Raising capital for real estate investments can be challenging if you do not have the right knowledge and structure, but one option investors may consider is utilizing Regulation D, approved by the Securities and Exchange Commission (SEC). This regulation provides an exemption from registration requirements for certain private offerings, allowing companies and individuals to raise capital without the need for a public offering.
Regulation D is a very important tool in the fundraising world, especially for real estate investors with a proven track record and existing strategy. This regulation allows you to raise capital for real estate investments through crowdfunding and pooling investors’ capital into projects.
What Is Regulation D (Reg D)?
Regulation D, or Reg D, is a set of rules issued by the Securities and Exchange Commission (SEC) that provide exemptions from the registration requirements of securities offerings. These rules are designed to make it easier for companies and individuals to raise capital without going through the costly and time-consuming process of registering with the SEC.
Regulation D provides three different exemptions, each with its own rules and requirements. The most commonly used exemptions are:
Rule 506(b): This exemption allows for the sale of securities to an unlimited number of accredited investors and up to 35 non-accredited investors. Companies must not make any general solicitation or advertising and must provide certain disclosures to investors.
Rule 506(c): This exemption allows for general solicitation and advertising only to accredited investors. This is useful for companies who want to raise capital through online platforms, social media, or other forms of general solicitation.
Rule 504: This exemption allows companies to raise $5 million in 12 months. General solicitation is allowed, and companies must provide certain disclosures to investors.
Related: Raising Capital For Real Estate In 6 Steps
Requirements of SEC Regulation D
Section 13(a) of the Securities Exchange Act of 1934 (“Exchange Act”) directs the SEC to adopt rules and regulations relating to the offer and sale of securities. In addition, Section 12(b) requires registration of securities sold under Regulation D. The following are requirements for compliance with Regulation D:
– Registration: The issuer must register the securities with the SEC and provide certain information to the SEC in connection with its registration.
– Forms: Form SD is a simplified document containing basic information about an offering, including information required by Rule 501(c)(1) of Regulation D and information about persons selling securities in the offering.
– Sales Information: All sales must be conducted through a broker-dealer registered under Section 15(b) of the Exchange Act (or other person registered with state securities regulators).
– Periodic Reports: Every issuer must submit periodic reports to the SEC on Form 8-K within 10 days after it learns of material events affecting its business or financial condition during any period covered by those reports, except for annual reports (Form 10-K), which must be filed within 120 days after the end of its fiscal year.
Limitations of SEC Regulation D
SEC Regulation D provides an exemption from the registration requirements of the Securities Act of 1933 for certain private offerings. Still, it also has several limitations that issuers must be aware of to comply with the regulation.
One limitation is that Regulation D offerings are restricted to accredited investors, with the exception of Rule 505, which allows for up to 35 non-accredited investors. Accredited investors are individuals or entities that meet certain financial thresholds, such as having a net worth of over $1 million or an annual income of over $200,000.
Another limitation is that Regulation D offerings are subject to certain resale restrictions, which means that the securities cannot be resold for a certain period without registration. This can make it difficult for investors to exit their investments and can limit the liquidity of the securities.
Additionally, issuers must comply with state securities laws, which may impose additional requirements and limitations on private offerings.
Lastly, an issuer conducting a Regulation D offering cannot solicit or advertise the offering to the general public. This means that an issuer cannot use traditional forms of advertising, such as television or newspaper ads, to offer its securities.
Benefits of Regulation D
Regulation D of the Securities and Exchange Commission allows companies to raise $5 million from accredited investors through Regulation D offerings.
A limited number of investors. Only accredited investors are allowed to participate. These people have a net worth of at least $1 million or an annual income of over $200,000 for the last two years before investing in the investment opportunity.
No broker-dealer fees. Investors do not pay any fees when they participate in a Regulation D offering, so they don’t have to pay commissions.
No minimum investment amount is required. There’s no minimum investment amount required in a Regulation D offering because it is an unsecured loan, meaning there is no collateral involved with the transaction, like with secured loans such as mortgages or car loans. So if you want your money back after investing in real estate under Regulation D, you can sell your property without penalty but only within 180 days after closing on your loan or sale closing date, whichever comes first.
We hope that this article will help real estate investors and brokers to raise capital through Regulation D and scale their current portfolio and real estate business. While the benefit of financing deals via Regulation D is limited to certain types of compliance rules, Cherif Medawar, Real Estate Fund Manager and Authority on raising capital for real estate through syndication and funds, thinks it’s important to highlight the fact that there are still many opportunities for investors and brokers to raise capital via this route.
There will be many opportunities in 2023, for investors to break into commercial real estate and scale their current business– you just need to understand that the money is in the structure. And Regd is a powerful structure for anyone with an existing record on investing. Cherif can walk you through the set up, structuring, legal work, compliance and marketing to LAUNCH your Real Estate Fund in 2023. Let Cherif and his Securities Attorney CRACK THE CODE ON YOUR RE FUND. Read Cherif’s book and get the story on how he started and how he launched his first Real Estate Fund (Regd 506b) in the midst of the last recession. BLUE OCEAN OPPORTUNITIES IN COMMERCIAL REAL ESTATE. Get Your Free Copy!