By: Jordan Fishfeld CEO & Founder at PeerRealty
There’s been a lot of discussion lately about the SEC’s newest capital raising option, Regulation A+. The new regulation, which has been dubbed a “mini-IPO,” will allow issuers of securities to raise funds from both accredited and non-accredited investors under certain circumstances. While many in the crowdfunding community are understandably excited about this new method of raising capital, some have raised concerns over how useful or practical the new regulations will be in practice. Other commentators worry about an increased potential for fraud or malicious activity due to non-accredited investors ability to participate in these new investments. I understand the concerns about cost and time, but I believe that Regulation A+ will become an excellent capital raising option for a select type of fundraise, specifically for real estate funds. I also strongly believe that the concerns about fraud are overblown, and that Regulation A+ will prove to be an incredible wealth building tool for middle-market investors.
First, a little bit of background on Regulation A+. Title IV of the JOBS Act, which was passed by Congress in 2012, directed the SEC to adopt rules exempting securities offerings of up to $50 million annually from the registration requirements of the Securities Act. Congress left it to the SEC to sort out the details, and after three years of exhaustive back and forth, and amazing efforts by the SEC staff, Sam Guzik and others, the SEC adopted its final rules implementing Title IV last month, which will go into effect on June 19th.
To briefly summarize the provisions of Regulation A+, it provides for two tiers of offerings: Tier I (offerings up to $20 million) and Tier II (offerings up to $50 million). Companies raising up to $20 million can choose to proceed under Tier I or Tier II. Tier II offerings are subject to additional requirements, including a requirement to provide audited financial statements to investors. Unlike with Tier I, though, Tier II offerings are not subject to state securities registration requirements. For both Tier I and Tier II offerings, issuers must file offering documents with the SEC and receive approval prior to selling any investments.
In the crowdfunding community, opinions about Regulation A+ are generally positive, but not unanimously so. Jorge Newbery of American Homeowner Preservation feels that Regulation A+ will be a “game changer,” and the new SEC rules signal the start of a “new era.” Others feel that with the SEC registration requirements, the process will be too costly and time-consuming to be of much use to real estate crowdfunding platforms.
As the CEO of PeerRealty, a real estate crowdfunding platform, count me in the “cautiously optimistic” camp. I share some of the concerns about the length of the process, and given that most real estate deals need to be closed in 30-60 days, I’m not sure if the estimated 6+ month approval process makes Regulation A+ a good fit for real estate crowdfunding. Platforms that are crowdfunding real estate deals may prefer the established Title II method. I do believe, though, that Regulation A+ will be a valuable capital raising option for large multi-stage development projects or traditional funds.
Regulation A+ also allows non-accredited investors to participate in both Tier I and Tier II offerings, and this is the other main objection raised by critics of the new rules. A recent San Jose Mercury News editorial expressed concern that non-accredited investors “are far more likely to lose their entire investment, and it will be easier for charlatans to prey on unsophisticated investors” with Regulation A+.
While the SEC should always be on the lookout for potential fraud, in my view this concern is overblown with regard to Regulation A+. The disclosure requirements of Regulation A+ are much closer to those of an IPO than of either traditional private offerings or Title II crowdfunding. As mentioned above, Tier II offerings are required to provide audited financial statements to prospective investors. Both Tier I and Tier II offerings are subject to SEC approval before any securities can be sold, and the approval process will likely be hands-on. In his invaluable primer on Regulation A+, crowdfunding attorney Mark Roderick notes that “real estate developers typically earn fees from the projects they sponsor – acquisition fees, management fees, brokerage fees, and so forth. In a Regulation A+ offering, expect the SEC to comment on and possibly reduce or prohibit some of these fees.” The fact that non-accredited investors can invest only in SEC-vetted projects is a feature, not a bug. Unfortunately, all forms of investing carry a risk of fraud – that is why the onus is on investors to perform adequate due diligence and on the SEC to scrutinze these offerings carefully. More importantly, and less discussed is the value the transparency of internet capital raising will bring. These investments are subject to the global pool of knowledge, eliminating much of the potential for downright fraud.
I also believe that the critics who profess to be concerned about small investors are completely missing the point. One of the largest problems with our economy is that wealth creating opportunities have only been available to the wealthy. It’s been well documented that IPO’s have been in decline in recent years. From 1980 to 2000, an average of 311 companies went public each year; from 2001 to 2011 only an average of 99 firms a year opted for an IPO. Today, most companies create their wealth long before they ever go public, and the only investors that get to benefit from this growth are accredited investors, venture capital firms and Private Equity firms, all of whom only decide to go public when they believe all of the major value creation potential is extracted. Regulation A+ evens the playing field, and smart middle market investors will be able to use this new opportunity to grow their wealth and the middle class. Personally, I don’t believe that wealth is a proxy for intelligence, so non-accredited investors who do their homework and take advantage of the new level of transparency available through the internet will have many sound investment opportunities available to them.