Different financial products and investment opportunities are available to different types of investors.
“Accredited investor” is a regulatory category created by the Securities and Exchange Commission (SEC). It protects less-experienced investors from the risks of buying and trading unregistered securities, which are financial products that are not registered with the SEC — as would normally be required by the Securities Act of 1933.
For accredited investors, various SEC regulations allow access to unregistered securities which often offer attractive financial performance like private business offerings, hedge funds, private equity funds, and venture capital.
However, some non-accredited investors may be interested in the unique financial performance offered by unregistered securities.
Fortunately for both categories of investors, the SEC has created a number of exemptions to the usual registration requirements. Some of them delineate products only available to accredited investors, but others can allow non-accredited investors to access the kinds of financial products that would usually be reserved for a more select group.
The regulations can get a little complicated, though. Let’s break down two of the most important SEC regulations in this area: Regulation A and Regulation D.
Both Reg A and Reg D are exemptions to the normal securities registration requirements. These exemptions can make offerings much easier to create, but that doesn’t mean they’re totally free of SEC oversight -- and that’s probably a good thing.
Reg A offerings still require the SEC to review an offering statement (Form 1-A), and confirm that the offering is “qualified” (which is different from “approved”). Essentially, the “qualified” status verifies that the offering entity has met their legal requirements, but it does not mean that investing in the offering is low-risk, or likely to produce positive investment returns.
Reg A offerings come in two flavors:
- Tier 1 offerings allow the issuer to receive up to $20 million in investments per 12-month period, and allow investment from the general public (non-accredited investors). In addition, Tier 1 offerings require the issuer to file and receive qualification for its offering from state securities regulators in every state in which they raise funds.
- Tier 2 offerings allow up to $75 million per 12-month period, but limit contributions by non-accredited investors to no more than 10% of their annual income or net worth — whichever is greater. Tier 2 also requires the submission of a few annual forms, and that the issuer’s financial statements be audited. But, Tier 2 does not require filing offering statements with state-level regulators.
Reg A is useful for entities that want to raise cash relatively quickly from the general public. Tier 1 is more useful for local projects, owing to smaller scale and streamlined reporting requirements. Tier 2’s increased investment ceiling and minimized state-level regulation make it more suitable for large-scale projects.
Note: some publications, professionals, and bloggers refer to Reg A as “Reg A+.” These are effectively synonymous. “Reg A+” technically refers to a modification of the rules under the 2015 JOBS Act that, among other things, increased the Tier 2 ceiling from $50 million to $75 million.
Reg D, like Reg A, creates registration exemptions. Reg D comprises nine “rules.” Of these nine, six of them are administrative, two create exemptions, and one is actually now defunct (more on this in a moment).
Rule 501 of Reg D defines “accredited investor.”
While Reg D’s exemptions don’t all work the same way, there are a few broad differences between Reg A and Reg D.
- Reg D offerings cannot use “general solicitation.” That means that these types of offerings cannot be advertised or marketed to the general public.
- Reg D offerings require the submission of Form D, which is a “notice filing.” Issuers under Reg D are required to submit the form, but it is not subject to qualification by the SEC, and it’s an extremely simple form to file.
- Because Form D doesn’t require SEC review, filing under Reg D is cheaper and faster than Reg A. However, Reg D filing isn’t always preferable to Reg A, because it virtually always requires the issuer to have access to accredited investors.
Rules 504, 505 (now-rescinded), and 506 create the actual exemptions:
Rule 504 originally allowed the receipt of up to $1 million in a 12-month period, but that amount was increased to $5 million in 2016, and $10 million in 2020. Investors in offerings under Rule 504 are not required to be accredited.
Rule 505 originally allowed the receipt of up to $5 million in a 12-month period. It required that no more than 35 non-accredited investors participate. Because Rule 504 now offers a higher ceiling under more lenient terms, Rule 505 is now obsolete.
Rule 506 allows unlimited contributions, and involves correspondingly stricter regulations. Rule 506 offerings come in two primary kinds:
- 506(b) offerings allow up to 35 non-accredited investors to participate, prohibit general solicitation, and allow investors to self-certify that they are accredited. Only restricted securities may be issued under 506(b), which means that securities issued cannot be resold on public secondary markets.
- 506(c) offerings, as of the JOBS Act, do allow general solicitation, but do not allow any non-accredited investors. Moreover, investors in 506(c) offerings are not permitted to self-certify that they are accredited; instead, the issuer is required to verify that all their investors are accredited by examining bank statements, tax documents, or obtaining verification from an independent qualified professional such as an attorney or CPA. And, as is the case with 506(b) offerings, the issued securities are restricted.
Because projects requiring more than $10 million in funding can’t access more than 35 non-accredited investors under Reg D, and can’t access any if they want to advertise, large-scale projects aimed at the general public normally use Reg A.
Reg D is, however, quicker and less demanding from a regulatory standpoint, which saves time and money for issuers who want to aim their offerings at primarily accredited investors.
A thorough explanation of the SEC regulatory framework is much more complex than we could capture in a simple Birgo Capital blog article. We’re real estate professionals, not attorneys — so, this information definitely isn’t legal advice.
Disclaimers aside, we think the existence of a wide variety of different types of offerings — and the increasing availability of diverse financial products to ordinary investors — are very positive developments. We love private equity real estate, but we also believe in balanced portfolios and promoting financial access for retail investors.
Especially in the world of real estate, an evolving regulatory environment has created numerous options over the past few years that non-accredited investors can leverage to diversify their portfolios and earn strong returns.