By: Evan Hudson, Partner and Co-Chair, Real Estate Capital Markets Practice Group, Duval & Stachenfeld LLP
Last month, the House of Representatives passed a bill that would raise the limit for a Tier 2 Regulation A+ offering to $75 million (plus future inflation adjustments) in any 12-month period, a 50 percent-plus increase from the existing limit of $50 million.
A handful of real estate sponsors have availed themselves of the Reg A+ exemption in raising funds, as an alternative to the traditional non-traded REIT and Regulation D channels.
As a quick recap, Reg A+ allows a non-SEC reporting issuer to raise capital from public investors while marketing the offering publicly. The ability to market the offering publicly and target smaller, non-accredited investors makes Reg A+ more user-friendly in some respects than that traditional mainstay of smaller offerings, Reg D. Additionally, in a Reg A+ offering, abbreviated public reporting requirements offer an improvement to the full-blown IPO route.
On the other hand, the $50 million limit on the offering size seemingly crimps the potential of Reg A+. So, with that limit potentially increasing to $75 million-plus, does the major barrier to widespread adoption of Reg A+ as a favored model for sponsors of real estate investment programs show sign of falling?
As it happens, signs point to “no.” Not because a barrier will not fall—surely it will, if the House bill becomes law. But rather, because in the experience of some sponsors, the $50 million cap has not been the limiting factor in making Reg A+ the way of the future.
Instead, three other factors are conspiring to block widespread adoption of Reg A+ in the real estate investment program space. One is negative press about Reg A+ issuers that listed on a securities exchange and have since traded down. Curiously, none of the duds was a real estate company. But, similar to the way broad market corrections drag down listed REIT shares even in the presence of strong real estate fundamentals, poor performances by Reg A+ tech and operating companies hurt perceptions of Reg A+ real estate offerings as well.
A second negative factor is the cumbersome process of making state notice filings. While Reg A+ preempts the states from requiring substantive review of an offering, the rule does not preclude the states from requiring notice filings, which, true to form, the states are doing. Of course, Reg D offerings also need state notice filings, but the process is well-worn. With Reg A+, the blue sky filing process is less worked out and streamlined, at least so far.
A third factor—not unique to Reg A+, but still serving to temper expectations—involves the slow death of the “crowdfunding” hoopla. Through a hard process of learning, many sponsors have figured out that direct-to-investor marketing is too often ineffective for all but the best-known sponsors, and even those marquee names often struggle with it.
In most cases, it is a tough sell to encourage people to invest online in projects run by strangers. Interest in “crowdfunding” peaked in the years immediately following the enactment of the JOBS Act in 2012. Now, most sponsors either do, or should, recognize the value of the broker-dealer and RIA communities that have been matching retail capital with companies since, essentially, forever.
By most appearances, the headwinds facing the widespread adoption of Reg A+ as the preferred vehicle for real estate investment programs have little to do with the offering size allowed. Challenges will remain whether the offering limit is $50 million or $75 million.
Nevertheless, Reg A+ still has great potential, particularly if lower-quality issuers clear out of the space; if blue sky regulators ease the path; and if sponsors accept that, whatever the wrapper, broker-dealers and RIAs provide real value. With those items solved, and even without, Reg A+ may yet become a major source of real estate equity capital.
Evan Hudson is a partner and co-chair of the Real Estate Capital Markets Practice Group of the New York City law firm of Duval & Stachenfeld LLP, a leader in real estate investment programs. See www.dsllp.com for more about Duval & Stachenfeld, and www.dsllp.com/attorneys/evanhudson for more about Mr. Hudson.
The views and opinions expressed in the preceding article are those of the author and do not necessarily reflect the views of The DI Wire.