The Real Estate Impact of Regulation A+

RICHMOND, VA—The Securities and Exchange Commission recently finalized rules implementing Reg. A+—an amendment to the existing Regulation A exemption in view of the JOBS Act. These will allow for a much wider, more diverse investor base to have access to, and experiment with, a larger investment portfolio of alternative investment offerings. Robert R. Kaplan Jr., a partner with Richmond, VA-based law firm Kaplan Voekler Cunningham & Frank, has been involved with Reg. A+ since its inception. He believes the new exemption may have a significant impact on the investing world and the economy as whole, because it allows unaccredited investors to diversify their portfolios into areas such as tax industries, mutual funds and new dividends. GlobeSt.com recently caught up with Kaplan, who provides insights on the real estate implications of the new rules. 

GlobeSt.com: What is Regulation A exactly?

Robert R. Kaplan Jr.: Regulation A is an exemption that has existed in one form or fashion since the mid-1930s. We are interested in thinking of exempt securities by how they are offered. If offered privately (we'll leave Rule 506 (c) for another discussion) they are exempt; offered publicly they must be registered under the Securities Act of 1933 and the issuer must report under the Exchange Act of 1933, as well as be subject to other laws such as Sarbanes-Oxley and Dodd-Frank. Regulation A, however, falls under a general exemptive authority of the Securities and Exchange Commission, which has the power to “qualify” securities that would otherwise require registration as public securities not to do so. So it exempts the security itself, as opposed to how it's offered, and creates a different kind of public security, but one that can be offered through general solicitation, is not restricted to certain investors and is freely tradeable.

Historically, this exemption has been limited to relatively small raise amounts and state registration requirements in addition to federal requirements to qualify. Under new rules, this exemption has been given much greater flexibility—permitting issuers to raise up to $50 million in a trailing 12-month period and exempting issuances from state review. This comes with requirements as to how much non-accredited investors can invest in an initial issuance and reporting requirements, but even these can be helpful to building a sustainable market for these securities.

GlobeSt.com: Is this just another channel for tech companies, or does this have application to real estate?

Kaplan: I am asked this often—Reg D was established to help start-ups, and look how it has been applied to real estate! The uses in the real estate world for Regulation A are just as broad. Most issuers in real estate with whom I work have seen real challenges with the ability to compete for accredited investor money, demanding more returns, and the liquidity risk private transactions have. The ability to source funds from a diverse investor base, potentially lower return requirements from increased demand and the ability to offer liquidity should be attractive to operators. Funds and debt offerings should become commonplace. We have already seen interest in developing REITs using Regulation A as either a lower cost and regulatory burden entry strategy, but we have also seen interest in iterations that are more focused, on a regional basis, for example, where Regulation A would be the natural growth channel.

GlobeSt.com: So is this just for newly established funds or offerings?

Kaplan: Not really, the Regulation A rules permit the qualification of generally 30% of the maximum amount you can raise in a 12-month period from existing investors. Also, the SEC does not require an issuer to have exclusively raised capital through Regulation A, so existing private funds could create a liquidity strategy for its current investors or seek additional funding through Regulation A, but should look to do so with experienced counsel who can structure to avoid issues such as integration, publicly traded partnerships or inadvertent registration under Rule 12(g).

GlobeSt.com: Will broker-dealers and financial professionals embrace Regulation A+?

Kaplan: We're already seeing a core of broker-dealers around the country venturing into this world. With some volume, I believe you'll see demand among broker-dealers and financial professionals steadily increase. The ability to use a more diverse menu of investment options to attract clients and help them diversify, as well as the transparency resulting from mandated reporting under Tier II of Regulation A and the liquidity that will hopefully come with developing secondary markets can be powerful draws from both wealth creation AND preservation perspectives.  

GlobeSt.com: Do you believe Regulation A will make Regulation D obsolete?

Kaplan: Absolutely not. First off, certain types of products, like fractional interests in oil well or mineral rights, are excluded from Regulation A. But, beyond this, what Regulation A does do in relation to Regulation D is to provide a powerful tool for issuers to develop strategies that are properly tailored to capital needs, risk profiles. Reward potentials and overall exit possibilities. For example, an issuer with access to accredited investors with higher risk tolerance would likely raise money for initial ground up development using Regulation D, but creation of new capital through cross-collateralized bond issuances on completed projects or contribution into a REIT funded through Regulation A might make sense to the overall strategy. What's great is that we no longer have one shape of peg to fit every shaped hole.

Robert R. Kaplan Jr. may be contacted at rkaplan@kv-legal.com.