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Deborah S. Froling is a partner in the Washington, DC office of Arent Fox LLP and a member of the law firm’s corporate/securities group. Michelle Napoli, editor of Real Estate Media’s TIC Monthly newsletter, spoke recently with Froling, a former attorney-advisor in the division of corporation finance at the Securities and Exchange Commission, about SEC news relating to the TIC market.

TICM: How will the SEC’s newly approved Form D and mandated electronic filing affect TIC sponsors, and what do they need to know?

Froling: I was involved in the American Bar Association’s comment letter to the SEC on this, and there was a lot of back and forth on Reg D stuff, and some discussion and dissension within various groups as to good things and bad things. I don’t think they’ve published the final rule yet. I’ve only seen the press release. The phase-in is going to be in September of ’08, so we’ve got another nine months before it even starts, and it’s not mandatory until March of ’09. That gives some period of time for the states to figure out how they’re going to deal with it. Trying to get 50 states to agree on how fees and those kinds of things are going to be facilitated is an implementation issue that needs to be resolved. What’s the purpose of having one-stop filing if you still have to send the fees to the states? I’m interested to see how the states are going to deal with it, and we’re not going to know that for a period of time.

If you can do it electronically it makes it much more accessible for everybody. So for TIC sponsors, more people are going to know what’s out there, because you have to file it and you have to state the date of first sale. There are very few states right now that require that, and the SEC never did. So now you’re going to be able to know how long things have been out there and you’re going to have kind of a calendar of who’s doing what, who’s busy, who’s got all these offerings out there. It will provide some information in a readily available format that was not previously available without going down to the SEC and going through their records.

TICM: So might there be a future TIC Monthly column reporting new deals out on the market, since that information will be accessible?

Froling: I think you’re going to find some resistance from the sponsors and the broker-dealers. I know its public information, but we still have the issue of general solicitation. Putting something like that in your newsletter could blow the exemption for a sponsor, and that’s going to be an issue.

TICM: But if it’s public information and readily accessible on the Internet…

Froling: Everyone can access it. That’s why there’s an issue as to what free writing you can do on the form. Because of the way the fields of information are, there is a limited ability to explain certain things. I think for TIC deals, that’s not going to be as big a deal but there are lots of Reg. D offerings that are not quite as straightforward, check-the-box kind of deals. You don’t want to be in a position of having misleading information out there, so you have to have the ability to clarify one of the check-the-box items, but at the same time you don’t want to get into a position where you have a general solicitation issue, and that was a very fine line that they were trying to walk. There’s going to be some learning process involved in that, and people in the industry are going to have to think about the balance between public, readily accessible information and securities law violations. It’s worth a discussion in the industry.

TICM: The other big SEC-related topic of course is the NAR exemption request. What are your thoughts on the request and the many comments the SEC received?

Froling: My perspective is that this is going to happen. There may be a few tweaks, but I do not suspect that there will be a whole lot of changes. And I say that because they’ve been in discussions with a lot of people. This is not something the SEC did in a vacuum. This was well-vetted with the various regulatory folks, including the state securities folks and Finra. So I don’t suspect that there’s going to be any wholesale changes to what was put out there.

If you look at the comments requested by the SEC, they were not focused on if we should do this. Rather, it was, have we defined “commercial real estate professional” in the right way? This comes out of the division of trading and markets, which regulates the broker-dealers, not corporation finance, which determines what is a security. They’re really only answering the question of how can we exempt these people in these limited circumstances from having to register as a broker-dealer. That is the question: it’s not if we should allow them to get paid commissions. The timing issues that were raised by TICA–what information is given to the investors, when it has to be given, when the broker-dealers have to get involved–are certainly things that may be tweaked to address some of those concerns, but again I don’t think the fundamental ‘this is what we’re going to do’ is up for grabs.

TICM: So it’s down to the details and not the concept?

Froling: And it’s not even a lot of details. It could be, how do we define substantial commercial real estate experience? And it could be, when does the securities broker-dealer have to be injected into the process? From the real estate people’s perspective, they’re giving real estate expertise and doing a property tour without having to discuss the issue with a registered rep is kind of within their purview. When you start doing the in-depth financial analysis that’s required when you’re a securities rep, who wants to put their client through that scrutiny until they really think that they’re going to do something? I can see both sides of that one. You don’t want the deal sold without the registered rep being involved, but the real estate folks aren’t going to want all of those things that the registered reps do to determine whether they’re an accredited investor done too soon in the process to turn them off.

The other issue big issue that concerns me is the ability to waive the fact that they’re not an accredited investor and go into the deal anyway. That would be the one that might not survive, although it may have been well vetted. You can’t waive the issue if you’re a securities dealer, but if the real estate person brought the deal to the securities person and the securities person says they’re not suitable, could that be colored in any way? Is there a different motivation for saying you’re not suitable than the objective fact that you’re not accredited or financially sophisticated? Because you don’t want to share your commission? It’s an interesting question. That to me is probably the most interesting thing that will come out of this: what happens with that ability to waive. There are a lot of things going on that could influence that.

TICM: Do you think the exemption is workable and everyone can play in the same sandbox together?

Froling: I don’t think they have a choice. Is it workable? Yes, but it’s going to be very difficult. The securities regime is such an odd thing for real estate people to get their arms around. It’s outside the realm of the real estate folks, so it’s going to be a process.

TICM: Do you have any insight to offer as to what the process and the potential time frame for the exemption being granted might be?

Froling: It seems to me like this is weeks away, not months or years away. I would not be surprised to see something before the TICA symposium in March. When they published it, it was pretty much a done deal. There are smart people who have been working on this for a long time. The thought is that the SEC is comfortable with the concept, and the questions they asked in the notice went more to defining the qualifications for the real estate brokers who can rely on this exemption.

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