must comply with state blue sky registration and qualification requirements unless the issuer chooses to comply with the Tier 2 requirements. All Regulation A+ offerings must disclose two years of financial statements, but the Tier 2 financial statements must be audited.
A non-accredited investor in a Tier 2 offering cannot invest more than 10% of the greater of his or her annual income or net worth. There is no investment limitation in Tier 1 offerings.
Tier 2 issuers must file current, semiannual, and annual reports that are less burdensome than (but analogous to) Exchange Act reports for public companies. But there is no requirement to provide the costly auditor’s attestation of the effectiveness of internal control over financial reporting or to comply with the costly disclosure obligations of the Exchange Act and the Sarbanes-Oxley Act.
Tier 1 issuers must file an exit report after the offering is terminated or completed. Tier 2 issuers can stop Tier 2 reporting after completing reporting for the fiscal year in which the offering was qualified if the issuer has fewer than 300 record holders and the offering is complete.