Hi, I’m Stewart Heath, CEO of Harvard Grace. Today I would like to discuss exempt offerings for securities, especially in the real estate sector and address the question, why are 506(c) offerings so popular. I was asked the other day, why is this so popular? I thought it would be a great opportunity to make a post.
This is a comparison of the different exempt offerings that are available through the SEC. They have different applications, but since the 2012 jobs act passed by the Obama administration, there has been a great upheaval in the ability for small companies to raise capital from the public. It’s all driven by the internet craze. Most of the securities laws that we have and the regulations stem from the 1933 and 1934 acts.
Generally, if you’re going to raise money from a security you have to register with the SEC and, or slash state governments unless you meet one of these exemptions. These exemptions are quite commonplace these days, and they’re relatively easy to use.
You’re starting to see some more regulation offerings. They were not very popular at all until the 2012 act changed. We received rules last year on regulation crowdfunding, but still today, I’m going to bet the vast majority of deals that you’re going to see are rule 506(c) offerings. Why is that? In a rule 506(c) you can do general solicitation, which means you can make vast use of general solicitation, digital ads, things of that nature to attract investors. You can only attract, you can only receive funds and subscription agreements from accredited investors. These investors must have a third party verification that are accredited. These make it very popular with the issuer and you no longer have to trust the investor.
When they say they’re an accredited investor, you can rely on a third-party such as a banker, an attorney, or a company that’s in the business of verifying investors as third-party. They provide that assurance to the issuer of the securities. You can then apply the ad out in the marketplace as you see fit. You can be assured you do not take $50,000 from someone who’s not an accredited investor and end up in trouble later.
This is why they’re so popular. The rule has been around for a while, but really technology has made it more popular. Rule 506(b) continues to be very popular. You can have 35 non-accredited investors, but you cannot, generally, solicit. You can solicit people whom you have an existing relationship with, which is tricky business. A little bit of a sticky wicket or trap there, which is, hence, the popularity of five or six seats.
We’d love to discuss this with you. I am not a securities counsel, but I am in the business of raising capital for real estate. If I can answer any questions, get online here, Click here and grab some time with me and let’s chat. Thank you and have a good day.