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From the Rooftop, April 28, 2015 Edition


From the Rooftop, April 28, 2015 Edition

By: Steve Sadler

April 28, 2015

The Impact of Regulation A+ on Real Estate Investing


Come June 2015 we’re likely to begin seeing the equity crowdfund promoters take to the air with the latest sexy offering. The Exchange Act of 1933 has been upgraded by the release of the new Regulation A+, boosting the previous Regulation A+. Offerors are now able to raise up to $50 million in a 12 month period, up from the previously allotted $5 million. It’s what’s being dubbed as the “mini-IPO,” replacing some of the more onerous and costly capital raising options for micro-cap companies. One sector particularly likely to reap the benefits of the new SEC ruling is the market for real estate investing.

As one of the fastest growing areas for crowdfund investing, real estate’s rise is likely byproduct of a number of features. First, real estate offers a collateralized investment. An investment that can be securitized, like real estate, allows investors to recoup at least a portion of their investment should things go south. Second, unlike startups, obtaining a measurable return from real estate, while not entirely easy, is often considered more doable than starting, growing and eventually cash-flowing something as complex and untried as a software company.

Real estate crowdfunding, like other forms of debt/equity offerings, can get highly creative and can be used for anything from development funding to the purchase of existing cash-flowing properties. It can be used in the acquisition and/or development of both residential and commercial buildings. In the case of Regulation A+ crowdfunding, I expect offerings to range across the map from large-scale commercial development projects to growth in single family unit development and/or acquisition with a specific niche in mind.

Unlike public company offerings, Regulation A+ offerings have a bit more flexibility from a structure standpoint. For instance, all public companies must be formed as a registered C-Corp (typically in NV, DE or WY), but Reg A+ filings allow for a bit more latitude in structure and can include Limited Liability Companies (LLCs), S-Corps or C-Corps. The choice of which structure is right for a particular deal may depend on both the capital stack, the waterfall payouts, the investors themselves or the legal and/or tax implications of a non C-corp structure. In many instances, I would expect separate entities to be created as vehicles for the crowdfund campaign itself. And while the C-corp is likely to continue to be the default, we’re likely to see other structures used as well in this process…



The Alphabet Soup of Raising Capital: Regulation A or Regulation D – What Would You Prefer?


On June 19, 2015, amended Regulation A recently adopted by the SEC will become effective. The new Regulation A, mandated by the JOBS Act and often dubbed as Regulation A+, is a significant improvement over the old Regulation A, which was rarely used as a capital raising vehicle. The old Regulation A permits unregistered offerings of up to $5 million of securities in any 12-month period, including no more than $1.5 million of securities offered by security holders of the company. Permissible thresholds of Regulation A+ are much higher. It provides for two tiers of offerings: “Tier 1, for offerings of securities of up to $20 million in a 12-month period, with not more than $6 million in offers by selling security-holders that are affiliates of the issuer; and Tier 2, for offerings of securities of up to $50 million in a 12-month period, with not more than $15 million in offers by selling security-holders that are affiliates of the issuer.”

However, will Regulation A+ become a more popular choice for smaller companies than Regulation D in raising capital? Is Regulation A+ a workable compromise between the company’s need to have access to capital and the SEC’s goal of investor protection?

Rule 506 of Regulation D is one of the most widely used capital raising exemptions under the US securities laws. The main reason of its popularity is its flexibility. Although Rule 506 does not provide an opportunity for selling security holders to participate in the offering as Regulation A+ does, Rule 506 does not have any caps on the dollar amount that can be raised. In addition, any company: public or private, US or foreign can raise capital under Rule 506. However, only a US or Canadian issuer that is not (i) a reporting company under the Securities Exchange Act of 1934 immediately prior to the offering, (ii) an investment company, or (iii) a blank check company is considered an “eligible issuer” under Regulation A+. Note that “bad actor” disqualification applies to both Rule 506 and Regulation A+ offerings. Also, a company that had its registration revoked under Section 12(j) of the Exchange Act within five years before the filing of the offering statement or that has been delinquent in filing required reports under Regulation A+ during the two years before the filing of the offering statement (or for such shorter period that the issuer was required to file such reports) is not eligible to do an offering under such Regulation…



York’s EDA Sells Property to Flex-Space Company


York County’s Economic Development Authority recently sold 4.94 acres at 100 Newsome Drive in York County to Spain Properties, LLC, which plans to build a flex-space facility.

The facility will be about 18,000 square feet and offer multiple spaces for businesses to lease, said Economic Development Director Jim Noel.

The facility will be located in the York River Commerce Park and of the 4.94 acres roughly 1.4 acres are wetlands, he said.

The wetlands and the EDA’s goal of bringing taxable businesses and jobs to the area is why the price was relatively low, Noel said. The assessed value in 2014 was $300,000, according to the county’s website.

“We are not just selling the land, we are trying to bring in tax revenue and jobs to the county,” Noel said.

The contract also includes a stipulation that requires the company to sell the property back to the county for the same price if the facility is not owner-occupied in 18 months, he said.

“Our purpose, our pricing might be a little lower, but that is because our return on investment is jobs and investment,” Noel said.



The Trend Grows: WeWork Eyeing New D.C. Co-Working Location


Co-working company WeWork is looking to expand its D.C. area footprint, this time on H Street NE.

The New York-based provider of co-working space is close to a deal for a 26,000-square-foot space at the Apollo, a mixed-use building under construction on the 600 block of H St. NE, according to a source with knowledge of the discussions.

The Wydown, the independent coffeeshop at 14th and U streets NW that opened last year, is also in talks to open in the building.

The Apollo, which is being developed by Insight Property Group, will be a huge, Whole Foods-anchored mixed-use development when it comes online in 2017. The $189 million building will include 431 apartments and a total of 35,000 square feet of retail space; work began on the foundation in January.

We’ve reached out to Insight, WeWork and the Wydown for this story and will update you if we hear back.


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