Which regulation should I use for Real Estate projects to reach everyone?
Regulation D Resources
Douglas Ruark is Senior Principal for the Denver, Colorado office of Regulation D Resources, Founder and President of Regulation D Resources Enterprises, Inc. Mr. Ruark began his career in corporate finance in 1992 with Heritage Financial, Inc. a company he co-founded that specialized in sourcing commercial real estate and corporate debt financing for commercial borrowers. In 1994 Heritage Financial was merged with InvestCap Partners, a Washington DC based corporate investment banking firm. Mr. Ruark assumed a partnership position in InvestCap Partners and was tasked with managing several areas of corporate finance for the company including real estate syndications, transactional risk assessment, Federal and State securities compliance, and investor relations. In 1999 Mr. Ruark served as a primary founder of Regulation D Resources. The Company was formed for the purpose of providing private placement offering advisory services to corporate clients. Regulation D Resources currently provides SEC Regulation D exempt and Regulation A+ exempt securities offering preparation and execution services. The Company also provides custom software solutions for management of investment compliance processes. Regulation D Resources has provided advisory services for over 5,000 securities offerings since 1999. In 2015 Mr. Ruark was instrumental in leading the team responsible for development of Regulation D Resources Investor Portal Compliance Management application. The web application provides for public promotion of Regulation D 506(c) and Regulation A+ exempt securities offerings and handles all compliance, subscription, and investor verification processes. The critically acclaimed software is now on build v2.3 and has been used to manage compliance processes for hundreds of private placement securities offerings. Mr. Ruark holds a degree in Economics from Elon University in North Carolina. He is regularly scheduled as an expert speaker at various venture capital, real estate and corporate finance conferences with regards to private placement offerings and the syndication of investment capital.
Dodson Legal Group
Specialties: Contract Law Business Development Real Estate Syndication Investment Opportunities Wealth & Succession Planning
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
Oscar Jofre 00:50
Well, good afternoon, everyone. And welcome back. We are now on day three, of KoreSummit real estate, the Jobs Act. And, of course, the one word that keeps coming up with real estate and tokenization is liquidity. So but today’s session as you’ve been following along, now, it’s about the regulations, and which one is right for you. And not all the regulations are, are the same, and they need to be carefully looked at. And more importantly, you need to get proper legal advice in these areas. And we’re really excited today with this panel. Some of the big names that have been working in real estate with all the regulations that are available under the Jobs Act, and, of course, the remaining ones as well, but predominantly in the Jobs Act, Reg, D, Reg A and Reg CF. Today, the panels are going to be kicked off with Peter Daneyko, of course leading the conversation. And hopefully out of that, you’ll be able to get the necessary information to engage with this audience. By the way to remind everyone, if you want to reach any of our speakers, simply go to KoreSummit.io. Click on speakers, you’ll see their profile, their access to their LinkedIn profile, and our email address. We want you to be able to reach them to be able to ask any additional questions, so you can start the capital raise for your real estate project. Till next time, I leave it to you, Peter.
Peter Daneyko 02:17
Hey, thank you, Oscar. Let me just get this camera back turned on, as we jumped from the moderator, the moderator.
Oscar Jofre 02:34
I always feel like your camera must be different than the rest of ours never comes on.
Peter Daneyko 02:40
It’s every time that you join and join Oscar, it seems to turn my camera off. So I don’t know if that’s the center stage or an attraction thing. But anyway, gentlemen, welcome. And thank you, Oscar. So to kick off today’s session here, for the next 45 minutes our panel will be discussed what regulation is typically in real estate. I would like to do a quick introduction to our panel. And we’re open to questions. Throughout the session, we have a panel of experts who have put together hundreds of offerings for for their clients for Reg CF, Reg A, and Reg Ds, highly specific to real estate, as well as a variety of other industry sectors. First off, I’d like to welcome Doug Ruark, the founding principal of Reg D Resources. Louis Bevilaqua, is the founding member of the law firm that represents and bears his name. And Nate Dodson, the partner in Crowdfunding Lawyers its great to have you all here, gentlemen. We always like to start off with start with the basics. And I’m going to pull it over to you guys. So we’re going to start with REG CF, we’ve got reg CF RegA+, and Reg D. And we’re going to go through a little bit of a Q&A on describing those. So Doug, let’s start off with the Reg CF and how it relates and what are the parameters and limitations requirements.
Douglas Ruark 04:04
Yeah, so you know, Reg CF, it’s interesting, we are starting to see a lot more real estate operators using CF. And essentially, it’s because of the rule changes for March of 2021, where they took the limit up to 5 million. And then they also opened the door to FINRA broker dealers serving as your intermediary. And what that did is it kind of opened the door to being able to avoid going up on the CF platforms and be able to kind of execute directly with your own raise portal. So on the CFs, I think you know, some of the key considerations to keep in mind. Number one, you are limited to $5 million in a 12-month period. That does work for a lot of these real estate guys. You know, if they’ve had an infill site development project, and they need to raise a couple of million dollars, it works great. Or we’ve also had people where it was just kind of a starter round for a real estate fund. They were using leverage so that 5 million might get them up to 22 million purchasing power and then ultimately, you know, they might then go out and do a second or third round, you know, using something with a higher limit like Reg A plus. The other thing to keep in mind is that you do need to have either a broker-dealer on board as your intermediary, or you need to obviously execute on a platform that is a CF-approved platform. So that’s one of the things to keep in mind on CF. The other thing to keep in mind is that for any offering that is above a million to 35 in size, you are going to be required to have audited financials. So that’s, that’s something else to keep in mind on that program. But I think with CF, what’s interesting is, it’s gonna get you close to reg A investor acquisition capabilities. I won’t say it’s equal to it, but it is close. You do you can generally solicit, you can raise money from everybody, and you also benefit from a very streamlined investment process. So you know, the KoreConX back end and subscription processing technology, not a lot of difference. Obviously, as you guys know, between the CF and the Reg A version there, I mean, very little difference. And that matters. I think it matters because anytime you have friction in the subscription process as you would have with a reg D 506. C having to provide verification, you know, it’s a problem. So with the CF, you get a streamlined way to execute a subscription process. So the big thing on CF, is you can accept investment from nonaccredited and accredited. It’s a three-minute investment process, there is going to be a transfer agent on board, and you’re required to have a broker-dealer on board or be on a CF approved platform. You’re limited to five million in a 12-month period. And also just keep in mind that a million to 35 is the audit limit. So if you’re gonna go above that, you do need to come in with audited financials.
Peter Daneyko 06:52
Oh, great coverage on that, Doug, appreciate that. So let’s let’s dovetail Okay, so a Reg CF, we can go up to $5 million. We have general solicitation. Lou, when we move over into the Reg A space, what’s the difference? I mean, it’s a more sophisticated offering. There are a lot more legal requirements, maybe you can give us the baseline as we go through the various regulations.
Louis Bevilacqua 07:19
Sure. Can you guys hear me? Perfect. Okay, awesome. Yeah, so one thing I just want to mention, especially in this fractionalized real estate space, is you know, and we’ll get into this, you know. Reg A can cost a lot more, you have to do a full SEC review, Reg CF, basically, you have to put the form CD together, and file it with the SEC, with no review. So a lot of times when you’re trying to prove the concept, and you want to save on costs and things like that, one thing you might want to do is start with you know, if you’re doing a series LLC, and a fractionalized offering and you want to try one series, you could try to raise the money under reg CF. And then you can continue thereafter under reg A and might be able to, you know, get your minimum viable product and proof of concept on under reg CF and then pivot to Reg A, you know, you can raise up to 5 million under Reg CF. So, why not save money and start there? So we have a lot of clients that we start off with Reg CF and go to Reg A. So with Reg A, you know, you have to file a full-blown offering statement with the SEC, then, you know, the SEC reviews it, so you file it. And then about 30 days later you get comments from the SEC to respond to the comments, you go back and forth. So, you know, the typical timeline might be I would say a month to six weeks to get everything ready and on file assuming the audit can be done in that time period. And then it’s probably another two to three months before you have a qualified you before you’re qualified and can start raising capital. So another reason that you might want to rely on Reg CF first is you can file confidentially under Reg A. So basically, you can get an offering started under reg CF, start bringing in money. And while you’re bringing in money under that Reg CF offering, you could be working on a confidential offering at the Reg A level, getting through the SEC comments, and then open that up as soon as you’re clear and you know, maybe at a higher valuation than you were doing at the Reg CF. So just thought I’d mention that. But basically, you know, Reg A is more involved because it will typically have a full SEC review at tier two you can raise up to 75 million, you could sell to both accredited and nonaccredited investors. And, you know, otherwise, it’s relatively similar to Reg CF, just the dollar thresholds are different.
Peter Daneyko 09:50
Okay, so dollar thresholds and the costs associated with going with a fully qualified offering obviously winning right
Louis Bevilacqua 09:56
And I should mention, since it’s a qualified offer barring the shares or the securities you sell or free trading, so this is really important. If you’re trying to create a platform where you want to have resale, you know the interests on your platform, whether you’re an ATS or broker-dealer. And you want to create your own screening ATS or broker-dealer and you want to, you know, have free trading shares, secondary market securities. In that case, you’d really want to go with Reg A because the securities are free traders and are closing.
Peter Daneyko 10:35
Okay. No grading insight and good overview and that let’s, let’s take a little bit further on the so on a Teg CF there. There’s a 12-month hold period on a Reg A plus they’re freely transferable. Does that have any impact? If I’m rolling from a reg CF to a Reg A, for example, let’s say I’m six months into my CF KoreTransfer I mean, we manage cap tables and shareholders and they have different rights and roles and restrictions. What’s been your experience from that perspective, the 12-month holding period from the CF as they move to the Reg A, which is freely transferable. Nate, have you experienced that or had comments on that?
Nathaniel Dodson 11:18
When it comes to the CEA for the Reg A, each one of them kind of has their right time in the right place. So I’m a huge fan of all the different regulations. And I know we haven’t talked about the giant of the room right d yet. But I mean $5 million. With the Reg CF is a great place to start, especially if you’re trying to build a large audience. It can easily lead to a Regulation A offering. But frankly, pretty often, we will do a Regulation D offering to get things kick-started and moving forward. While the Regulation A process is moving along. And really just comes down to everybody that’s looking to raise money, when do they want money tomorrow, not three, six months down the road with Reg A. Although once they hit that point, it’s pretty clear sailing that they’ve got a long runway and a great platform to move forward with. But in terms of expediency and to lower the not just the $5 million limitation and be able to raise more than that, but to be able to move quicker, and not having to do audited financials, and not having to go through any suitability with a broker-dealer. I think at the end of the day, the Godzilla in the room is still reg Ds, with the five of success where you still have the exact same general solicitation you can mark it advertise online everywhere else. Still leveraging the KoreConX portals and platforms to make things nice and simple. I just think at the end of the day, the ability to move fast and take in the capital that much sooner, really kind of throws the weight behind still Reg Ds monster.
Peter Daneyko 13:17
So you hit the key points, all three have general solicitation. Let’s dive in. And let’s dive into the Reg D side of the equation here are the Reg D exemption. What are some of the filing requirements for the reg D, you mentioned that it’s faster. It’s limited to accredited investors only. So you’ve had I guess a smaller net when you’re doing your outreach, but from a legal and a filing perspective. I I know that a reg CF is pretty standard. It’s a pretty boilerplate. And I know that Reg A is a more sophisticated offering. But in the reg D world, it can take many different colors. So who wants to weigh in on this and just say, you know, what’re the big differences with the reg D asides from you know, aside from 2000 accredited investors before I’m fully reporting beyond that, and the fact that it’s easier to do the filing, but is it really, you know, and this is asking you guys, I guess it depends on how you structure the deal.
Douglas Ruark 14:21
I’ll pop in real quick. I mean, I think, you know, Nate hit the nail on the head. I think it really comes down to the client because ultimately and I had to chuckle when he said, you know, timing-wise, everybody wants to be out tomorrow starting to raise money. I mean, that’s just the way it is. So I think it really just comes down to the client, what are their needs, because ultimately if you’ve got a client and they do have the capability to syndicate capital from we’ll call it the accredited crowd. We’ll keep it simple, you know, do a Reg D 506. C. I mean, you got to notice filing to the SEC, that’s basically four pages of basic info and you’ll have some state notice filings So I think a lot of it comes down to the client’s needs, you do get some clients where they are long term looking to build a big syndication base. And they do feel like they need to access nonaccredited. And then you know, there’s a couple of options there. As Nate said, you can roll them into a Reg A, but you can start them with a reg D, so they can get out, they can start raising money while you’re prepping a Reg A. Or they can obviously go the CF route. And, you know, as Lou mentioned, you know, CF isn’t going through a qualification process. So I think it really comes down to the client’s needs, and what are their capabilities, because some clients, yeah, if they’re, if they’re working with high net worth folks or family office money, there’s just no need to go through a reg a or a CF, they could just do the Reg D and keep it simple.
Louis Bevilacqua 15:45
Yeah, I would add to that, if I may, you know, I think under Reg D, there are no information requirements, right? So you could literally just use a simple subscription agreement taking the money there, you probably want to have at least a rep, that the person is accredited, and you’d have to verify in a 506. C. But in most cases, I think if you’re going to do a general solicitation, and you’re going to go out to people, you don’t have a substantive pre-existing relationship with, you’ll probably want to have some kind of disclosure. And that disclosure can range from a full-blown ppm, that’s equivalent to a Reg A offering statement, or what happens in a lot of cases is you’ll have a very well-done investor presentation and full risk factor disclosure. So a lot of times what we see is issuers will go out and do a Reg D, they want to provide the investors with information. So they’ll provide, you know, an investor presentation that clearly describes what the company does, maybe has summary risk factors in it also has, you know, some financial information in it, even if it’s an audited description of who the management team is, et cetera. And then also separately provide full risk factor disclosure. I also think, especially if you’re going to go down the Reg A route later on, and you want to start with REG D, I would prepare a full-blown ppm in that case, and I would make it look like the Reg A offering statement because you could recycle all that work into the Reg A. So, you start with a document that looks as close to the Reg A as you can, you don’t have to get it reviewed by the SEC, because you’re not doing a Reg A offering, you’re just doing reg D, but at least you have the starting point now for your Reg A offering statement, your form one a. So you know, that’s something we frequently do.
Nathaniel Dodson 17:41
Okay, you know, the way that I see it, and I agree with you, 100%, and Louis, in that, I still think the best practice is to have a full disclosure document, whether you call it a PPM disclosure, document prospectus or otherwise because it’s not just about disclosing to the investors, it’s about not only protecting the investors but also protecting the issuers. This is what we’re doing, here’s all the risk factors there, mister investor, you’ve got to be ready to take on this risk. And here’s everything that’s that could go wrong with it. I think that the cost-benefit of providing that level of protection, disclosure, and transparency, honestly just helps everybody in the market, whether it’s the investors or the issuers,
Louis Bevilacqua 18:31
Yeah, for sure, you want to have one place that you could point to, that has all the disclosure in it. So that if anything comes up, you can say to the investors, like, look, we told you this might happen, right? And so that’s why full-blown risk factor disclosure, in my opinion, is key, because you’re going to try to put everything and then you have to be thoughtful about it, you just can’t cut and paste it from some other offering, right? You got to think about the risks of your particular deal. Otherwise, you’re wasting your time.
Peter Daneyko 18:57
So where’s the accountability on this side of it? Let’s say we know that when it comes to and we’re going to think or the answer to this is so I’m just throwing it out there. So I’m doing a Reg D offering, I don’t need a broker-dealer from a legal perspective. I certainly need to be collecting the various asset stations associated with those individual investors coming in. Maybe you can just touch on that like what are those asset stations? And what’s the responsibility of the issuer? Should they not wish to use a broker-dealer to actually validate those accredited investors?
Louis Bevilacqua 19:31
Well, from an issuers perspective, if they don’t verify that the investors are accredited, they blow the exemption and they violated section five of the Securities Act. They may have to do a rescission offering so it’s its enforcement can come after them. So there are lots of risks for the issuer. And that’s what makes verification, you know, really important and the 506 C, you know, to the extent that they and make any misleading statements or omissions. Notwithstanding the fact that the SEC hasn’t reviewed it, they’d still be liable under securities laws, 10, B, five, etc. So again, enforcement can come after them. There could be securities lawsuits. So you definitely have to take these things seriously, even though the SEC is not reviewing them.
Peter Daneyko 20:21
No, I think that’s a key point. And you guys keep mentioning and say, you know, the proper disclosures, the proper, you know, key is protect the investor, by informing the investor. You know, what that offering is sometimes, you know, we do here, you know, frame, we’re the technology facilitator, but we do hear individuals or issuers coming, oh, I’m going to do a Reg D, and their comments and they say, I’m going to. It’s just so much easier, faster, quicker, and better. Well, maybe up to a point. I mean, it’s still you have to go through and do the proper disclosures, the proper preparation associated with firms like yourselves. Are you? Are you seeing more broker-dealers getting involved when it comes to being involved on the reg D side of it, as far as validating those accredited investors, we’re seeing in some on some platforms, some issuers say I’d like my broker-dealer that’s going to be doing my Reg A or my Reg CF to also assist me on the Reg D, just as far as as far as investor suitability and verification goes, comments, thoughts, experiences in that regard?
Nathaniel Dodson 21:32
You know, we still do a whole bunch of the 506 C’s and probably close to a couple of hundred over the past year alone. And I would say that 80% 90% of the issuers are relying on written opinions from CPAs. To verify the accreditation, it’s just the most direct and simplest, oh, could we get your CPAs contact so that we can get the verification done? I mean, it’s just the least heavy amount of work on all sides. So I think there what was previously a big fear of, Oh, my God, there are these extra steps with these verifications are the investors even going to want to provide this information, they’re definitely don’t want to provide the information to me, because they don’t know me. We’ll just kind of the way that the process is really worked out has not been a major hurdle.
Peter Daneyko 22:28
And I think from a technology perspective, we’re starting to experience that becoming more and more simplified. If it’s a check in the box that says, Okay, here’s your let’s say, your nine attestations, a letter from my lawyer, a letter from my CPA, whatever that attestation that is going to validate me as an individual. If I could just click on the box, and that issuer can request that information actually, to approve that investment. I think it just makes the journey a lot like cleaners in Swift, or for both that investor and, and also again, protects not protects that issuer behind the scenes. So I think the days of running around with a lot of paperwork, depends who you’re talking to the next segment is going to be a little bit more in the family office institutional, which involves a whole bunch of different documentation requirements. Are you seeing more of a transition to try to go online with say, a reg D offering for those accredited investors just out of efficiencies and not not mailing documents around or emailing documents, comments, or thoughts? More, a bit less of it?
Douglas Ruark 23:39
I think ultimately, people are wanting to use technology to manage these offerings. I mean, you know it and, you know, I can back what Nate said. I mean, we typically see through our portal system, CPA letters as the primary means of verifying credited status. And I mean, that’s a pretty simple way to do it, you set up a form letter, you know, the CPAs, probably been doing the guy’s taxes for a while, and is in a good position to obviously verify accredited status. But I think technology has definitely helped. And I think it makes, you know, it’s, it makes for a lower load on the issuer as far as managing a lot of these processes. And if you’ve got a good system that will pass manage stuff for you, it’ll track people through all the investment processes. So technology’s definitely made a big difference there. I think the other thing is just education that, you know, investors need to understand that no, they don’t have to send the issuer their tax returns or their bank statements. You know, I think there are a lot of times misconceptions out there about what constitutes verification. I mean, technically, they could send tax returns, but no one does. I mean, I’m going to just call my CPA and say, hey, sign this form letter. I’m getting ready to invest in a 506 C, and at that point, then it’s the CPA stating I’m accredited, but they’re not I’m telling them my net worth, they’re not, you know, telling them my exact income or what happened.
Peter Daneyko 25:06
I think you hit a really, really key point because I think there are far more high-net-worth individuals. I never went through any accreditation status because it might be part of a bit of a fearful narrative. And I mean that to say, I’ve got to give you my tax documents. No, and I think, would you both have just said is to say, if I’ve got a letter from my accountant that says I, my annual income meets the thresholds, it can be that simple. That also segues back to the comment of, the differences between the regulations when we look at a Reg A and a Reg CF is the ability for that individual investor to it’s it’s self accreditation. In the sense, I tell you how much money I make, and I’m not submitting any other documentation for that exemption, which really makes us CF. And I think a Reg A is a tremendous vehicle for casting that wide net to the investment community with whatever you’re offering might be at large. Back to the real estate side of things. So we’ve got to Reg a, I think we got a good idea of the differences between the three regulations. So three exemptions. What kind of question q&a Do you go through for those investors? They’ve got a real estate project. I’m going to turn it over to you guys and give you maybe share some experiences and examples to say the different types of projects and what regulations or exemptions you might guide them towards, beyond just educating them on what what their options are. Louis, do you want to jump in on that?
Louis Bevilacqua 26:51
Yeah, sure. So one of the exciting things that we’re seeing in real estate now is these fractional offerings. For example, one of our clients has arrived homes. And so they’re using a series LLC structure. And for example, in Delaware, you can create these LLCs. And you put a paragraph in the Certificate of Formation that says that the LLC can create different series, you can call them series one, series two, series B, or whatever you want. And so each series has its own members, has its own tax ID number, and has its own assets and is supposed to be bankruptcy removed from the other series. So they’re treated almost as separate companies. And so what people are doing are putting, you know, in the case of arrived homes, for example, a single-family house, in series one and a different single-family house in series two, and then they’re offering interests in those series in an offering. And what’s really interesting about Reg A in this context is, for example, you can do an offering. And you can file your Reg A offering statement, and you could have three series and you could say you’re raising, you know, $300,000, for 100,000, for each of the series. And you go out, you raise money, and the SEC qualifies your offering you out, you start raising money. And then as long as those offerings are ongoing, you can file an amendment to that form one offering statement and add additional series. So you don’t have to do a whole new Reg A offering statement, you’re doing an amendment, and you can add series four, five, and six, for example. And you can keep doing that, again, as long as the offering continues to be ongoing. And what’s nice about that is, you know, although you’re going to have the startup cost of doing your Reg A offering, when you do these amendments, a lot of times the SEC either won’t review it, because they’ve already reviewed you, or they’ll do a monitor or more limited review. And so the cost of doing the amendments is significantly less than the cost of doing the original offering. And so you could end up adding series and series and series and it’s really neat for investors to I mean, think about it, they may not be able to invest in a second home that they want to rent out. But now they can invest in a series and only a fraction of that. So, you know, if they have $20,000 or $10,000, or even $1,000 or less, they can invest in one of these series and have the same benefits of if ownership, but on a fractional basis. Right. They, the series might be renting, have rental income so they could participate in that rental income if that’s something that they want to balance out their portfolio. So I just think it’s a really interesting area. We’re seeing a lot of activity in that area. And I think it’s great for investors who get to you know, invest in different things that they might not otherwise be able to.
Peter Daneyko 29:55
I think the whole concept of a series is as you’ve indicated, the investors and the issuers themselves and I guess, a new set of entrepreneurs that might be issuers, they may be really, really good at managing geographical projects in the past. Or marketing real estate in the past. But now they have this other vehicle to leverage their story, their expertise and tell the market to say, Do you want to participate in this, and as you said, that small investor ability to say, hey, I can buy, I can buy a piece of 10 different homes. You know, I can even leverage my risk, I can have a piece of a home here and a piece of a home there and a piece of a home and a different regional or geographic location. So I think I’m really, really, it’s an exciting time when it comes to what the possibilities might be.
Louis Bevilacqua 30:44
And I know this is focused on real estate, but we’re seeing this in all other kinds of assets to our collectibles, we’re also seeing people doing some really innovative things with, you know, with the different influencers and trying to capture a portion of their revenue stream and things like that. So it’s a neat, neat area. For sure.
Peter Daneyko 31:08
So fundamentally, the concept of the term of fractionalization tokenization, is really breaking down an asset into pieces and having to have them represented by a security that the investor is investing in, would that be a really simple way to to write this case.
Louis Bevilacqua 31:23
It’s, you know, a series of a limited liability company. So it’s like a special purpose vehicle, and you’re buying a share in that or a membership interest in that. So you own you know, a fraction of that entity, which owns a single asset, usually it’s a house or could be any kind of property in the real estate side.
Peter Daneyko 31:47
When it comes to the amended and violent amendment filings, you see, it can be a fairly easy process. So I’m a new developer, and I want to write whether I’m developing a project or whether I’ve got some existing assets that I want to purchase, let’s say I want to buy a building here, there, and elsewhere. And I’m a seasoned operator. Walk me through and maybe Doug or Nate, you can give me some insight as to how that fleshes out. So in my mind’s eye my imagination and say, Okay, I can raise up to $75 million dollars in lieu, you mentioned that I could allocate 300,000 to this series and another 300,000 of that series, and move along. If I do a Reg A filing, is there any guidance on how small I start and where I go from a practical perspective?
Nathaniel Dodson 32:44
So I’m happy to jump in on this because we do a lot of these series offerings. And I kind of refer to really the new syndication model, especially in real estate, you have the very traditional serial syndicators that just have deal after deal property after property that in the past. They would have just done multiple syndications single asset or designated asset investments. And then they’re just rolling out Reg D after Reg D is the way it used to be. But then you’re dealing with the smaller pool of accredited investors and all that. Now, the wide open door that the Reg A series offerings has really opened up is, you know, don’t change what you’re doing in terms of finding that next piece of real estate, and keep doing exactly what you’ve been doing. Except now, instead of dealing with this small pool of maybe 10% of America, that’s accredited investors, you’re casting the wide net, with everybody giving them the opportunity to invest. But you’re still coming in on a real estate asset-by-asset basis, the exact same way that these indicators have been operating for decades.
Peter Daneyko 34:02
So I got a question from the crowd here. We’re talking about the assets themselves. And somebody was just saying yesterday heard there was no possibility of a land deal. I’d say that all projects are one-slide developments. If we can complete our project with 5 million or less than we want to attempt in offering, what is the expected cost to prepare? I’m not 100% sure of the question, but I guess it’s looking at the possibility of a land deal. We’ve had clients come that are especially in the farming communities that have indicated that they’re going to say, hey, we’re going to fractionalize hectares of real estate. And these are long-term investments and they may be reaping the benefits of what’s coming out of the ground or what’s being cut out of the ground as far as crops and things are they miss just be saying it Just want to take pieces of parcels of land, and they’re doing this sort of reg D offering experience in that regard. I mean, we, I think a lot of people are thinking of buildings versus actual physical property being land.
Douglas Ruark 35:12
Well, yeah, I mean, you could definitely do land deals. I mean, look, we’ve done plenty of entitlement deals where it’s, you’re buying a partial, and you’re getting it entitled, and then that’s the deal. You’re not You’re not going vertical on assets and constructing assets. You’re basically just in titling land. So yeah, you certainly can do land deals under this. I think from a cost to prepare standpoint, I mean, that really depends on what you’re coming in, under Reg, D, Reg, CF, Reg A Plus, they’re different programs, they’re gonna have different needs, they’re gonna have different, you know, legal needs as far as the prep work goes. So you’re looking at a pretty wide variance in costs between those because a reg D is going to be the most simplistic option, it’ll be the most cost-effective option. Reg A due to the complexity is going to be the more expensive option. But obviously, we’ll have some capabilities that your Reg D is not going to have.
Peter Daneyko 36:08
And I guess two of those being one, you’re casting your net to the general public at large, as far as the nonaccredited investor, but you’re also, let’s talk a little bit about the ability, the ability to transfer shares between the three different exemptions. So reg CF, I’ve got a 12-month holding period, a Reg A there, they’re immediately transferable. So what does that mean to that investor, then? When they say transferable, I know what it means to us as an SEC registered transfer agent, they log into a platform and say, Hey, I would like to transfer my shares from Peter to Paul, maybe it’s a family member, and the cap table gets updated from a legal perspective. Comments on that, thoughts on that? between the different rates and then a reg? D? Of course?
Louis Bevilacqua 37:00
Well, I would say, don’t start to jump in jump and lose. That’s where I would say, it’s great that they’re freely transferable. But that doesn’t really help much if there’s no market, right? So so you know, you need to have a market, I mean, certainly, you could transfer it to a friend, you don’t have to worry about 144 If you’re Reg A qualified, right? But the real key is to have a market. And so the market and not so much for Well, let’s talk about the series first, a lot of times what’s happening there is the platforms are trying to create a market. So they’ll either become an alternate alternative trading system that is set themselves or there’ll be a broker-dealer, and they’ll do it in kind of a bulletin board fashion as a broker-dealer. Or they’ll find some other way, you know, creating a relationship with a broker-dealer or an ATS to create that secondary market. And so that’s the way you know, the series interests would trade typically is if there’s some kind of alternative trading system ATS that’s either sponsored by or created by the issuer, you know, then they’ll have their technology set up with that, and it’ll trade on that ATS for more standard companies, not series LLCs. But you know, operating companies, a lot of times, they’ll want to go on to the over-the-counter market, or eventually on to a national securities exchange, like NASDAQ or NYSE American. And so, you know, that’s also very helpful, right? You can do a Reg A, you can create a shareholder base, and you can create a public float. And then you can do another offering to up list, you know, from commitment underwritten offering, and you already have that shareholder base. And what we’re seeing in the IPO market right now, is that the deals are getting smaller and smaller, right? So if you need to do if you can’t raise 15 million to meet NASDAQ’s $15 million public float requirement, but you have a lot of float, because you’ve done a Reg A offering, you know, now the bank might only have to raise 7 million or 5 million or 10 million whatever it is, because they have the float available and can still meet the qualification requirements of the exchange.
Peter Daneyko 39:20
Now and it makes for an easy transition, I guess. Especially coming out of that Reg A and going into recently had a client that literally they did two CFs rolled into a Reg A and rolled rates and Aztec. And, I think those liquidity events for that individual investor beyond just transferring, but on the flip side of that when we talk about things like transferring grandfather says. Hey, I just spent $10,000 on this and I want to transfer those shares to 10 people, just the ease of doing it I think is where we’re a technology and the regulation exemptions come into play. That was a very difficult task to do you know in the past pre certainly these exemptions and pre-technology. And we see that it surprises that sometimes because everything’s new, sometimes our grandpa says, Hey, I got $10,000 worth of something and I want to divide it into 10 and, and transfer it to 10 family members. So it’s just an interesting legacy approach to depending especially when you get into things like real estate that a family member may want to embark upon. Something that just, somebody made a note of here. We’re transitioning between these various exemptions, and one of the key comments or notable things that don’t come up a lot is this whole concept of selling shareholders when it comes to Reg A offering. Does anybody want to touch on that, what that really means?
Louis Bevilacqua 40:52
We’ve done some offerings with selling stockholders and Reg A, I mean, there are limits, I think it’s 30, or 15 50 million
Peter Daneyko 41:01
30 to 30% of the reason is my understanding. So you can allocate 30 presented the raise to the selling shareholders, I think it’s just warranted for some firms or some organizations that might say, Hey, I’ve got, you know, a lot of existing shareholders, and I’ve raised capital through different means over the last seven years, for example, and now I want to do a Reg A and expand and maybe have the opportunity for some or existing shareholders to take something off the table. Now, it’s not meant for that CEO to come in and say, I’m going to do a raise and out, you know, the SEC has to qualify that specific. So it’s not onerous for the company. But I think it’s just a great other option when companies are looking at the advantages of a Reg A offering, I’ve got freely transferable, I can go to an ATS, I can fractionalize them via go to a marketplace, and have those liquidity events. And I think if fisheries understand that, each exemption has, you know, varying degrees of value based on your needs, especially in real estate, I think the opportunities grow and grow. Let me ask you, guys, a question that’s coming up here. And I’m this is from a student. So I think there’s a little confusion, but I think it’s important that we talk about it. So when a tokenize an asset, do they tokenize, the physical real estate, or the paper that holds the asset? Well, I, I think we’re talking about we’re tokenizing the securities behind the asset, we’re not actually dividing up the real estate. Any comments on that? I could have misinterpreted the question here. But that was how it’s ready.
Louis Bevilacqua 42:46
I think it’s really hard to do a token offering though I haven’t seen any go through maybe one through Reg A, I don’t know what you guys are saying.
Nathaniel Dodson 42:56
You know, I just don’t see a big point of tokenizing a lot of the assets under Regulation A, because you already got a transfer agent, whose job is to keep up with the capital stack, the actual ownership of the company. And so the tokenization is a little duplicative when it comes to the reg A’s.
Peter Daneyko 43:21
I think it can also be a bit of a misnomer. Or Doug, you had a comment on that?
Douglas Ruark 43:26
Well, it’s funny, because actually, Nate and I, we had this discussion on Monday, I mean look, you really have to ask yourself, what are you going to accomplish with creating a token structure because ultimately, what you’re doing is, you’re kind of out of thin air creating a hybrid security structure. And you then have to ask yourself, What am I accomplishing with that, that I can’t accomplish by selling membership interests, or stock or traditional security that is going to provide someone with an investment in that asset? So, you know, with the token stuff, it is interesting, because it’s, it does create, so in my opinion, some complexities. I think where I see a lot of people get hung up is essentially the rights or if you want to think of it a kind of a certificate, a designation document that’s going to outline the rights on these tokens. And I think it’s just one of those things where you have to look at what is the most straightforward path here if you have someone that has an asset and it’s sitting in an LLC, and they wholly own it, and they want to maybe exit some of their equity and they want to maybe sell membership interests. There’s I don’t really see a need to tokenize just sell membership interest to an offering and sell 40% participation in the asset if you want and, and move on. And I think the other thing, too, it is just investors understanding the security. You know, that’s the other thing is you do run the risk of the average everyday investor looking at this hybrid security this token and maybe you know, Having some reservations about what are they actually getting whereas a membership interest or sheriff stock in a REIT, for example? I mean, they’re gonna have a better chance of understanding that as far as the security goes, Lucas?
Louis Bevilacqua 45:17
Yeah, I think I don’t think the I think you’ll be stuck in registration or qualification or whatever you want to call it forever. If you try to register tokens right now, I just don’t think the SEC will let it go through. And I, you know, I guess the benefit of it would be that if you are able to get it through and you have these freely tradable tokens, then, you know, they could trade on the blockchain. And they could trade on these other platforms that trade Bitcoin and other cryptocurrencies, perhaps. But I don’t think we’re there yet. I think, you know, the SEC has got to come out with some rulemaking to eventually let something like that happen. Right. Now, if you file a Form One A that tries to register digital securities, I think you’re going to have a really hard time. And I doubt you’d be able to get it through the SEC at this point.
Peter Daneyko 46:09
I think what I’m hearing a lot of its just definition, I mean, I can talk to three different people. And, everybody has a different interpretation of what is the token. And from a very simplistic perspective, I look at it, it’s a representation of something if it’s representing security, and I’ve called it a token. Still, my underlying vehicle is security. Blockchain and we do this every day. So I kind of scratch my head sometimes, and they go, I go, we kind of tokenize everything that we do, if you’re saying a token is something that’s fractionalized, and putting on the blockchain, it’s just an efficient method to have a representation of that security. And if that’s the case, I kind of tokenize everything all the time. But I think where that where it crosses the lines is people looking at the vehicle of a token in the ICO world. And I use that as one category. Where I had means the individual has complete control and responsibility over that token with no intermediary, that’s protecting me. And that’s the, I mean, we live in the world of compliance. And here, we’re talking about Regulation A, you know, CF, A, and Ds. And if you want the outcome to be, I want to be able to fractionalize an asset, I want to have an underlying security that I can ever transferable and trade and move it around. And I also want to be protected as an individual. I think we have it. So my best analogy is me walking over to a bank and the bank teller gives me $100. And I put it in my mattress at home because I decided I wanted it off the chain I don’t want and then I lose it. And my house burns down, I go back to the bank and say, hey, my $100 is gone. Can you give it to me? And that’s the disconnect that I have a fundamental problem with, when we go after, hey, I’d like the world to be a place of trust. And I’d like to have a blockchain that’s going to be this immutable ledger that protects us all. But if that were the case, today, maybe we’ll get there, we wouldn’t see all the problems that we’re having with the FTXs of the world, would we?
Douglas Ruark 48:17
Well, let me add one thing real quick. So if I decided that I wanted to syndicate some capital for a real estate asset, and I called Nate or I called Lou and said, Hey, guys, I need you to form an LLC for me, and I need you to draft an operating agreement.The operating agreement that they’re gonna draft is based on some tried and tested legal principles. So I’m going to feel very confident when I move forward with that, that ultimately, the membership interests that I’m selling at a governance document that is governing the LLC and the rights of these members that it’s tried and true, tested, legally tested principles there. I think the problem with the token stuff is this is all fairly new. So I think at the end of the day, if I’m selling a token, right. You know, what, you’ve got a governance document there is rights document and what what you know, has that actually had, you know, the type of tests applied to it from a legal standpoint, that’s something like an operating agreement, and membership interest, word or stock out of a REIT, for example..
Nathaniel Dodson 49:24
I see the biggest issue, I hear it all the time, people don’t understand or think of a token as a security and do not realize it’s kind of irrelevant. If you call it a crypto token, fractionalized real estate, that alone doesn’t make it a security it always comes down to that investment test of whether are you selling securities, do you have to care about this? Or is it more of a smart contract? That is not really a security everybody tries to avoid dealing with us But at the end of the day, we’re there to protect the clients to make sure that they’re actually doing it right. So they really need to understand whether or not their token or their smart contract isn’t really just security at the end of the day anyways.
Peter Daneyko 50:15
And if my security has some liquidity options with it, do I care as an investor? And do I want the protection, I still struggle with the desire to have something that nobody gets to see. And I get to hold over here, but I want to be protected. I struggle with that because there’s something that seems to be missing in that conversation. So, on that note, we’ve approached the top of the hour. Any closing thoughts or questions, gentlemen, this has been extremely insightful for me. And I really enjoyed your panel and your participation. And I want to thank you for all of that. And to the investment to the, I’ll say the investment community to the audience out there, they can reach out to you on LinkedIn, your profiles, and all your information is posted there. And, again, thank you for the call any closing comments, other than to say, to reach out to you guys? And it starts with measuring once and speaking to your attorneys.
Nathaniel Dodson 51:19
You know, one big thing that we hadn’t touched on yet, we’ve talked about the Reg A, the Reg CF, the Reg D. But people also need to understand that anyone is not the end-of-the-day solution. And in fact, there are processes to switch between them based on where you are with your marketing with your business. And really what makes sense for you today may not make sense after you’ve raised $5 million, but there’s always the next opportunity.
Peter Daneyko 51:53
I can’t think of anything better to close off on their vehicles are there for all the participants to understand first and, again, speak to gentlemen like yourselves and decide which one’s the best to start with. And many firms use all three at the same time, which is, can be surprising to some, but they’re all there for us. So thank you all. As a newly registered investment advisor looking to register to facilitate these questions.
Louis Bevilacqua 52:31
Yeah, that’s more of an investment advisor regulatory-type question. I wouldn’t.
Peter Daneyko 52:37
Wheelhouse doesn’t quite fit here. It’s just popped up on the screen here for us. So on that note, we’re approaching the hour. Again, I want to thank you all and for the rest of the week, we’re going to be having multiple other sessions. Now we get to dive into our audience. That’s still here. We’re going to talk about the world of rare gases and how they relate to writing these. So pleasure as always, we’ll talk to you again soon. Thank you. Bye