Real estate sponsors often advertise real estate offerings to the public to obtain new investors. Yet, 87% of the people seeing their ads cannot legally invest because they need to be accredited.
The Problem: Advertising to Everyone Yet Only 13% Can Invest
An accredited investor must meet specific financial qualifications, such as having a net worth of over $1 million, not including their primary residence, or an annual income of over $200,000 for a single person and $300,000 for a couple. There are far fewer accredited investors than non-accredited investors. According to the Securities and Exchange Commission (SEC), only 13% of the US population qualifies as accredited.
Solution 1: The Drawbacks of the Reg A
There are two legal solutions to this problem. The first is for sponsors to conduct a Reg A offering. A Reg A is a type of securities offering registered with the SEC and allows issuers to raise up to $75 million in a 12-month period. However, getting SEC approval for a Reg A offering takes time (up to six months), a lot of effort, and significant amount of money. The sponsor must pay legal fees and spend significant time on the regulatory approval process. Additionally, the sponsor will need a technology platform and marketing support for the offering, which are also costly.
Solution 2: A Better Option – Reg CF and 506c
An easier and far less expensive way to promote to, raise, and accept capital directly from the public — accredited and non-accredited alike — is by using two regulations found in the JOBS Act: Regulation Crowdfunding (Reg CF) and 506c. Reg CF allows issuers to raise up to $5 million in a 12-month period and 506c allows issuers to raise an unlimited amount but only from accredited investors. Both rules are exemptions that allow general solicitation, which means sponsors can advertise to the entire investing public. When used simultaneously, accredited investors invest through the 506c exemption, while non-accredited investors invest through the Reg CF exemption.
The Role of a Funding Portal Like Invown
Importantly, sponsors must use a platform approved by the SEC and FINRA to conduct a Reg CF offering. Invown is a registered funding portal that specializes in helping real estate sponsors and owners reach more investors by conducting a joint 506c and Reg CF offering on its platform.
In summary, real estate sponsors are often hampered in their promotional efforts because, legally, they can only accept investments from accredited investors. However, there are legal solutions to this problem. Conducting a Reg A offering is one option, but it is difficult and costly. A better solution is to use a funding portal like Invown and run a simultaneous Reg CF and 506c offering. By using both regulations, sponsors can use general solicitation and accept investments from a wider pool of potential investors, making raising capital directly from the public easier and more cost-effective.
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