How the SEC Regulation D 506 Has Changed the Industry

Over the past year we have seen real estate crowdfunding unfold into its own animal at an  unprecedented rate. With the SEC Regulation lifting the General Solicitation Ban, private companies can now publicly advertise their investment offerings. Additionally, open fundraising is the catalyst for this past year’s whirlwind of changes. Not only should all companies understand how this affects their business and their competitors, but investors should understand the importance in the development of the Title II of the JOBs Act when vetting investments.

The Scope of Public Advertising

What has been known over the past 80 years as illegal by the SEC under Rule 506 of Regulation D and Rule 144A of the Securities Act of 1933, is now amended. Under the amendment, companies will be allowed to fundraise investment offerings to a larger audience of people who may or may not be Accredited Investors.

General solicitation has created impactful progress for investors. By increasing transparency to review detailed offering terms, this allows for investors to compare other offerings to make informed decisions that were otherwise difficult to do in the past. This has been vital for startups and investors that had little to no access to these investments prior to use of general solicitation. So much so, that on a global scale, the real estate crowdfunding industry should grow roughly “1.8 times the size of the global venture capital industry today by 2025,” stated at the UCLA Ziman Center for Real Estate on August 27th, 2014.

Rule 506(b) or 506(c); exemptions of raising an unlimited amount of money

Under Rule 506 of Regulation D, there are two distinct exemptions that take place when raising funds:

506 b 506 c
  • Cannot use general solicitation or advertising to market the securities;
  • May sell securities to an unlimited amount of accredited investors and up to 35 unaccredited investors. Unaccredited investors must be sophisticated in terms of sufficient knowledge and experience. This will allow them to make an informed decision of the prospective investment.
  • Use general solicitation or advertising to market the securities;
  • Sell securities to accredited investors only.
  • Has taken reasonable steps to verify accreditation. These steps can include documentations such as W-2s, tax returns, bank statements, and the like.

Title III… Still in Review

In addition to the above rules, Regulation Crowdfunding through Title III of the JOBs Act is still under review two years later. Even more so, it likely won’t be adopted anytime soon. Regulation Crowdfunding covers how much an issuer can raise and how much unaccredited investors can put into deals.

Until approval of Title III, we can only speculate how this will influence real estate crowdfunding on a global scale. We are sure that it will be, increasingly, substantial. Especially since we continue to uncover even the recent amendments to the JOBs Act.