Title IV Reg A+ Reg A and Reg D IPOs and VCs Scared or Cocky?

16 Replies

There is a new way to raise money for a start up.  Reg A+.  Reg A+ is the JOBS act amended version of Reg A.  Reg A has been around as along as Reg D,  but had a $5M cap and just wasn't worth the attorney expense and regulation limitations.  They were virtually never used.  

The biggest advantage that Reg A+ has over Reg D is being open to non accredited investors,  The biggest advantage Reg D has is there no dollar limit.  There are other differences of course  reporting, resale times State Approvals, SEC pre approvals, Suitability Standards, and advertising methods.  

There is quite a bit of resistance by traditional investors to all CFing, IPOs are no different.  For IPOs it appears there is a growing rift between the old and the new.  The old VCs familiar with Reg D model looks and thinks most of the CF IPOs are quacks.  People just resist change in general, but at least now there are more choices.

Patch of Land was the first approved SEC filing of a Reg A+.

The VCs appear to be either scared of losing deals or just cocky.  What do you think?

This post is kind of all over the place.  Any seed stage investment that would correlate with a startup won't be done under Reg. A+.  The attorney fees alone would consume a sizable portion of a $500k or so seed raise.  This doesn't even account for ongoing expenses like audited financial statements and filings.  

If by startup you mean a Series B or later round I can see Reg. A+ working okay. There are some "e-REIT" structures in the industry that seem to be pretty popular of late. In general the fund constructs seem to fit better with the RIA regime and avoidance of BD registration.

Venture capitalists compete on expertise and adding value above and beyond the money they invest.  I don't think they're very concerned with crowdfunding right now.  On the venture side guidance, advisory roles, introductions to early customers, or other strategic partnership value is a big deal to the companies VCs fund.  I don't think crowdfunding will be able to replace this very well absent a broker or intermediary that will serve largely the same role the VC does.  

The general poster on BP isn't going to be using Reg. A+ for their offerings.  Reg. D, Rule 506(b) or (c) offerings will be common and some may be able to to navigate Title III if they're willing to deal with a portal intermediary for a small raise.  In general the site is filled with pretty independent folks that dislike others controlling their capital formation process and thus my prediction is that technology will largely allow active operator/sponsors to bypass the intermediaries in time.  Raising money really isn't rocket surgery if people have access to the right tools and resources.  Anyone in the real estate business for  the long haul should be working to have direct relationships with their investors absent intermediaries IMO.  

Great response  @Bryan Hancock

It is a generalized post.  Summarize quickly and get to the point.  It is not intended to be completely informative but to begin a discussion regarding VCs losing business to Crowdfunded IPOs.  

VCs are losing business to Reg A+ CF IPOs especially for Crowdfund Portal start ups.  Because of the SEC rules, regs, are so exacting, as well as portal, and  I agree they aren't to concerned, but I think that's more out of arrogance. 

I am aware of the diverse expertise range in BP.  They really are more an issuer or investor of an RECF offering.

Reg A+ Tier I is a great option for a mid sized developer/builder capital raise.

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Thanks for the info @Thi Huyhn , there's plenty of discussion about crowdfunding for real estate here on bigger pockets, but most are talking about Title III of the JOBS Act.

Can you please explain to us how Reg A+ and Reg D differ from Title III and which would be best for real estate investing? 

You would have to define what "real estate investing" you are interested.

A generalized answer @Ivan Vargas would be the amount of capital needed.  And in increasing order:

Title III  $1M < Reg A+ Tier 1 $5M < Reg A+ Tier2 $50M < Reg D Unlimited

With Title III not being an IPO

There are of course many rules and regulations that differ between those 4.  To explain those would be more of a blog or article than a discussion.

The discussion I wanted to begin was what those thought of Venture Capital being afraid of or turning their nose up to a CF IPO.  Which I saw happen today.  So I figured I'd write about it.

I doubt most people on BiggerPockets are very familiar with VCs or going-concern financing.  Real estate is project-based and entities are generally set up by project instead of by issuer save their core set of entities.  For real estate projects people are likely to use SPEs by project.  

Most of the rules I have seen were clearly written for the venture space with little regard for real estate.  

@Ivan Vargas  any one looking for this information on BP is just plain silly.

these are complex transactions and the only one who can guide you through them is a securities attorney in YOUR state.   

general information to bat about  sure.. but specifics NO way

@Ivan Vargas  just seems like a lot of work to raise 1 million dollars... which really is not much money in the grand scheme of most real estate developers and movers and shakers. 

but in certain markets were they are buying houses like a used car buyer  IE same price points I can see where a million would be meaningful

@Jay Hinrichs

$1M is a lot for seed stage ventures in most areas of the country; Silicon Valley's valuations and general business environment excluded.  If you try to hire people in The Valley you're probably going to be paying at least 2X what you'd pay in other tech hubs in other states.  Much of what the platforms are tying capital up in are salaries in high cost areas.  This hardly seems like a way to be a good steward for funds for the venture financing.  

It is not clear to me that venture financing is the right tool to finance growth of these enterprises either.  Venture investors are typically looking for 10X returns in short order.  This "fail fast" or become a unicorn financing strategy works well if:

1.  You are the venture investor and this "bet" is one of many in your portfolio

2.  You're financing something with giant margins

The business model typical of the platforms doesn't fit with number 2 above.  Doing quality diligence requires very smart people who are experienced.  These people are not going to risk a move to work at a startup like these absent some sort of premium or major upside.  The alternative is to hire people who are green and don't have the experience needed to design out risk.  Nobody in the industry can execute well on securities law, real estate, technology, data science, marketing, institutional financing, etc.  It takes a team to do this.  This isn't a lone wolf type enterprise.  

Title III seems like a better mechanism to finance growth of the platforms to me.  The VC industry is busy floating the idea that they don't want a bunch of "cats and dogs" (pejorative for angels or other small balance investments) on the cap tables or they won't issue follow-on financing.  This to me is another example of our we-want-it-now culture and entrepreneurs being unwilling to put forth the effort to grow a business steadily the old fashioned way.  Those running the platforms are pulling in a salary though so it may be in their economic short-term interest to finance things this way.  

I don't understand the luster of seeking venture financing.  If you want to work extraordinarily hard for people with money why not just go get a corporate job instead?  

I agree $1M is not much. But don't underestimate the power of $1M for a startup or small business. Especially if we're talking about hundreds or even thousands of them.

JOBS Act: Jumpstart Our Business "STARTUPS" Act. 

Since we're on BP, discussing real estate: for the typical single family rehab deals $1M can go a long way. Most platforms are focusing on the SFR rehab market and the offerings are usually under $1M. So the cap on Title III is not that bad, especially if you think of the hundreds of flippers on BP that may want to take advantage of the new rules to raise capital for their first or next project.

As for it being complicated or "too much work" as @Jay Hinrichs mentioned, its actually not much more than a Reg D raise. Problem is there isn't a portal to do it on yet, at least not one dedicated to real estate. Once a portal exists, creating an offering shouldn't be an issue. I've seen a few Title III offerings already and their Form C filings with all the required disclosures and it doesn't seem that difficult at all, most Reg D offerings already provide most of this information.

I was only talking about 506 (D) @Ivan Vargas  That's why the the next sentence talked about rules and regs.  It is RULE 506(D), I wasn't talking about RULE 504, or RULE 505...I'm not a Securities Attorney Ivan.   I'm RE Law.  The quotations you put around General Counsel, seems derogatory.  If you'd like to discuss further.  Please send me a message.  

The first I heard of a Title IV Reg A+ Mini IPO, actually was on Sunday.  I am fighting a learning curve as well.  I don't know every thing as it appears you do.  I am  here to learn and share information.  I'm not here to interpret or give legal advice, and I have to be careful since I'm a licensed attorney  I can't speak in specifics, which can be construed as giving legal advice.  You don't have that concern.   I also can't have any reference to the Company I work for, or who I work for.   Since BP banned our founder for doing that.

However, information is so valuable and important I have been given the task, to just keep writing.

Hopefully you and @Bryan Hancock can understand that.  It appears Bryan can.   Or anyone else for that matter.

The reason Title III wouldn't work for us that we need $5M $2M at the very least.    And remember with Title III the issuer can do no advertising other than a "tombstone" ad.  That's not going to work for most.  Or if you can work with it.  It would be a tremendous burden.

Yesterday, when I watched and participated in a round table discussion with one of the founding fathers of Crowdfunding, who is doing the CF IPO and a VC Wallstreet/Silicon Valley "we've always done it this way" type,along with the Founder of the RECF seeking capital.   I realized two things the VC new VERY little about Reg A+, or crowdfunding in general.  I also wasn't sure this type of conversation had EVER happened before, or if it had, for sure not many times.

To get to this point in the creation of the RECF, the RECF founder pitched the VC and sold him.  The founder just wanted to sell IPO shares at a Pre-IPO price to the VC.  The VC was so excited, so I am told, I wasn't there, that he wanted to IPO the RECF, 506 RegD.  My boss told him this is a RECF, and I want a CF IPO not a Reg D,  Not interested!  

When I was told this, I was flabbergasted.  Then I was told..."the surest way to get someone to buy something, is to tell them they can't have it."  And I got a wink.

So he set the meeting up between the two.

So while it watching.  This was really about something other than money.   It was about changing ideas and preconception.  

Watching these 3 distinguished gentlemen, who are all extremely bright, and with vision that most can't even comprehend.  Oh and they were really were just 3 guys talking.  

 I thought to myself, "is this conversation/argument/debate, historical?"  I might overstating, or over emphasizing.   I'm not sure.

In the end, the VC left with 3 things.

1.  He had to do more research about CFing.

2.  He had to have a more open mind about change.

3.  Another appointment in 2 weeks.

So that is why I thought it might be interesting to discuss. 

In case you wanted to know.

@Thi Huyhn I apologize for the sarcasm or if I came off as a cyber bully. 

I understand that you are just now learning about securities and crowdfunding, you made that kind of obvious in your post. To launch a startup RECF platform, you need a good securities attorney who knows the new rules. Even the best attorneys who are well versed in the new rules cannot accurately answer some of the questions I have asked, hence why I used the quotations in my previous post. 

I warned John about his posting, he's lucky he didn't get his account deleted. 

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@Ivan Vargas Thank you.  You were a little aggressive, but that's fine.  I argue with words all the time and rarely take offense,  All good.  I will vigorously defend myself or my clients though.  :)

We have all the funding and help in the RECF platform that was created.  Lord knows we're paying for them.   Total cost from initial consult with IPO consultation to Lights on...approx.  $500K

My boss is very passionate about CF.  He mostly got upset because he kept getting a cut and paste response of "no mention of your website" in a post that was deleted where he was truly trying to help a woman, and there was no mention of any website.   Then when he asked for clarification he got no response.  So he escalated to the CEO...lol.  THat's how he is and how he got to where he is...

Anyway the woman who wrote the post had inquired about a DIYer getting funded by a RECF.  He developed a program just for that need, and that was the first time he heard a member of the public ask for it.  He was very excited about that and wrote a paragraph about "my company...I created."  So it wasn't any website, it was 1 person possessive reference to "his company"  instead of straight 3rd person.  It's really hard to write straight up 3rd person if it's you doing the research etc.  So, the very strict no advertising policy has created a no advertising policy with BP ever policy with our company.  

You will hear about the launch.  Note 3rd person conjugation...lol

Get used to it @Thi Huyhn .  I have been posting on BP for around 7 years and have thousands of posts and one of mine got deleted yesterday for responding directly to a question someone asked about our platform.  You're left with the decisions to either:

1.  Not respond at all and look like a jerk for not responding, or 2

2.  Respond and have your post deleted

@Thi Huyhn A few points of clarification:

-Patch of Land never did a Reg A+

-A Reg A+ is not the same as an IPO. 

-Your founder kept getting his posts deleted due to the way he would mention the platform. Isn't not to say you can't mention the company, you just need to be mindful of how you do it. I don't know the specific ethics rules in WA, but as an attorney, you have a higher ethical bar, so might want to refrain from things like "I know of a RECF platform" without disclosing your affiliation with them.

Thank @Amy Wan .  John is a bit of a maverick in the industry.  Gene called him "a bronco in a glass house made of money."

John told me about you, and we will be reaching out to you soon.  I'll be making the call this time to discuss some legal questions.

Myself and John will be a the 4th Annual RECF Summit on 6/23