New SEC Rules Open Doors For Real Estate Syndication Capital Raising

Recent updates from the U.S. Securities and Exchange Commission (SEC) have made significant strides to ease the process of securing capital for real estate syndicators. These adjustments are particularly impactful for those involved in private securities offerings, which have been surpassing public offerings in funds raised.

With the SEC’s new measures, syndicators have gained the opportunity to refine their strategies and attract a broader range of investors. These changes mark a pivotal moment for private issuers, making the capital formation process more accessible and streamlined.

SEC’s New Roles and Responsibilities

The SEC has undertaken significant initiatives to improve the capital formation landscape for private issuers. Establishing the Office of the Advocate for Small Business Formation is a cornerstone of these efforts. This office is tasked with reviewing and updating existing regulations and ensuring they are aligned with current market dynamics.

By eliminating outdated standards and inconsistencies, the SEC is fostering a more efficient regulatory environment. These changes aim to reduce barriers for small businesses and private issuers, including real estate syndicators, thereby enhancing their ability to raise capital effectively.

Key SEC updates are poised to benefit real estate syndicators. In the next sections, you will find more details about these changes and how they affect you as a syndicator.

Proposed Finder’s Exemption for Private Offerings

On October 7, 2020, the SEC proposed a new exemption for finders. The new rule allows individuals to act as finders in private offerings without needing to register as brokers, which adds complexity and cost to the capital-raising process. It aims to clarify and simplify the process of connecting issuers with potential investors in private offerings. However, finders are still required to adhere to specific conditions. 

This update is particularly advantageous for real estate syndicators as it allows them to leverage their networks of finders without the regulatory burden traditionally associated with broker-dealer status. By utilizing finders, syndicators can more efficiently and cost-effectively identify and connect with potential investors, enhancing their ability to raise capital.

The public comment period for this proposed rule ended on November 12, 2020, and will be approved when the SEC is done evaluating the responses.

What does the proposed finder’s rule mean for you as a syndicator?

1. The rule-making process is ongoing. Until the public comments are reviewed, incorporated, and a new rule is adopted and published in the Federal Register, the new rule remains merely a proposal.
2. It is still against securities laws for an unlicensed finder to receive transaction-based compensation, such as commissions, for referring investors to a deal.
3. As an issuer of securities, you cannot legally compensate anyone without a securities broker-dealer license.
4. Current rule remains in effect: All parties involved in managing a syndicate or fund should have a role beyond just raising money, and their compensation should reflect this.

Harmonization Amendments to Exempt Offerings

Issued on November 2, 2020, and enacted 60 days after publication in the Federal Register, these changes streamline the exempt offering framework by aligning various exemptions to make them more user-friendly. The offering limits for Reg A+, Reg CF, and Rule 504 have been increased, and financial reporting requirements for issuers of Rule 506(b) offerings have been modified.

Integration rules for successive offerings have likewise been clarified. In securities offerings, integration addresses the issue of treating multiple offerings as a single entity, especially when they occur close together. This can complicate compliance with securities laws.

To mitigate this, the SEC’s final rule introduces four “safe harbors” that help issuers manage multiple offerings without triggering unintended regulatory consequences. These safe harbors provide clear guidelines on timing and types of offerings, offering issuers more flexibility in structuring their capital-raising activities.

For real estate syndicators, the guidelines cover offerings that:

• are more than 30 days apart
• inherently don’t integrate
• meet specific registration requirements

This flexibility helps avoid the pitfalls of inadvertent integration, allowing syndicators to focus on capital formation strategies.

Accredited Investor Amendments

On August 26, 2020, the SEC adopted amendments that broadened the definition of Accredited Investors, which took effect on December 8, 2020. These amendments represent a significant shift for real estate syndicators. By widening the criteria, the SEC has opened the door to a broader range of potential investors. 

Traditionally, accredited investors were limited to those who met specific income or net worth thresholds. Now, they include individuals with certain professional credentials, experience, designations, or certifications that demonstrate sufficient knowledge and expertise. This change allows syndicators to engage with a wider and more diverse pool of investors for private offerings.

For retail investors and private individuals, the expansion recognizes that financial sophistication can come from professional experience and education, not just personal wealth. For instance, professionals with Series 7, Series 65, or Series 82 licenses now qualify as accredited investors, regardless of their financial status.

Non-retail and institutional investors are also beneficiaries of this broadened definition, provided they meet certain criteria. Family offices with at least $5 million in assets fall under this category, as do their clients. Exceptions are doctors, lawyers, CPAs, and finance professionals who do not meet the required income or net worth.

By including these new categories, the SEC is facilitating greater participation in private offerings, thereby enabling more dynamic and flexible capital-raising strategies for real estate syndicators. This broadened investor base can lead to more robust funding opportunities, offering real estate syndicators the chance to pursue larger and more diverse projects than previously possible.

What’s Next for Syndicators After the SEC Updates?

The SEC’s recent regulatory updates offer a unique chance for real estate syndicators to enhance their capital-raising strategies. By taking advantage of the new Finder’s Rule, harmonization amendments, and the expanded definition of accredited investors, syndicators can now tap into a broader investor base and streamline their capital formation processes.

These changes simplify many of the regulatory hurdles that previously complicated private offerings, making it easier to attract and secure investment. However, to fully leverage them, you need to stay informed and adapt to their evolving nature.

Additionally, it is imperative to engage with a seasoned real estate investment attorney who can provide valuable guidance, ensuring you navigate the new rules correctly and remain compliant. This legal expertise can also help you maximize the benefits of the new regulations while mitigating any potential risks.

In addition to legal consultation, consider revising your current strategies to align with the latest SEC guidelines. Whether it’s leveraging finders to expand your investor network or targeting newly qualified accredited investors, these adjustments can significantly impact your capital-raising success.

On the flip side, be careful not to get ahead of the rules pending approval or promulgation, as it comes with serious consequences. For issuers, paying unlicensed brokers could lead to losing their exemption at both the state and federal levels. For Finders, acting as an unlicensed broker can result in significant legal trouble and make you liable for the performance of the investment for those you refer.

By understanding and applying these regulatory changes, you will enhance your investment strategies, attract a more diverse investor pool, and ultimately achieve greater success in your real estate capital-raising endeavors.Have questions or concerns about the recent SEC updates? Don’t leave anything to chance. Ask an expert real estate investment attorney! 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.