Reshaping private real estate capital formation

Reg A+ was launched in 2015 as the next evolution of the Jumpstart Our Business Startups Act of 2012 (JOBS Act). The JOBS Act was meant to streamline the process of capital raising for smaller companies and startups. This effort paved the way for crowdfunding platforms. Reg A+ provides an exemption to certain offerings of securities up to $75 million in a 12-month period. Previously, companies seeking to raise funds through securities offerings had to navigate through complex and expensive processes. Reg A+ significantly eases these burdens, making it more accessible for real estate developers and entrepreneurs to raise capital directly from the public. This shift allows smaller U.S. and Canadian real estate owners and developers to sell their debt or equity ownership to the general public, creating an environment for financing and crowdfunding platforms to operate.

With Reg A+ in place, private companies now are able not only to sell their offerings to more buyers, but also to publicly advertise their offerings, with many choosing to do so online. The goal of the regulation is to give smaller companies and startups an avenue for growth and to give them access to a wider population of people for raising capital. Various crowdfunding platforms offer investments across asset classes ranging from investments in multiple property holdings within real estate investment trusts or funds in addition to individual rental and vacation homes.

Reg A+ exempts Tier 2 investors from blue sky laws, which require that the offering be registered in each state where qualified investors purchase shares of a company. As a result, Tier 2 investing is more beneficial to smaller companies and startups, which, in turn, can be more beneficial for their investors.

Key features of Reg A+

Tiered structure. Reg A+ provides two tiers of offerings. Tier 1 allows companies to raise up to $20 million in a 12-month period, and Tier 2 permits offerings of up to $75 million. Tier 2 offerings come with additional requirements, including audited financial statements and ongoing reporting obligations.

General solicitation and advertising. Unlike traditional private offerings, Reg A+ allows issuers to engage in general solicitation and advertising to attract potential investors. This means that real estate owners and developers can market their projects more broadly on their website as well as with common platform providers.

Retail investor participation. Reg A+ enables both accredited and nonaccredited investors to participate in offerings, broadening the investor base and providing opportunities for individuals who previously were excluded from such investments.

Secondary market opportunities. While not a requirement, some Reg A+ offerings provide a secondary market for investors to buy and sell securities.

Reg A+ and Reg CF have introduced transformative changes to the real estate financing landscape, empowering individuals to participate actively in ownership of private real estate. As more people gain access to diverse real estate projects through crowdfunding platforms, the industry likely will shift toward greater activity, transparency, and investment. In short, these regulatory frameworks are allowing for a greater democratization and interaction with potential investors and new business ventures in private real estate. The crowdfunding platforms provide a business model that combines PE-like funds and fintech to help a knowledgeable investor purchase private real estate stakes with investments as low as $10.

These regulatory frameworks provide additional avenues to real estate development and ownership financing. They are additional levers that allow real estate owners and developers to scale their respective businesses.

Both frameworks represent new and exciting financing paths for private real estate, but as with any financial decision, it’s important to thoroughly understand the risks and rewards.