Limitations For Capitalizing Real Estate Projects
The Securities and Exchange Commission (SEC) along with the state securities regulators place limitations on how capital can be organized. Marketing and selling securities in small placements is generally done according to the rules set forth in
Regulation D of The Securities Act of 1933. Below is a greatly abbreviated synopsis of the three rules classically used to qualify for an exemption to the 1933 Act:
• Rule 504 – Provides for an exemption for the offer of up to $1,000,000 of securities in a 12-month period to an unlimited number of unaccredited investors
• Rule 505 – Provides for an exemption for offers and sales of securities totaling up to $5,000,000 in any 12-month period. Under this exemption the securities may be offered to an unlimited number of “accredited investors” and up to 35 “unaccredited investors” who do not need to satisfy the sophistication or wealth standards associated with other exemptions. This exemption carries the requirement for either audited financial statements or an audited balance sheet
• Rule 506 – Provides for an exemption where the investor can raise an unlimited amount of capital. The exemption provides for an unlimited amount of accredited investors and up to 35 other purchasers. Unlike Rule 505, all non-accredited investors either alone or with a purchaser representative, must be sophisticated. Sophisticated is defined as having sufficient knowledge and experience in financial and business matters to make them capable of evaluating the merits and risks of the prospective investment
A securities attorney should be consulted regarding the specifics for each offering due to the unique nature of each transaction and need for expert advice. Equity funds generally require accredited investors in order to attract capital. Rules 505 and 506 allow for up to 35 unaccredited investors. The accredited investor restriction greatly limits investment capital for large projects due to this 35 investor constraint.
Comments (5)
Reporting requirements increase significantly with non-accredited investors in the fund. You are also limited to 35 with the right fund type and they need to be sophisticated or advised by those that are sophisticated. Non-accredited investors are a bigger liability center and it also takes a lot more of them to raise the requisite funding.
Bryan Hancock, over 14 years ago
Another option is an intrastate offering which is exempt from SEC registration and may have to meet the requirement in the state of offering. Many states have rules similar to SEC regs on private exempt offerings, but intrastate offerings may be significantly less expensive to set up.
Don Konipol, over 14 years ago
What is the main benefit of using accredited vs non accredited investors in a transaction?
Tom Bukacek, over 14 years ago
Here is an excerpt from my e-book: So what is an accredited investor? In the United States an accredited investor must have a net worth of at least $1,000,000 or have made at least $200,000 each year for the last 2 years ($300,000 with his or her spouse if married) and have the expectation to make the same amount this year. Note that this definition MAY change with legislation being introduced. There is talk about raising the net worth limit to $2.5M, which would shrink the pool drastically and be a direct assault on capital formation. This wouldn't be anything new for the current administration though....hell...20% U6 unemployment is okay if you have a nice, cushy gov-mint job living off the spoils of others. You can do a Google search on "Accredited Investor" and "SEC Definition" and find this on their page too. The devil is in finding the investors and organizing the money. You have to file form D with the state and make sure you have one of the exemptions outlined above. Using websites to find investors and what is considered "general solicitation" gets murky really fast. Most people do "educational" content on their page in an effort to find money, which works okay I guess. I am still learning a lot about this process. It isn't easy to find investor money in this environment so it isn't the best time to be cutting your teeth and learning. As you stated it is a necessity right now though. I have a coaching program that eats through spare capital so this is a big bottleneck for our growth right now. We have a new site coming out soon and I would love some feedback on it once we get it out :)
Bryan Hancock, over 14 years ago
Bryan, thanks for the bulletin Given that banks have practically stopped lending on real estate investments, this topic has become much more important. Can you explain a little further about accredited vs unaccredited investors? Tod
Tod R., over 14 years ago