The SEC’s New General Solicitation Rules

The SEC’s New General Solicitation Rules

The SEC

The Securities and Exchange Commission (SEC) recently approved a change to long-standing rules that had previously prohibited the general solicitation or general advertising of most private securities offerings. Before, even under the Rule 506 exemption that permitted the participation only of persons of some wealth or sophistication, that “private placement” could not be advertised -- whether through newspaper ads, television or radio commercials, public seminars, or unrestricted websites. To remove some of the perceived risk of these private offerings, people to whom they were offered were required to have a pre-existing relationship with the company selling the securities -- even to find out about the offering.

The recent Great Recession, however, caused many people to re-think whether making it easier for business ventures to raise capital might help in fighting the unemployment that continued to linger after that economic shock. Now -- since September 23, 2013 -- securities offerings limited to “accredited” investors (persons of a certain income level or net worth) can utilize such general advertising as long as the offering company takes additional steps to verify investors’ accredited status before consummating any sale. This means not only that companies will have an easier time reaching potential investors, but also that accredited investors will now have exposure to an increased number of investment opportunities.

Some of those opportunities will be in the real estate sector, which is often attractive because it can offer current cash flow as well as appreciation potential. But unlike investments in corporate bonds or stocks (where investors may at least have some experience with the company, like using an iPhone or shopping at a Home Depot), real estate often requires some education about available property types, market risks, and return-on-investment calculations. For companies like Realty Mogul that focus on crowdfunding for real estate, one significant result of the SEC’s rule change may be that it improves opportunities to educate individual investors about private real estate investments.

While it’s not uncommon for some individual investors to own shares of a real estate investment trust (REIT), that’s not usually how the bigger players put their money to work. A recent MIT study showed that institutional investors typically put about 95% of their real estate holdings into direct participations in specific real estate properties, like shopping centers and office buildings. Crowdfunding sites may give a lot more people a chance to participate in these private real estate transactions. Most estimates put the number of accredited investors in the U.S. at 7-8 million people; yet public filings indicate that less than 50,000 of them participated last year in the Rule 506 type of private placement that was targeted by the SEC’s rule change.

It would appear, then, that this market has been incredibly underserved, and that the new marketing regulations will widely broaden the horizons of accredited investors who have not before made an investment of this type. Crowdfunding through Realty Mogul can offer individual accredited investors the same type of access, at relatively small individual investment amounts, to transactions that were previously only available to these larger players.

The new rule allowing general advertising could result in a series of impactful changes:

• Informational Marketing – Real estate companies can now share meaningful transaction details (location, property type, yield projections) without having to be secretive about it. More meaningful information is just what investors need.
• Creative Advertising – Not only can they bring transaction details out of the boardroom, but companies are also now free to be more creative about how they get that message out to an audience. Just as with other companies or products, you might start seeing billboards advertising certain real estate investment opportunities. Maybe even skywriting over the property?
• Added Transparency -- The additional marketing, and broader scope in how that marketing can be brought to an audience, should bring increased transparency to transactions. Keeping transaction details behind locked doors makes it difficult to compare to other offerings of similar properties. Investors will now be able to review differences among geographies, property types, and sponsor companies.

The SEC’s rule change, allowing general solicitation and advertising of investment offerings to accredited investors, will change the way that private companies raise capital. Hopefully, it will also achieve its goal of stimulating the entrance of new companies and growth of the economy generally. One big benefit, though, is almost certainly going to be that real estate transactions will become more widely available and more transparent. The change, along with the advancement of the crowdfunding phenomenon generally, should result in a broader knowledge of private investments being shared by a larger number of investors -- people without pre-existing industry connections, who can now participate with smaller individual investment amounts than ever before.