Key Exemptions and Rules Under the Securities Act Of 1933

As a fundamental piece of legislation, the Securities Act of 1933 is designed to maintain transparency and honesty within the U.S. securities market. Established to protect investors from fraud and ensure they receive all necessary information, it serves as a guide for those involved in issuing and selling securities.

Real estate syndicators must grasp the importance of this Act to launch and manage projects lawfully. It mandates that securities be registered with the Securities and Exchange Commission (SEC), unless an exemption applies, with comprehensive disclosure and adherence to anti-fraud provisions.

Continue reading to gain a thorough understanding of the Securities Act for both compliance and the smooth operation of your ventures.

Definition of Security

As per the Securities Act:

“The term ‘security’ means any note, stock, treasury stock, security future, security-based swap, bond, debenture, evidence of indebtedness, certificate of interest or participation in any profit-sharing agreement, collateral-trust certificate, preorganization certificate or subscription, transferable share, investment contract, voting-trust certificate, certificate of deposit for a security, fractional undivided interest in oil, gas, or other mineral rights, any put, call, straddle, option, or privilege on any security, certificate of deposit, or group or index of securities (including any interest therein or based on the value thereof), or any put, call, straddle, option, or privilege entered into on a national securities exchange relating to foreign currency, or, in general, any interest or instrument commonly known as a ‘security’, or any certificate of interest or participation in, temporary or interim certificate for, receipt for, guarantee of, or warrant or right to subscribe to or purchase, any of the foregoing.”

This Act governs the sale of securities and impacts a wide array of entities, including real estate syndicators. If you are publicly or privately seeking passive investors to invest in your fund, syndication, SPV, or other collective investment entity, you’re considered to be selling securities.

However, if you are simply looking for a business collaborator or pursuing a joint venture where both parties maintain control, it’s probable that you are not involved in the sale of securities. When in doubt, it’s best to consult your legal advisor.

Selling Securities: Essential Requirements

These are the actions you should take:

1. Register the Securities with the SEC

This involves conducting an IPO or another transaction to go public for your fund or special purpose vehicle (SPV). However, going public is practical only if you are raising an exceptionally large investment vehicle. The process can be burdensome and costly, and demands excessive legal time and resources.

2. Secure an Exemption

Selling your securities in accordance with an exemption from SEC registration is a preferable route. We will discuss the options in the next section.

3. Ensure Full Transparency in All Disclosures

Unless an exemption applies, an accurate and thorough declaration of your securities’ financial information ensures you maintain investor trust and meet legal obligations. For a deep dive into disclosure documents, head on to our Essential Documents for Your Securities Offering <insert link> article.

4. Adhere to Anti-Fraud Provisions

These rules protect investors from deceptive practices. Consulting with a real estate investment attorney can provide guidance to help safeguard both you and your investors.

Exemptions from Securities Registration

The Securities Act includes several exemptions to ease the process of issuing securities:

Regulation A. A hybrid public/private offering with two tiers: Tier 1 allows for simpler raises up to $20 million within 12 months. Tier 2 permits more complex raises up to $75 million within 12 months. This requires extensive disclosure.
Regulation S. An exemption for the sale of securities outside the United States.
Regulation CF. Known as the crowdfunding exemption, it authorizes capital raising up to $5 million in a 12-month period, albeit with investment limits and other specific requirements.
4(a)(2). With this exemption, an issuer can execute transactions that do not involve a public offering.
Regulation D. Most real estate syndicators rely on this exemption for their investment funds and SPVs as it offers pathways that cater to different investor types and marketing strategies.

We discuss the above in detail in our article, Compliance in Real Estate Syndication: A Guide to SEC Exemptions <insert link>.

What is Regulation D?

This includes two primary exemptions:

Rule 506(b)

If you secure this exemption, you can invite up to 35 Non-Accredited Investors to participate, provided they have sufficient knowledge to evaluate the investment. While this rule is versatile due to no limitation on Accredited Investors, it prohibits general solicitation, which limits your marketing reach.

Rule 506(c)

Here, you can perform general solicitation, enabling you to reach a broader pool of potential investors. They must all be accredited, and as the issuer, you are required to take reasonable steps to verify this status. This rule can be beneficial for those with a large network of Accredited Investors, but might be restrictive for others.

Regulation D also mandates specific government filings to maintain compliance. You can learn more about the difference between Rule 506(b) and Rule 506(c), and Accredited and Non-Accredited Investors, in our Rule 506(b) And Rule 506(c): Key Differences Explained <insert link> article.

Crime and Fraud Prevention

Within Regulation D is Rule 506(d), a.k.a. Bad Actor Disqualification, a critical provision that can impact your ability to take advantage of its exemptions. It applies to individuals or entities involved in past misconduct, such as securities fraud, financial crimes, and other serious felonies. If anyone associated with your project—such as directors, officers, or major investors—presents a disqualifying event in their history, your offering may lose its eligibility for Rules 506(b) and 506(c).

That’s why it is very important to conduct thorough background checks on all key participants in your real estate syndication.

Another salient provision is Rule 10b-5. This regulation aims to prevent fraud in the securities market. It strictly prohibits any act of deceit, misrepresentation, or omission of material facts in connection with the sale of securities. Adherence to this rule maintains the integrity of your investment offerings.

Maintaining Securities Act Compliance

While pursuing your investment goals as a real estate syndicator, keep in mind that overlooking any aspect of the Securities Act of 1933 can lead to serious legal and financial consequences. Therefore, it’s a must to engage professional legal counsel who can guide you through the nuances of securities registration, exemptions, and filings.

Note that there are two types of lawyers available to syndicators, depending on their needs and requirements. Discover them in this article: Real Estate Attorney Vs. Securities Attorney: Key Differences <insert link>.

Aside from protecting investors, the Securities Act offers many benefits to syndicators, issuers, and fund managers. However, you won’t be able to enjoy these if you run afoul of the originator law. Make sure you stay on the straight line with tips from our Complying With Securities Laws In Real Estate Syndication <insert link> post.

These steps will not only help you stay compliant but also enhance your reputation and investor confidence in your projects.Planning to sell securities? Learn about the legal framework that surrounds it. Talk to a real estate investment expert today! Shams Merchant is the leading real estate private equity and syndication lawyer in Texas, representing clients in more award-winning real estate projects in the state than any other lawyer under 35. Specializing in real estate syndications, fund formations, securities law, and private placements for commercial property investments and development, Shams has been featured in publications like Law360, the Austin Business Journal, BisNow, and The Real Deal.