By JOE GOSE, A new rule change lets private firms and investment funds widely advertise their securities offerings.
This promises to give individuals more opportunities than ever to invest in income-producing real estate. Or, depending on one’s point of view, potentially make them the target of swindlers.
The recent end to an 80-year-old ban on “general solicitation” advertising of private securities offerings lets real estate sponsors market money-raising efforts to the public via the Internet, television, newspapers, billboards and other means.
The Jumpstart Our Business Startups Act of 2012 directed the Securities and Exchange Commission to end the ban, and the change marks a significant departure from the past. It used to be that private placement issuers could only quietly offer their securities to potential investors already familiar or affiliated with the company — or hire investment banks to find buyers.
“I think we’re going to look back three years from now and say, ‘Boy, did the way we do deals change,’ ” said Darryl Steinhause, a partner in the real estate capital markets group at law firm DLA Piper. “Is it possible that it becomes the ‘Wild, Wild West’ and that the pendulum swings back because of problems? Yes, it’s possible.”
Unlike shares of Boston Properties (BXP), Simon Property Group (SPG) and other well-known real estate investment trusts, private real estate securities aren’t registered with the SEC. So the private sponsors aren’t subject to reporting regulations meant to promote transparency and safeguard investors.
The JOBS Act mandate to lift the general solicitation ban was part of Congress’ effort to promote capital-raising through “crowdfunding.”
So far the rules only let private placement issuers sell to accredited investors: generally those with single or joint income of $200,000 or $300,000 a year, respectively, over the two prior years, or net worth over $1 million excluding a primary residence. The onus is on issuers to verify that buyers are accredited.
The SEC has yet to adopt broader crowdfunding rules letting anyone invest in private offerings, which was also required by the JOBS Act.
It took the SEC several months to lift the ban, but the change has already stimulated demand on some online platforms created to connect investors with private issuers.
Many of the online crowdfunding portals feature offerings from a variety of industries. But some now are exclusively dedicated to real estate deals, including Realty Mogul and RealCrowd.
The online real estate platforms typically review offerings and sponsors to verify that they’re legitimate, and then open them to investors for a minimum $5,000 stake. If the issuer fails to raise its goal, the portals return the money to investors.