LOS ANGELES-According to the SEC, in July 2013, the commission adopted amendments to Rule 506 of Regulation D and Rule 144A under the Securities Act to implement the requirements of Section 201(a) of the JOBS Act. The JOBS Act requires the SEC to adopt rules amending existing exemptions from registration under the Securities Act of 1933 and creating new exemptions that permit issuers of securities to raise capital without SEC registration.
The two amendments, Rule 506(b) and Rule 506(c), allow for two ways a crowdfunding company can attract potential investors to their platform, according to David Manshoory, CEO and founder of Asset Avenue, an L.A.-based online marketplace that connects investors with real estate professionals to acquire commercial properties. Manshoory tells GlobeSt.com that Rule 506(b), which has actually been in existence for some time but has now been renamed, allows only accredited investors to see a specific deal, and they must self-certify by answering questions that identify themselves as accredited.
“In using 506(b), most potential investors are finding out about a real estate crowdfunding company online or in the news, so when they come to their site, they don’t have a preexisting relationship with anyone in the company,” says Manshoory. “The crowdfunding company is not allowed to put a single deal in front of that investor for 30 days after they’ve self-certified—complying with a cooling period per the SEC. You need to give them 30 days to learn about you, and likewise, you need to learn about them and who they are to make sure you’re the right place for them to match their money. This is critical.”
After the cooling period, investors are allowed to see any deals on the crowdfunding site that are raising money, and they can choose to invest at that time. They’re not required to do anything else except sign a document that says they’re certified, according to Manshoory.
On the flip side, Rule 506(c) allows public solicitation of any deal without restrictions, but only accredited investors can interact with and invest with a crowdfunding site. They are not allowed to self-certify, but there are two ways they can prove accreditation: by verifying their income or net worth through documentation such as tax returns and 1099 forms or by obtaining a letter from a CPA or attorney attesting to the fact that they are accredited.
Manshoory sees several flaws with the 506(c) method. “Many people aren’t comfortable exposing their financial information with a new company—they want to be private—so they don’t want to submit tax documents to an unknown company. Also, many CPAs are up in arms right now because they don’t know what it means for them as a profession to be singing off for an accredited investor or anyone. They’re getting requests are uncomfortable with it. If they sign for someone who isn’t accredited, they could be in a lot of trouble.”
Also, while many CPAs know how to analyze income, they don’t necessarily know how to analyze and assess net worth since they may not have all of the puzzle pieces needed to determine that. “There’s a lot of confusion around how to adopt the new rules and where liability falls if something goes wrong, so 506(c) is not as clear,” says Manshoory.
As with any new regulation or ruling, time will sort out the issues, but in the meantime Manshoory recommends sticking with the 506(b) method of determining accreditation. Check back with the L.A. page for his take on what real estate operators and investors should look for when evaluating a crowdfunding platform.