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.
Regulation A+
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.
Groundfloor
Both SEC-approved Groundfloor offerings are Tier I offerings for $1,453,000 and $545,000, respectively, in specific states for specific projects, complete with property descriptions and pictures.
Groundfloor has imposed its own investment standards on non-accredited investors: investors must have minimum annual gross income of $70,000 and a minimum net worth of $70,000, or just minimum net worth of $250,000.
Groundfloor Finance Inc.
$1,453,000 Limited Recourse Obligations (LROs) (debt)
Tier 1 offering to accredited and non-accredited investors in nine jurisdictions (all investors must have $70,000 income/net worth, or $250,000 net worth)
Form 1-A filed October 7, 2015; SEC qualification filed October 29, 2015
Audited financials
Business: web-based real estate investment platform for investors and developers
Use of Proceeds: sale (via internet platform) of 15 specific series of LROs will fund 15 specific loans to developers of 15 specific properties (each property listed and described)
Distributions: pro rata portion of any loan payments received from developer-borrower within five days of receipt
Liquidity: no secondary market
No underwriter
No Investment Company Act registration
No voting rights
Investor agreement requires investor indemnification and binding arbitration
Blue Sky: NASAA Coordinated Review Program
Legal fees: $16,000
Groundfloor Finance Inc.
$545,000 Limited Recourse Obligations (LROs) (debt)
Tier 1 offering to accredited and non-accredited investors in nine jurisdictions (all investors must have $70,000 income/net worth or $250,000 net worth)
Form 1-A filed March 23, 2015; SEC qualification filed August 31, 2015
Audited financials
Business: web-based real estate investment platform for investors and developers
Use of Proceeds: sale (via internet platform) of seven specific series of LROs will fund seven specific loans to developers of seven specific properties (each property listed and described)
Distributions: pro rata portion of any loan payments received from developer-borrower within five days of receipt
Liquidity: no secondary market
No underwriter
No Investment Company Act registration
No voting rights
Investor agreement requires investor indemnification and binding arbitration
Blue Sky: NASAA Coordinated Review Program
Legal fees: $458,000
Fundrise
Fundrise expects to be one of the first non-exchange traded REITs offered directly to investors solely over the internet, and the first available to both accredited and non-accredited investors.
Just like private real estate development, investors have very limited liquidity options. Fundrise addresses liquidity concerns by stating that it intends to complete a transaction providing liquidity to shareholders within five years from the completion of the offering.
Fundrise Real Estate Investment Trust, LLC
$50,000,000 Common Shares
Tier 2 offering to accredited and non-accredited investors
Form 1-A filed November 3, 2015; SEC qualification still pending
Audited financials
Business: originate, invest in, and manage commercial real estate investments (affiliate of web-based real estate investment platform)
Use of Proceeds: originate, acquire and structure commercial real estate loans and investments (no specific projects or investments identified)
Distributions: quarterly following first real estate investment (but at Manager’s discretion), consistent with REIT rules (funded in part by affiliate’s obligation to purchase additional common shares to support quarterly distribution payments)
Liquidity: no secondary market; quarterly redemption plan allows investors to request redemption of 25% of shares after 6 months at 5% discount (or larger discount depending on net asset value), subject to aggregate limits, but redemption request may be rejected for no reason
No underwriter
No Investment Company Act registration
Limited voting rights; no power to elect or vote on Manager
Also raising $200,000 in private placement of common shares to affiliates prior to SEC qualification
Affiliated sponsor also plans nine additional programs as real estate investment trusts for future offerings
Subscription agreement requires binding arbitration
Legal fees: $275,000
Medalist
Medalist has filed a Form 1-A that suggests a more traditional equity investment for the purpose of investing in specific income-producing properties.
Medalist Diversified REIT, Inc.
$50,000,000 Common Stock
Tier 2 offering to accredited and non-accredited investors
Form 1-A filed October 5, 2015; SEC qualification still pending
Audited financials
Business: acquire, reposition, renovate, lease and manage income-producing properties
Use of Proceeds: acquire four specific properties (each property listed and described)
Distributions: quarterly (but at board’s discretion), consistent with REIT rules
Liquidity: no secondary market (plans to become OTC listed)
Underwriter: plans to engage for best-efforts offering
No Investment Company Act registration
Voting: one vote per share
Legal fees: $225,000
