Understanding Regulation A Real Estate Crowdfunding

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Contributor, Benzinga
September 27, 2023

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Looking to raise money as a real estate company? Or maybe you’re an investor looking for a new opportunity. Either way, real estate crowdfunding can offer the potential for a payout.

Crowdfunding works by raising money from a large number of investors each contributing relatively smaller amounts. It can be conducted via the Internet and for a comparatively low cost. Crowdfunding can be a great way for companies to bring in funds and for investors to buy into new companies.

Crowdfunding comes with several government regulations. One is known as Regulation A or Reg A+. Learning more about Regulation A can help you decide whether to invest in it or use it for your firm.

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What is Regulation A or Reg A+?

Formerly known as U.S. Securities and Exchange Commission (SEC) Regulation A, this amendment began under the Securities Act of 1933. Reg A+ is the most recent, updated version from 2015 and is currently an evolution of the 2012 Jumpstart Our Business Startups (JOBS) Act.

Regulation A gives crowdfunding companies an exemption from registration for public offerings. This effort can be accomplished by registering or meeting the requirements for Regulation A.

According to the SEC, Regulation A has two offering tiers: Tier 1 is for offerings up to $20 million in a 12-month period, and Tier 2 is for offerings up to $50 million in a 12-month period. In the case of offerings of up to $20 million, companies can elect to proceed under the requirements for either Tier 1 or Tier 2. Tier 1 is typical for local investing, while Tier 2 is ideal for investments across multiple states and the entire nation.

In many ways, a Regulation A offering can be thought of as a mini initial public offering (IPO). While your company is selling shares through stocks, the registration process is streamlined and therefore less labor-intensive than a traditional IPO. You also have the freedom to test the waters and try out whether it’s a good fit.

Regulation A is intended for small and medium-sized companies. It provides them with an exemption to sell shares to both accredited and nonaccredited investors — whereas before they were only able to sell to accredited investors.

Accredited investors are individuals with a net worth above $1 million or with an annual income of at least $200,000 over the past two years. They are assumed to have more knowledge about investments and greater experience. They are also thought to be financially well-equipped and able to bear the risks associated with unregistered offerings.

Nonaccredited investors are individuals who don’t meet this definition. Reg A+ makes it possible for nonaccredited investors to buy in.

What is the Timeline of Events Under Reg A+?

For companies looking to move forward with a Regulation A offering, the process tends to follow a set timeline. There may be some exemptions, but the general procedure from beginning to end often looks like this.

  • Initial “testing the waters” phase. This step is optional; it includes using approved marketing tactics and determining whether it’s worthwhile to move forward with a Reg A+.
  • The real process begins with drafting and sending a draft offering statement (DOS) to the SEC.
  • Approval and requests for amendments as needed occur.
  • Regulation A qualification is granted.
  • Solicitation of funds and advertising are allowed.
  • Fundraising is undertaken and completed.
  • Make reports to the government and SEC as needed and follow all ongoing requirements.

Who Benefits From Regulation A Crowdfunding?

Regulation A crowdfunding is ideal for smaller companies. For example, for a contracting business that has recently acquired land but needs significant funds to develop, Regulation A crowdfunding could be a great option for raising capital.

Companies that want to advertise in other states and invite the public to invest also should consider a Reg A+ offering.

Regulation A can be a solid investment option for everyday investors. Real estate is traditionally a stable and profitable venture. Crowdfunding can also be a great way for investors to buy in on a company’s early stages of growth and establish a long-term relationship — all the while maintaining flexibility on investment amounts.

Potential Drawbacks of Reg A+ Funding

Regulation A offerings can be a straightforward way for companies to raise capital, and for investors to get in on a larger number of deals for a relatively smaller principal amount. There are several potential drawbacks that companies and investors should be aware of.

Regulation A entails reporting and financial auditing. For Tier 1 offerings, even though you can sell up to $20 million in equity over 12 months, the issuer has to pass a state-coordinated review of financials. Additionally, Tier 1 issuers have to submit an exit report (Form 1-Z19) following completed or terminated offers as well as obtain state-by-state approval in the states they are selling in.

While Tier 2 offerings allow companies to set up to $75 million in equity over 12 months, there are also up-front and ongoing audit and reporting requirements. This process includes limits on how much funds nonaccredited investors can invest — set at the greater of 10% of the investor’s annual income, or net worth, per year.

A general rule of thumb is that companies should only pursue a Regulation A offering if they’re expecting to be worth at least $4 million.

For investors, it’s important to be aware of potential risks. No investment is an absolute guarantee, and it’s critical to conduct your own research and refrain from committing more money than you could afford to lose.

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Ready to get started on real estate investing but don’t know where to begin? Whether your company is looking to raise capital, or you’re an investor, Benzinga has compiled a list of the best Regulation A real estate investments. Take a look!

Weighing the Benefits and Risks

As with any venture, Regulation A offerings feature their own unique set of benefits and risks. As long as you do your research and better understand the ins and outs of crowdfunding, you’ll be in a stronger position. Whether you’re looking to grow your business or invest in the right type of crowdfunding, make sure to keep coming back to Benzinga for information and tips.

Frequently Asked Questions

Q

Is real estate crowdfunding a good investment?

A

Real estate crowdfunding can be a good investment because you make small investments into a larger real estate portfolio. The owner of the portfolio pays dividends based on your initial investment.

Q

Is real estate crowdfunding expensive?

A

 No, real estate crowdfunding is not expensive. This type of investment removes barriers to entry in the real estate sector, making a real estate investment more affordable.

Q

What is Reg A?

A

Reg A exempts a business from registering for something like an IPO. The offering cannot be more than $50 million in a 12-month period, but the offerings are still managed under federal and local laws.

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