Changes to Regulation D under the JOBS Act
Later, the passage of the Jumpstart Our Business Startups (JOBS) Act in 2012 amended the exemptions from registration under the Securities Act, as well as creating new exemptions to the rules surrounding reporting and general solicitation. While the JOBS Act was responsible for several amendments, the ones most relevant to real estate crowdfunding have to do with the changes made to Regulation D.
Specifically, the changes to Regulation D under the JOBS Act eliminated the ban on public solicitation of private investments, meaning that real estate developers are now allowed to solicit an unlimited amount of funds from any interested accredited investor, and they are allowed to have up to 35 non-accredited investors in the mix as well. Though, notably, the non-accredited investors must qualify as "sophisticated investors" under SEC guidelines.
The SEC guidelines state that a "sophisticated investor" is someone who "must have sufficient knowledge and experience in financial and business matters to make them capable of evaluating the merits and risks of the prospective investment."
Choosing between Rule 506(b) and Rule 506(c)
Following the changes made under the JOBS Act, there are now two vehicles that investors can use to crowdfund for real estate investments. Notably, under each of these rules, there is no Reg D limit to the total amount of funds that can be raised from the various investors, which makes this regulation particularly appealing to companies that are hoping to raise a large amount of capital.
Crowdfunding companies that decide that they want to crowdfund through a Regulation D platform must choose whether they want to use Rule 506(b) or 506(c). In light of that, the distinction between the two rules is as follows:
Regulation D Rule 506(b)
- Regulation D Rule 506(b) allows companies to raise funds from an unlimited number of accredited investors and up 35 non-accredited investors.
- An "accredited investor" is a person with a net worth of around $1 million at the time of investment or who has an annual income of at least $200,000 for the last two years.
- Investors are usually asked to certify via a questionnaire that they meet the criteria to be considered accredited.
- Non-accredited investors must be given a substantial amount of disclosure information pertaining to the investment.
- General solicitation (also known as "promotional advertising") for the investment is not allowed under Rule 506(b).
- Specific details related to the offering must be posted behind a "gate," which investors can only access once they've self-certified.
Regulation D Rule 506(c)
- Regulation D Rule 06(c) is open to accredited investors only.
- Unlike Rule 506(b), where investors are allowed to self-certify, the investors involved must be vetted, usually by providing supporting documentation.
- Since accredited investors are assumed to have a certain level of background knowledge about investments, general solicitation, or promotional advertising, is permitted.
Who is a Regulation D exemption best suited for?
In general, pursuing a Regulation D exemption is thought to be a good choice for crowdfunding ventures that are in the early stages. Typically, these companies will either be at seed or Series A rounds of funding and, up until this point, they will usually have begun generating significant revenue or substantial growth.
The bottom line
Keep in mind that while a Regulation D transaction offers the opportunity for limited reporting, it is not exempt from any anti-fraud, civil liberty, or any other federal securities laws. Any transaction of this type must also comply with applicable state laws relating to the offering and sale of securities, which may include disclosing any notices of sale or collecting the names of any individuals who receive compensation.
However, provided that you make sure you understand and comply with all the necessary regulations, using a Regulation D offering to crowdfund for real estate investing can make the funding process much easier.