Have used up your own personal Rolodex of investors for raising capital for a new deal?
This is a common problem that most real estate investors face at some point in their investment career.
Traditionally, real estate investors have used Regulation D (504, 505, and 506) to raise capital for their deals. Two common complaints of Regulation D that investors raise are the inability to advertise the offering and take in capital from unaccredited investors. JOBS Act under Title II has helped remove/reduce the obstacle surrounding advertising the offerings but the second complaint still lingers.
There is a little known Regulation that can help solve the two remaining problems. It is known as Regulation A.
Related: Simple Rules for Raising Capital
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What is REG A?
Regulation A is a security offering that bridges the gap between a private offering and a public offering. The issuer under this regulation is allowed to engage in general solicitation from both accredited and unaccredited investors for up to $5 million every 12 months (subject to increase to $50 million with JOBS Act under Regulation A+ offerings). That means an investor can publicly advertise their next investment offering through ads, billboards or whatever mean the issuer deems appropriate. The general solicitation combined with little to no qualifications required for capital investors can make this a useful capital raising tool for real estate investors.
Why REG A?
The best part of the REG A offering is that you can do what is called “testing the waters” before spending a ton of money and time completing FORM-1A. Under the “testing the waters” premise, issuer may advertise for investors prior to even filing with the SEC. This allows the issuer to gauge demand and interest for their offering before taking on the legal and accounting costs involved with filing FORM 1A. The issuer can advertise the offering but must stop short of taking money from investors until the SEC approves the offering.
Why Not REG A?
The two biggest drawbacks of Regulation A are the cost and the SEC review. Regulation A offerings are costly to complete as they are labor intensive for attorney firm (cost upwards of $50,000 to complete) and can take up to 1 year to complete due to the SEC review and comment requirement.
Any investors looking for new capital partners in the third circle of influence should consider Regulation A.
Have any of you considered using Regulation A? What are your thoughts?