Which regulation should I use for Real Estate projects for accredited and institutional?
Entrepreneurial business development executive who brings ideas and people together for the delivery of new products and services to market. The start-ups that I helped found have produced a variety of innovative applications and new businesses with measurable results. They range from downloadable marketing and educational tools to custom digital signage to on-demand apparel manufacturing. Founding partner of Whimsy Rose, a print on demand apparel brand; which has produced and sold over $20 million worth of apparel through its in-house developed production system. - https://www.whimsyrose.com/ Founded AppWare’s, creators of Deskplayer, - a marketing application design company that produced apps generating over a million downloads for brands ranging from Sony Music to Budweiser, to Marvel. Developed, and delivered customized video delivery and educational communications tools for corporations such as Deloitte Worldwide, to the Pharmaceutical industry for the on-demand delivery of accredited professional development educational courses to Physicians. New Initiatives: A co-branded community-based photo-apparel label and an On-Demand consumer profiling/persona services company. (ProfileNINJA) by http://statanalytics.ca & http://www.didanalytics.com Specialties: • Strategy for Business Development • Maximizing Sales • Analysis & Forecasting • Enterprise Sales to Senior Executives • Program Planning & Implementation • Product & Market Identification • Communication & Negotiation
Bull Blockchain Law
Carman Lehnhof Israelsen
Marty is a nationally recognized securities, finance and fintech attorney and counsels clients throughout the U.S. and internationally on various forms of structured finance, private and public securities offerings, fintech, real estate financings, venture capital and angel financings, fund formation and compliance, business formation and corporate governance. Since 2009, Marty has been active in advising clients in the crowdfunding and peer-to-peer lending space, with a particular focus on the JOBS Act, Regulation D offerings, intrastate offerings and Regulation A. His clients in this space include nationally and internationally recognized platform operators, sponsors, issuers, REITS, funds and service providers. He has been recognized as one of the top crowdfunding attorneys in the United States and continues to provide expertise and play a leading role locally and nationally in this area of securities law.
Peter Daneyko 01:16
Well, thank you for that Marty, technical glitches every time we turn these sessions on and off. Welcome back to KoreConX real estate JOBS Act and tokenization Summit. For today’s afternoon session, we’re going to be continuing on a little bit of a departure from Reg CF and Reg A and the investor community from the public at large and the crowd and we’re going to focus on a little bit more on what regulations should we be used for real estate for the accredited and the institutional investors and focusing on Reg Ds and Reg CF’s and where they fit into the landscape. It’s my pleasure to have two experts in their field of securities tokenization real estate, and most importantly, the law and the ever-changing regulatory landscape. I’d like to welcome Marty Tate, partner at Kinzler Bing and Adamson and Tyler is a partner at Bull Blockchain Law. There’s a tongue twister, good to see you both and good to see again from yesterday, Tyler.
Marty Tate 02:25
Yeah, thanks very much for having me, Peter.
Peter Daneyko 02:28
Marty, welcome. I know we’ve had with KoreConXs relationship, numerous conversations, and your guidance and tutelage. As far as regulations go, the ever-changing landscape is very, very much appreciated. So, so welcome. And it’s a pleasure to have you here. I want to jump on jump into, you know, the last session, we talked fairly extensively on reg D. But I think it’s super important too, to go over Reg D and REG S if we want to touch on it today. Reg Ss are used a little bit less frequently since the adoption of Regulation A plus. But I’m going to turn it over to you too. And maybe give you a bit of the definition and the differences between the Reg A’s and the Reg S’s and what the filing requirements are from a legal perspective. Who wants to take over on that first? First question. Marty, do you want to jump in on that? Sure.
Marty Tate 03:27
Sure. Happy to. Yeah, so a read Regulation D is a safe harbor private placement. Exemption. It’s an exemption from registration. It’s as I said, it’s a safe harbor that basically consists of a few rules, the most common of which is rule 506. The most commonly used and basically says if you meet these requirements, then your exemption or your offering falls within the safe harbor of a private placement and does not need to be registered as exempt from registration. And as I said, for traditional real estate financing and probably financing in general it’s the most common exemption that’s used to raise capital. You think of you know, any think of your real estate fund or a real estate syndication or even a private equity or private venture capital fund. All those are going to rely on typically rely on a Reg D exemption.
Peter Daneyko 04:46
So you touched on 506 C which is I can do general solicitation. I think that’s but also hear the term 506 B. And there’s a difference between the two so maybe you can give the audience a little bit of a quick overview on the pros and the cons. Tyler, do you want to jump in and add, or Martin, either way?
Tyler Harttraft 05:09
Yeah, sure. So yeah, 506 is quite different in that it allows you to raise money from nonaccredited investors up to 35 of them. But the big kicker is that you cannot generally solicit so you’re not able to go out and advertise using a website, social media marketing, or anything like that. It’s really an exemption that’s primarily used by individuals who have pre-existing relationships with investors. It’s also referred to as the friends and family exemption. So to the extent you want to bring in people who are not accredited, it provides an opportunity for that. But you know, the majority of raises that we see in, you know, that are ongoing out there in the market are your 506 C raises.
Peter Daneyko 05:54
And the five or six they were limited to 2000 accredited investors before I’m fully reporting is That’s my understanding.
Tyle Harttraft 06:02
Yeah, and then not so much in offering restriction. And that it’s, it’s a separate restriction that applies to all companies, once you hit that 2000 investor threshold and a 10 million in assets value. Then that 12 G Exchange Act regulation kicks in, and so you have to become a reporting company. But you have to meet both requirements, both prongs at the test.
Peter Daneyko 06:27
So we know that a 506 C, I can do general solicitation, what are some of the parameters around a general solicitation? What do I need to disclose? What can I say? What can I not say? Where can I do that general solicitation? Marty?
Marty Tate 06:45
Inside? Yeah, sure. So the general solicitation and this was a big deal when it was included as part of the Jobs Act? Because what it did is it expanded the ability, you know, in doing a private placement, it basically allowed people to advertise and market that, that offering. Primarily, you know, most of that offer that advertising is done over the Internet through web pages or, you know, internet or ads or so forth. But really, there’s no limitation on where those can go they can you can, you know, you could have it on the back of a plane, you could have it on a blimp, you could, you know, Billboard TV ads, radio ads, I think I’ve seen her and heard at all. With regards to what you can say that you’re, you’re pretty wide open there are well, there are no general restrictions on what are specific restrictions or what can or can’t be said. Other than what you have, you can’t say anything, that’s misleading. You can’t say anything, that’s promissory, you know, we strongly advise against certain graphics that show you know, arrows going up on your return on investment, or anything where you’re being, again, promissory or talking about, you know, 2x on your return, or 10x. On your turn, anything like that is would be frowned upon and could be deemed a violation of the rules associated with that offering. But again, it’s not specific.
Peter Daneyko 08:39
So you can be forward-thinking, but a lot of common sense of, you know, applies. I’m making an offering, and I’m showing a castle and I’m in and I’m selling residential real estate, and that may be misinterpreted, that I’m actually investing in the castle. And there may be, you know, an obvious visual example of misrepresenting the offering so, so from marketing so that’s one of the beauties of a 506. C. Is that ability to say, hey, I can go after the public at large, but I’m going after the public accredited investor at large? So that becomes often the challenge for I think the investors or for the issuers themselves is to say, Do I have an offering? And am I willing to spend enough time articulating my message and touching those investors on an ongoing basis in order to to make my offer compelling at the end of the day? From your guy experience and we’re going to be dumped jumping into the institutional family office side of it. What what’s been the what’s been I guess the general approach? I know this is because you’re both in the legal side of it. But can you share some insights or experiences with what companies are doing when they’re trying to present their offerings to those accredited investors and what the approaches that they may be taking?
Tyler Harttraft 10:06
Yeah, happy to jump in and share some approaches. I mean, we have clients who certainly want to, you know, put their best foot forward as far as communicating the investment prospects or the prospect of returns. But without running afoul of saying too much, or saying something that might be misleading and getting into trouble where there might be omissions. And so what the exercise that we work through with our clients, when we’re talking about we’re reviewing the marketing materials is really, if you are going to provide numbers or projections or past history, you know, how is that calculated? Are there any caveats that need to be mentioned, as far as how the numbers were, were derived? And then do we, you know, to the extent that there are communications around those numbers? Are we leaving anything out that would subject us to misstatements or omissions liability, as Marty was referring to, and it’s just usually a review and discussion for those marketing materials and, and making sure that there are no holes in any of the information that’s being presented to the investors. And, like Marty said, it’s largely common sense, you know, to the extent that it’s not false, and not misleading, you’re generally going to be in the clear.
Peter Daneyko 11:26
So when it comes to real estate, we’ll go over to the reg S a little bit later. But when it comes to real estate and structuring the deals for Reg D, where do I begin? Let’s say I’m a, I’m new to this, and I want to I’ve got a development project, and I’ve got a shovel in the ground. And we’re going to do a residential property, for example, what? What kind of questions do you ask and where do I begin? Marty, want to weigh in on it?
Marty Tate 12:00
Yeah, sure. So typically, when we have a client that’s wanting to do a new offering, the questions that, that I asked her. You know, how much and from Who are you trying to raise the capital? So, in this situation, if somebody came and said, Listen, we’re trying to raise, you know, we’ve got this real estate project, we need to raise a million dollars of equity, to go on top of the debt financing that we’re that we have lined up. So then the second question is, you know, who, if they said, it’s, you know, a handful of accredited investors. And we know, we know all of them, and we’re just going to talk to them then that, you know, that kind of dictates what steps need to be done. If they said, Well, we’ve got a few we’ve got, you know, two dozen, or let’s say, 50 investors, half of which are accredited, half of which are not, that would drive us towards. You know, using a 506. B. And I guess the other question is how, you know, how do you want to do this, if they say, Hey, we want to raise this capital, but we want to do it over the internet, we want to send out things then that that would dictate, again, what we would do what exemption, you know, using 506. C. But that also, that also would dictate those questions dictate what disclosures need to be provided. If it’s just two or three people that are coming together, they’re all accredited investors, the amount of disclosure, you know, the rule of thumb might be less than if they’re saying the other example where it’s 50 people and some are accredited, some are not, then the disclosures that you would want to provide to those investors would need to be ramped up accordingly.
Peter Daneyko 14:05
Okay, so more detail for the nonaccredited investor than the accredited investor, maybe not detailed, different.
Marty Tate 14:12
Well, is it different and it’s, you can’t It’s not different. It’s not different from what you would provide them everything, you have to provide the same information to every investor regardless of whether they’re accredited or not. But if it’s two or three sophisticated, accredited investors that come together, they probably don’t need a full private placement memorandum with, you know, pages full of risk factors, they’re presumed to understand the risks associated with that. However, the more investment this is just kind of my rule of thumb, the more investors, and especially the greater the number of nonaccredited or less sophisticated investors. The more information the company is going to want to provide them about the project about The the company about the risks, financial information, all of that so that if nothing else, it’s like an insurance policy or pseudo insurance policy, it sure you wouldn’t have them come back and say, Well, you didn’t tell me x. The purpose of that private placement memorandum or disclosure document is to say, we told you the risks, we gave you the financial information, we told you all these things. So.
Peter Daneyko 15:28
So you want to broaden that information? Yeah, no, that makes perfect sense. Broadening the information that that’s being disclosed, not necessarily disclosing that you’re articulating to, to a wider audience versus one individual or two individuals is what I’m hearing which makes, which makes good sense. So So Reg, D, it’s a US exemption, have to prove that I’m an accredited investor. Could be a letter from my CPA, for example. I mean, we do that from a technology perspective, just to try to make it streamlined and easier. But now I’m seeing we have clients that are doing a reg D and a reg s simultaneously, for example. And there’s certain there’s a variety of online restrictions that are associated with that. Tyler or Marty, do you want to weigh in on the difference? Let’s start with the regulation. We know what a Reg D is. Let’s, let’s talk about a Reg S.
Tyler Harttraft 16:29
Yeah, happy to comment on that. So regulation S is an exemption used to offer securities to non-US individuals in offshore transactions. So that means the individual is not defined as a US person under the Securities Act, and they’re not residing in the US. And that exemption can be used in parallel with other exemptions like Reg D. So you might have a combination exemption exempt offering, whereby you’re offering to US investors under Reg D, and you’re offering to non-US investors, under reg s. And there are some additional particulars, you know, the Securities Act is very meticulous. There are often clients that think of perceived workarounds, like what if I open a company outside the US, now, it’s either my BVI entity and that’s a non-US person. But the Securities Act has forecloses those loopholes, and things like that. So if you have an entity that’s wholly owned by a US person. That entity is going to be considered a US person for the purposes of that exemption. And so it is a great tool for purely offering to non-US investors and stacking it with a reg D exemption. But, you know, in addition to having an exemption that applies in the US, if you’re an issuer based in the US, you also need to be aware of the offering rules, or the private placement rules in the jurisdiction that your investors reside in. So if I’m offering in Germany or the EU. I want to be aware of the private placement rules in those jurisdictions to make sure I’m not running afoul of non-US laws with my offering. And so, you know, we’ve done especially in the context of digital securities, we find a lot more interest from issuers in wanting to expand their prospective investor pool by offering to non-US jurisdictions. And so that requires some analysis of those, those additional offering laws. And if you want to offer globally you can imagine that’s a pretty tough task as far as trying to comply with all of those exemptions. There’s no standard rule, but there are a lot of similarities across different jurisdictions.
Peter Daneyko 18:54
Okay, so you’ve got so I’ve got a for my neophyte side of the rate regulations. So I’ve got a reg D is a US regulation, I’ve got a reg s, it’s a US regulation. The reg S is for foreign investors coming in, but the issuers should be aware that that exemption may have well, that exemption may have some qualifiers on it, based on where those investors are coming from what I’m hearing. Right, right. From your legal perspective, do you okay, I’ve got a real estate project here I want those foreign investors I’ve decided I’m going to do a Reg D Do I just say and let’s do it, I guess
Marty Tate 19:42
I guess it would depend on as Tyler said, the how, the scope, or the reach of the investor of the issuer and where they want that offering to go He said, in connection with digital securities, especially that does make it you know, the sort of, you know, our geographical boundaries are having less meaning than they did in the past. And so people want to say, hey, we want to, you want to allow anybody to invest. And one thing that Tyler said that I want to just reiterate is that reg s is great, basically, that’s the exemption for the issuer here in the United States. And what it basically says is, it’s the SEC saying, we’re here to protect US investors. So if you’re an investor in the UK, or in Singapore, we’re not here to protect you. However, those countries have laws that are designed to protect their investors. So if you’re making a selling effort, if you’re targeting investors in these borders, and dictions, it is wise to make sure that you are also, like Tyler said, complying with the private placement, exemptions and rules, and regulations that jurisdiction. So Reg S doesn’t really have qualifiers on the US side, but the qualifiers are on the foreign side of the foreign jurisdiction.
Peter Daneyko 21:26
Okay, so then, so it’s probably I’m gonna make an assumption, maybe not 100% accurate. If I, if I’ve got a bunch of known investors that are like a lot of funds may have, they say, hey, I’ve got my accredited investor pool, and some are, some are foreign, and some are domestic, I’m in a much better shape because I made say that I know the jurisdiction that my foreign investors are coming into the Reg S. So those are often just to repeat investors. And, if I know those investors, it just makes my life a whole lot easier doing a Reg S and a Reg D simultaneously.
Marty Tate 22:06
Presumably, however, if say, but say there are 15 investors in there, you know, 20. I think the larger the number, the more attention you probably want to pay to this. But if there’s a number of investors and it is in a jurisdiction where you kind of repetitively solicit and obtain investments, you definitely want to make sure that you’re complying with those laws. And so for example, you know, doing that, let’s say Reg D, offering, and then you want to do a Reg S in Canada, that’s great. But Canada, and specifically, each Canadian province has its private placement rules and prospectus delivery requirements and rules for their exemption. So if even if you know the investors and have done deals with them before. You want to make sure that you’re complying with that law so that you don’t run afoul of the regulator’s there. And even though you might be 100% compliant in the US, the Canadian regulator would have an issue.
Peter Daneyko 23:14
No, and you brought up a really good point here being a resident of Canada is there isn’t a central governing body that’s, you know, like the SEC and candidate, it’s provincial jurisdiction. So and rules change all the time. And that’s the tricky part. And that’s why you guys get paid the big bucks to manage those changes all the time and keep everybody aware of what’s going on. Because you’re right, what goes on in Ontario today, and I see this in what goes on in Ontario a couple of years ago or Alberta changes. So they may have said, We’re comfortable with that investor investing in whether it be a Reg A, whether it being a Reg S, in the United States can change so so really, really important points to note. And the real reason that you know, we’re strong advocates for not only from an educational perspective but also from really, you know, recommending that any issuers, especially when having a conversation, whether it’s again, whether it’s a CF, D or Reg A, to speak to folks like yourself. Specifically to say get the best guidance, because you do it all day long. Because it’s tricky. It’s a tricky landscape to navigate. When it comes to Reg Ds, for example, and we’ve talked about, you know, things like to hold periods, and I’ve heard individuals have come to me and say, Oh, they’re freely tradable, after freely transferable, or I can do whatever I want after a 12-month window. That’s not accurate, is it? I mean, fundamentally it’s accurate, but if I’m a GP I can write whatever I want in my offering, and the 12-month window isn’t just it’s, it’s a date without doing exist, exists additional amendments to that, would that be a correct statement?
Tyler Harttraft 25:17
Well, so having a comment on that, I think, you know, if you are not an affiliate of the fund, you’re gonna have a lot fewer restrictions on the transferability. And so under the Securities Act, if you did, an offering under Reg D, generally, you will be able to trade that asset after 12 months. Assuming as you said, there are no GP restrictions baked into the operating agreement, or the limited partnership agreement. And to the extent that, you know, you’re an accredited investor, you can usually sell that asset to other accredited investors even sooner than the 12-month lockup period, provided other requirements are met. And so it is relatively flexible. And you know, to comment on reg s a little bit, it’s even more flexible, as far as the transferability, there’s different three different compliance periods or holding periods for that asset. And the period that applies really depends on the nature of the asset being sold, and the issuer that selling it, and you kind of it’s a tiered compliance period, a structure that is set up to prevent flow back to the US. So issuers with the most likelihood of their assets flowing back to the US, are we gonna have a longer compliance period, issuers where the SEC is deemed that it’s a much lower risk of the asset, the investment flowing back to us purchasers. That it’s going to have a much shorter compliance period. And so Reg S also has some compliance restrictions, depending on the status of the issuer. And that’s something obviously, with digital securities, we’re very focused on when we’re talking about looping in non-US investors for the offering and what their potential for liquidity will be. And with those distributed button periods, excuse me.
Peter Daneyko 27:08
No, thank you for that. Define digital securities in the sense that we’re for this discussion point that we’re talking about here. And you’re referencing, go ahead.
Tyler Harttraft 27:20
Right, yeah, I mean, I just mean it to, you know, the way I explain it is, it’s a technology overlay of an underlying asset. So and the underlying I mean, the direct asset, the limited partnership interest, the LLC unit, the ultimate underlying is a property in this context. But the digital security represents one of those interests, it can represent a share stock, although it typically doesn’t given we’re using pass-through structures for real estate. Right now, I saw one of these comments flow by I think it was yesterday, what is the point of using Blockchain to represent these assets? I mean, right now, most of what’s being done with digital securities is this is just a courtesy copy of what exists on the books and records of the issuer. It’s not a bearer instrument, meaning you can’t show up with that token and say, you own it unless the books and records also reflect that. And the point of blockchain and decentralized context is the instrument of ownership or whoever owns the wallet that has, you know, access to the instruments via their private key is the owner. And the reason we can make that happen right now is largely because of regulation. The SEC put forth the special purpose broker-dealer requirement that says, if you’re going to allow brokering of digital assets, that’s the only business that you can be in. And so all the brokers in the space have licenses currently for other activities. And there really is no special purpose broker-dealer out there as of yet that I’m aware of that’s been approved for just handling digital assets, and is solely dedicated to that. And there’s been lots of commentary in the industry on that issue. And, you know, we’re waiting to see if it’ll be, you know, changed so that any broker-dealer can allow for the trading of digital assets to, to really use the technology as it’s intended to be. But for right now, we still have transfer agents that are recording the books and records and keeping the ownership records for these assets. But the whole goal is ultimately we’ll get somewhere it gets to a point where the asset is the bearer instrument.
Peter Daneyko 29:35
No, that’s probably the clearest that I’ve heard that I think we know where we want it to end up. And the challenges If that’s the case, and the bearer of the asset, controls the asset and the concept of its own immutable ledger, where does it break down? I mean, where does it you know, we see the failings of the exchanges, by not having a third party any intermediary that’s worth themselves, you know, somebody, you know, who’s watching the store, so to speak? Where do you see that playing out? Marty. What are your thoughts on that? I mean, we’d all like to have this, I think personal digital asset world, but if you don’t have a third party and a, hey, let’s be honest, at the end of the day, we have rules and regulations where they’re in compliance and the SEC, whether we like them or not, but if a securities and securities security, and we try to cross those boundaries. Where does that lead? Yeah.
Marty Tate 30:39
So I think that Tyler said correctly that, you know, we’re still waiting, the regulations are creating some roadblocks. Some of the roadblocks have just been meshing technology, with the regulations. And, and I know that like, initially, when we were trying to do issued digital securities under regulation, that a lot of the comments back from the SEC, related to just, you know, how will this work? Tell us how that transversion. And how do you? And the pieces weren’t there, which I think they’re, they’re definitely coming online. And we’re in a different spot than we were five years ago.
But I think that you know, the name of this conference is real estate JOBS Act tokenization. Because liquidity, I think that I think that’s representing these securities, whether it’s debt or equity interests, is, I that’s definitely where it’s going. And I think right now, creating this, this record of it on a distributed ledger, has benefits. But as Tyler said, it’s not a bearer instrument, it doesn’t give you the ability to go in and claim anything. You know, it’s just a replica or duplication of what should be reflected on other records. But I do think it’s, but I still think that there’s a future and I think that you’ll, you’re seeing more and more, you know, the tokenization of more and more assets. And, you know, by tokenization, meaning just the ownership of that being represented in a digital format.
Peter Daneyko 32:42
Yeah, so I think it’s just, we’re still at that nascent stage. And maybe sometimes we want to get from point A to point B, faster than both technology and the regulators are ready for and, and, you know, so but, and as we talked about the nature of this, this week, on the real estate, you know, trying to put some clarity, I guess, when we talk about, you know, fractionalization tokenization, digital asset securities, combine that with the regulations. Fundamentally, we live in a world of rules around these regulations and these exemptions that we’re talking about. And in order to comply with them, we can’t necessarily do things that somebody might want to do. And I tend to, and I want your thoughts on this, they tend to make a comment. And when we get a lot of issuers or a lot of entrepreneurs that come to us, and they say, Hey, we want to use your tech platform, in order to do this offering, and we want to tokenize the offering. And we say, what does that mean to you? And they say, Well, I, I want to be able to digitize my asset. And I want to put it over here, and I don’t want anybody else to have visibility to it, you know, towards it, except for myself. And the problem, you know, we articulate is, maybe I’d like that, too. But if you don’t want to run a file with the SEC, and often the commentary is, well, they’re doing it over there. And I think that’s probably the biggest mistake that anyone can make. Just because somebody’s doing it over there doesn’t mean it’s legal and compliant. And maybe we’re gonna get there, and I think we will get there, but it’s just not today. Your thoughts on that? I mean, do your eyes look, I see a lot of the SEC is going to clamp down I think harder, and 2023. You know, based on trust and compliance than any other year we’ve seen. What are you hearing out there? What are you seeing out there? What are you advising your clients in that regard?
Tyler Harttraft 34:46
Yeah, I think we’ve certainly heard that story before. You know, we point to this person over here and they’re doing exactly what I want to do. Why can’t I do it? And unfortunately, the lack of clarity does not be moved those who are abiding by the rules of the road, I think, you know, as regulation starts to become more robust, and more clear and 2023 and beyond. You know, those who have abided by the rules of the road, to the extent that they’re clear, will be rewarded. But you’re right, it does kind of create this race to the bottom, the lack of clarity, for those who are operating in any gray area, or just flouting the law with no repercussions. It serves, no, it’s a competitive advantage versus those who are actually comforting. With, with the rules. And so, you know, it’s a, it’s a very frank conversation that needs to be had. And at a very early stage, and as long as I think we’re, you know, we take a very practical approach, and there are situations where there is a lot of gray, and it’s a commercial decision that comes down to the client’s risk tolerance. And so we’re always gonna give, you know, not only our opinion on the law, but you know, our opinion on the commercial risk and, and what that might entail. And so those are all things that we have, regularly discussed with our clients.
Peter Daneyko 36:15
No, well, thank you for that. We’ve got a question here from one of the viewers online, and it’s more to do with the documentation for the SEC. For Reg S offerings, and I guess it pertains, do you submit any documentation to the SEC.
Marty Tate 36:37
So there’s no court. So with a reg D. To have the exemption, you’re required to file a Form B. Reg s says, there’s no form s that needs to be filed. So self executing.
Peter Daneyko 37:00
So but that form must be posted somewhere. So where do we put it? On a Reg S, on a Reg S.
Marty Tate 37:08
So there’s, there’s no form. So you by doing, it’s just magic. You know, you can? Yeah, it’s something that so if you, here’s kind of how we approach it. So a reg s subscription agreements going to look a little bit differently, or I guess, disclosure documents gonna look a little bit differently and mainly address even, you know, the holding periods who you can sell to when you can sell to them, or transfer. Those items need to be addressed, you would also want in the subscription agreement, reps and warranties about them being a non-US person, where they live, and so forth. But none of those documents are filed. And even a reg D, the only thing that’s filed is what’s called a Form D, which is just a notice filing that goes to the SEC. And then and as well as the states where you’re selling that just says we’re listening, we’re doing a private, but we’re doing a reg D private placement. But it’s not reviewed by the regulators, at least not for an It’s not reviewed and approved. It’s just something that you provide no, there’s no corresponding document. There’s nothing like that for Reg S. Okay.
Peter Daneyko 38:28
But there are stringent requirements as far as who can actually access the Reg S online. For example, where I must, the US investor cannot access only because we’re in the tech space. So we have to look at this and seek legal counsel when we’re assisting clients, where they’re going to put a button for the application for the Reg S. t must be gated there must be a forget the technical term for it. But basically US investors, or there’s like a firewall they can geofence Thank you, Marty. That was, yeah, so it needs to be geofence little things like that, you know, to say I’ve got a Reg S button, and I’ve got a Regg D button over here. And I’m doing everything. But there’s a simple technical example, I need to geofence my Reg S button. So the US investors can’t not be clicking on that and going through that offering. They gotta go over to the Reg D button. That’s all
Marty Tate 39:21
which is, which is interesting, and maybe Tyler can land on this as well. But it’s an interesting nuance to that. Right. So one of the issues is to qualify for the right so that you can have no directed selling efforts within the United States. And so this concept of having a simultaneous reg D and REG s it’s permissible, but it’s also a little bit goofy because just by saying that I go to the website and I say I’m a US investor, and I can invest in the Reg D that I know, I’m not a US investor, I can invest in the right gas. You know, how are you? What are those directed selling efforts? It seems to me if you have a website that the US investor could access That looks like a selling effort. But yes, you know that. That hasn’t been the position with the SEC. So yeah, hence the
Peter Daneyko 40:09
geofencing. So they say if you’re geofencing it, we know you have a reg gas, but you’re not letting me Look, you’re not letting me click on it. So I think maybe that’s,
Tyler Harttraft 40:18
yeah, yeah, they kind of say, if you’re using another exemption, you know, you’re okay. But to the extent that you’re not, you know, that’s a direct selling effort. And I wonder, I don’t know, offhand if that rule predates the ubiquitous of the internet. Or for if that’s, you know, something that was more recent, but I’d be interested to know if that was something that was, you know, really devised when it was more, you know, mailings, and you know, paper advertisements and things like that, and it was much more needed probably.
Peter Daneyko 40:49
It was certainly easier to manage, I would think, you know, delineate. Jumping over to institutional. From a document requirements perspective, I mean, I, there are two different audiences here, I mean, the accredited investor investing in a reg D versus what an institution or what a family office requirement might be, it’s more on the institution side, looking for some comments on that. I’m doing a Reg D offering, and I’m soliciting family offices and institutional investors. differences, nuances, and requirements.
Tyler Harttraft 41:31
Yeah, I’ll come on, and then really interested to hear Marty’s take as well, because like, you know, while ppm is not required under, you’re going to use reg D most likely. And while ppm is not required, it is somewhat of a best practice, even, you know, in our experience, even when there are large, large institutional investors. Depending on the type of venture, you don’t see it really in, you know, private equity too much. But with respect to real estate investments, you know, there’s a lot of information to be disclosed. And usually, the best way to do that is put it in an offering memorandum with risk disclosures that, you know, they’re, they’re going to do more benefit than harm, you know, there’s no harm in providing them. And so we see still PVM being used as a best practice even with institutional investors. But it also, you know, Marty alluded mentioned this, it depends on the number of investors too if we’re general systems soliciting we want to have that PPM available. But if we’re just going to a couple of people that we’ve dealt with, and, you know, they’re in the space, they know, the industry, it’s going to be hard to say that they weren’t aware that for them to turn around, say they weren’t aware of the risks when they did, you know, a, b, and c deal with you already, or in the same industry, or, you know, that’s their niche. And so, it’s definitely a risk-based approach.
Peter Daneyko 42:54
Okay, and that makes sense. So it’s, the more details you provide, really, the wider your audience and the more due diligence that a, let’s say, an institution or family office is going to require anyway.
Marty Tate 43:10
And a lot of times a family office, or it’s kind of sad, it’s not required, but it is best practice. And watch, I was a family office and institutional investors they’re looking for the project that will say, you know, send us your ppm. So that’s, it’s, it’s also just kind of become part of doing business. So that’s another reason that you know, it’s done. Now I get it, it does provide some level of protection and but it’s, it’s also a kind of the standard.
Tyler Harttraft 43:51
If they don’t know you, it’s a gating mechanism, really, I mean, polished is your presentation, how good you look on paper, you know, if you don’t have one, or you send them something that’s really very robust. It’s going to, you know, they’re going to take that and judge a book by its cover, you know, because they’re getting lots of these assumptions we assume, and it’s it’s kind of a gating mechanism in that respect.
Peter Daneyko 44:16
You’re getting the reason to say no, early on, right? Okay. Hey, so, in some of our earlier panel sessions, we’re talking about sidecars between Reg Ds and Reg CF, and Reg A’s. Maybe you can share some of your experiences from a tech perspective. We do it on a regular basis when somebody is doing a CF and they say I need to do a reg D and they’re using an investment platform for the application. It’s going to vary between who the investor group is differing between the accredited and the non-accredited or the hybrid of both. And then the offerings are Different, somewhat different between the Reg D and the Reg CF and a Reg A when they’re doing a sidecar investment, what’s been your experience? What’s your recommendation in the real estate sector to do. Good idea, bad idea? You’re casting a different narrative, but you are structuring your deals differently in such that my CFI offering might be different than my reg D offering. Comment. But I
Marty Tate 45:25
I think it can be a good idea. And it can be helpful, I think, especially with the CF, because you’re limited to the amount that you can invest, or you can raise under that exemption, whereas a reg D or not. So, if you have you know, if you’re doing a CF to try to raise, you know, say you need $10 million, you could only use CF to raise five, you could have your accredited investors invest under a 506 or reg D offering. And come in that way that where you have to be careful is that because you are advertising your Reg CF, just by having a C, if you’re deemed to be doing a general solicitation, you have to comply with not only you have to comply with those requirements, but your Reg D offering would therefore have to be a 506 C. And if you’re advertising, you have to take the higher law of the reg CF advertising requirements, in which there are limits, or there are restrictions on what you can and can’t say. So you can say whatever you want over here to the reg C to the sorry, to the 506 C guys. And then the limited stuff here. It’s deemed to be the same communication for everyone. So there are some nuances to that. But it definitely is something that makes sense.
Peter Daneyko 47:02
Yeah, no super important point that you just made there. It’s just making sure that you’re clear to the audience that you’re doing both of these. And it’s and it’s perfectly acceptable. You’re doing him I’m gonna raise 5 million here and at 20 million over there. And maybe I started to see if I’m not moving into a Reg A right now, for example, and try to accommodate both of them. But yeah, no, that makes perfect sense. So yeah, I mean, from a legal perspective, I can never see CF and a Reg D and a Reg A all at the same time legally, can I not? Usually, you see rule one rolling into the other. But there’s no legal requirements as you can’t do all of them. I generally see one rolling into the other but a reg D is a sidecar to a CF and a Reg A potentially simultaneously, when you’re at different locations on the web for, you know, going for those different audiences.
Marty Tate 48:01
Jjust there are different requirements for each and I think you just have to make sure you navigate through that with the amendment to you know, a couple of years ago to Reg CF to allow testing the waters. That kind of makes it not it makes it less difficult. Because you before you did a Reg CF, you couldn’t say anything. So now, you know, that’s one less bear trap to step into.
Peter Daneyko 48:28
So one of the questions that comes up a lot, and I mentioned institutional, for example, or even family offices, was the old adage of, oh, I don’t want too many shareholders on my cap table, because they’re not going to be interested in that. My takeaway from my experience has been not necessarily true. It used to be when technology then facilitate that, or the perception of I’ve got too many chiefs at the table, so to speak. So if I’ve, I’m looking more in the VC world where I’m coming in and saying, Okay, I want to be the lead and, and I want a seat at the table. And I don’t want too many investors that can perhaps influence my position. But when it comes to the democratization of capital to the crowd, the tech says, I don’t know we got 100,000 people on the cap table, and their common shareholders also say it might have a following and brand advocates in an audience. Do you see that dissuading any family offices? In that regard? If they’re coming in on, let’s say, different terms, because they’re a large investor into, you know, an issuance that they might like, comments on that?
Tyler Harttraft 49:46
I mean, yeah, I think the issue you’re highlighting is one of control. And in most of the circumstances we see these assets are the interests don’t don’t have any voting rights attended to them. And so what your concern Within the VC context, as far as, you know, a board see and different control provisions and different rights for different investors is not necessarily going to rear its head in, in a lot of these real estate contexts where it’s just an economic right at the end of the day, and absent any sort of, you know, abridging of rights decision to abridge the rights of the interest holders, you’re not going to need their vote for for most of the activities and so that, yeah, it’s not really as much of a concern in that context.
Peter Daneyko 50:33
And no, and that’s what we’ve been experiencing some, but it used to be, I never quite understood the context, originally, when they said, you can’t have committees here and shareholders and, and back my mind, I’m going. I don’t know, I’ve never said that in a public company. So
Tyler Harttraft 50:49
you might, yeah, it might be a reference to that 12 G rule that we were referring to with the 2000 investors. You know, lots of companies want to avoid that public reporting requirement that comes along with having that many investors if you also have the requisite amount of assets.
Peter Daneyko 51:06
And that makes, but let’s elaborate a little bit on that. So we talked about that fully reporting on a Reg D after 2000 investors or the asset threshold. When it comes to I’m doing a reg CF, I’m doing a Reg A I can have an unlimited number of shareholders. When a Reg A you’re, you’re still reporting. But give me some insights on the different types of reporting as a fully reporting company, in relationship to the different exemptions.
Marty Tate 51:43
Yeah. And maybe this has been touched, touched on in other sessions, but you know, a fully reporting company as a company that is required to report under the 34 Act. And that’s what we deem as a public company. And they’re required to file annual quarterly reports. They’re also required to file you know, statements of ownership changes, there’s a lot that goes into that. And so it’s too big. Yeah, that’s the highest, well, not the highest, I guess, if there, there are other types of reporting companies, they have to do more but with a Reg A, your, your pseudo-public in that you do have to make, you have to file an annual filing and a semi-annual filing. But you don’t have to do quarterly reports or ownership changes. And then with REG CF, you have to do an annual update on the company. So there it’s tiered. Definitely and but it’s also advisable to, you know unless you want your stock to change or to trade on it on an exchange or market. Most companies try to avoid being a public company.
Peter Daneyko 53:08
No and fully understand that from reporting. It’s not really the number of shareholders then it’s if I’m using certain exemptions, I’m reporting in some capacity on a CF on a Reg A. It’s just the level of reporting that I’m actually doing is what I’m hearing here.
Marty Tate 53:24
Yeah. And that, that trigger Tyler mentioned, the section to 12 G trigger is based upon assets that the company has and the number of shareholders they have. However, Reg A and Reg CF provide an exemption from that reporting requirement from becoming a reporting company Reg D does not have that. exemption, so, so bring on? Yeah.
Peter Daneyko 53:52
Go ahead. I was just gonna. So it’s another reason that everybody says Reg A plus is probably the best exemption that exists today. If you’re prepared, and it suits your, your appetite for the raise, and the due diligence as for the filing, would that be fair assessment?
Marty Tate 54:12
Yeah, it’s, it’s definitely flexibility. It’s a good thing, that it provides a lot of flexibility, but it’s also more expensive. And it takes a lot longer than the other two. So
Peter Daneyko 54:23
Iit sounds like, and I think we’re getting the top of the hour here, they all have a purpose. And they all have a home at different stages. And they’re just more opportunities for individual companies today to look at what their options are. And by speaking to Tyler and Marty, they can give you some infinite wisdom on strategies and structure early on, rather than jumping into one or the other or all three. Would that be fair?
Marty Tate 54:53
Absolutely. Yeah. Absolutely.
Peter Daneyko 54:56
Well, I want to thank both of you. Every time we have sessions. If you can get one good idea that came out of it, I think they were invaluable and I always get a great, great new takeaway and I always learn something. So, Tyler, and Marty, I want to thank you. And I want to thank our online audience for sitting in and participating until tomorrow. wishing everybody a great afternoon. Thanks so much, guys.
Marty Tate 55:24
Thanks for having Thank you.