(Please note that this is neither legal nor investment advice. This information is presented for informational purposes only)
As an investor looking to invest in real estate, the world of SEC regulations can be confusing, especially if this is your first time learning about them. Regulation A (Reg A) and Regulation D (Reg D) are considered by many issuers as two of the most essential regulatory frameworks when raising money. While both have their place, they operate mechanically differently for the issuer and investor. If you do not know what these terms mean or want to learn more about how they work, this summary will shed light on SEC Reg A and Reg D exemptions for investors. You can also see the SEC definitions for Reg D Reg A.
What is Regulation A?
Reg A provides an exemption that allows issuers (like CalTier) to offer opportunities (securities) to non-accredited investors. Reg A came to prominence after the JOBS Act reform, and since then, many issuers have utilized it to open up their offerings to a larger pool of investors.
Since Reg A allows you to offer opportunities to non-accredited investors, there is a high degree of scrutiny and documentation requirements by the SEC designed to protect the investor. Reg A also allows non-accredited investors to seize opportunities that might otherwise pass them by. There are two regulatory tiers: Tier 1 and Tier 2, each with its own set of requirements.
Tier 1
Allows companies to raise up to $20 million within 12 months. However, no more than $6 million can be solicited on behalf of affiliated selling security holders. Although firms adopting Reg A Tier 1 are exempt from ongoing reporting requirements, they must diligently file their offerings. Furthermore, they must have their filings qualified by state securities regulators in each state where they intend to conduct business. Reg A Tier 1 offerings are typically tailored to smaller companies or those primarily operating in localized spheres, as the maximum capital raise is significantly lower than Tier 2.
Tier 2
In contrast, Reg A Tier 2 allows businesses to raise a maximum of $75 million in a 12-month period. Similar to Tier 1, there is a limit on the amount that can be raised on behalf of security holders affiliated with the issuers. The 2015 JOBS Act significantly changed Tier 2, raising the limit from $50 million and making it easier for larger companies to go public. Tier 2 is often called Reg A+.
Even though non-accredited investors are welcome in Tier 2, they are limited in how much they can invest without being accredited.
Understanding SEC Reg D
In essence, SEC Reg D gives private companies and aspiring entrepreneurs a way to raise money, with often fewer registration requirements. Reg A has two levels, but Reg D has only two rules: Rule 504 and Rule 506.
Rule 504 says that companies can only offer and sell up to $10 million worth of securities in 12 months. There are some exceptions, but most investors get “restricted securities,” which means they can not sell them for six months to a year without registering them with the SEC. Rule 504 says that to start an offering, a company must file a Form D and give accurate information to investors. This ensures issuers avoid violating anti-fraud laws, like when securities are sold too early without being registered with the SEC. Rule 504 strictly forbids general solicitation, meaning companies can not tell the public about their products or services. Rule 504 is a good thing because investors do not have to be accredited to take part in offerings.
Rule 506, on the other hand, has two subcategories: 506(b) and 506(c). Similar to Rule 504, Rule 506 investments are restricted securities that can not be sold freely for six months to a year after being bought unless registered. Both subcategories let anyone contribute as much as they want, but they are different in other ways.
Rule 506(b) says that companies can take up to 35 non-accredited investors but can not ask the public for money. Under 506(b), there is no limit on the number of accredited investors. Non-accredited investors must show that they know something about money and understand their investments’ risks and possible results. They should be given the same information as accredited investors and should be given disclosure documents.
On the other hand, rule 506(c) says that all investors must be accredited, with no exceptions. Companies must take reasonable steps to determine if their investors are “accredited” by carefully looking at their tax documents and financial statements. Rule 506(c), unlike the other exemptions we have talked about so far, allows companies to advertise their offerings to raise money.
Contrasting Reg A and Reg D
Reg A focuses on public offerings, while Reg D focuses on private offerings. Both sets of rules help companies get the money they need while keeping an eye on things and possibly protecting investors. Both have specific filing requirements, and companies are required to give investors information about their finances.
Even though there are parts of these rules that apply to investors who are not accredited, it is important to know that Reg D has a lot of restrictions. Whether accredited or not, you need to be a certain level of savvy to understand the risks and rewards of both public and private offerings. Before making any changes to your portfolio, it is wise to talk to a financial advisor to get a complete picture of your investment options.
