§15.4 - Regulation of Securities Issuances Under Federal Law

• Jurisdiction: Washington

§15.4 REGULATION OF SECURITIES ISSUANCES UNDER FEDERAL LAW

All securities offered and sold must be either registered with the SEC or expressly exempt under the Securities Act, 15 U.S.C.§§ 77a-77aa. If no exemption is available for a particular offering of real estate securities, the amount and type of the proposed offering will determine the appropriate form of registration.

Comment: Compliance with most of the exemptions from registration requires, at a minimum, the making of a notice filing with the SEC The specific requirements of that notice filing, including the timing during which such filing must be made to obtain the benefit of the applicable exemption, vary depending on the exemption.

(1) Registration of securities

The following discussion reviews the forms, guides, and releases appropriate to real estate offerings without extensive analysis of particular federal securities issues.

Form S-1. Form S-1 is used for registration of securities of all issuers for which no other form is authorized or prescribed.

Form S-3. Form S-3 may only be used by registrants who, among other requirements, have a class of securities registered pursuant to Section 12 of the Exchange Act, 15 U.S.C. 78l, or are subject to the requirements of Section 15(d) of the Exchange Act, 15 U.S.C. §78o(d).

Form S-11. Form S-11 is used for the registration of securities issued by real estate investment trusts and securities issued by other issuers whose business is primarily that of acquiring and holding real estate for investment.

Regulation A. Although a Regulation A offering is technically an exempt offering pursuant to Section 3(b)of the Securities Act, 15 U.S.C. §78c(b), most practitioners view Regulation A as a simplified form of registration for small offerings. See Rules 251 through 263 under the Securities Act (17 C.F.R. §§ 230.251-.263). The sum of all consideration to be received in the Regulation A offering may not exceed $5 million, less the aggregate offering proceeds for all securities sold during the 12 months before the start of and during the Regulation A offering. One advantage of a Regulation A offering is that, unlike other forms of registration, Regulation A does not automatically trigger subsequent periodic reporting requirements under the Exchange Act.

Title IV of the Jumpstart Our Business Startups Act of 2012 (JOBS Act) renumbered §3(b) of the Securities Act as §3(b)(1), 15 U.S.C. §77c(b)(1), and added subsections 3(b)(2)-(5), 15 U.S.C. § 77c(b)-(5). These provisions direct the SEC to either amend or supplement Regulation A to allow for exempt offerings of up to $50 million in any 12-month period. The SEC has implemented rules amending Regulation A to create a two-tier system. 80 Fed. Reg. 21,805-21,925 (Apr. 20, 2015) (codified at 17 C.F.R. pts. 230, 232, 239, 240, and 260). Under these rules (which have been widely labeled "Regulation A+"), Tier 1 offerings largely retain the existing Regulation A requirements and limitations, including the $5 million 12-month offering limit. Tier 2 offerings, however, have a $50 million 12-month limit and are exempt from state blue sky securities laws. In exchange, issuers taking advantage of the Tier 2 exemption are subject to additional reporting requirements, including a requirement that such issuers prepare and disclose audited financial statements.

Comment: Financial reporting requirements often make registration prohibitively expensive. As an example, registrants generally must comply with requirements imposed under the Sarbanes-Oxley Act of 2002, Pub. L. No. 107-204, 116 Stat. 745 (codified in scattered sections of 15 & 18 U.S.C.), regarding management's assessment of internal controls over financial reporting, and auditor attestation of management's assessment. According to a January 2008 study by research firm Lord & Benoit, the average cost for so-called "non-accelerated filers" of the first year internal control assessment by management, exclusive of requirements related to auditor attestation, was approximately $53,000. Bob Benoit, The Lord & Benoit Report: The Sarbanes-Oxley Investment, A Section 404 Cost Study for Smaller Public Companies 3 (Jan. 8, 2008), available at http://www.section404.org/UserFiles/File/Lord_Benoit_Report_The_section_404_cost_study.pdf Nonaccelerated filers are all public companies with public float (i.e., the market value of all outstanding shares held by nonaffiliates) of less than $75 million. Id. at 2 n.1 Auditor attestation of internal control over financial reporting has not yet been mandatory for nonaccelerated filers. Cost estimates related to auditor attestation for this same group of the smallest public companies vary widely, although this same research study projected an average estimated cost of approximately $24,000. Thus, as a result of this single reporting requirement, each entity of this segment of the smallest public companies should expect to incur approximately $75,000 in compliance costs. These costs are in addition to the costs of actually preparing the registration statement and complying with the myriad additional obligations imposed on public companies in the United States.

Guide 5. Guide 5, entitled "Preparation of Registration Statements Relating to Interests in Real Estate Limited Partnerships," provides specific disclosure guidelines for all registered real estate offerings. 1 FED. SEC. L. REP. (CCH) ¶3829, at 3332.

Comment: Although Guide 5 is for the preparation of registration statements relating to real estate partnerships, it is very helpful in preparing real estate private placements under various exemptions from registration.

(2) Exemptions from registration

Registration of securities involves a great deal of time, effort, and expense, and is only economically justifiable for relatively large offerings. A smaller offering, therefore, is usually made pursuant to an exemption from the registration provisions. The exemption applies only to the registration requirements, not to the disclosure or antifraud provisions of the federal securities laws. This section briefly summarizes the federal registration exemptions commonly relied upon for the offer and sale of real estate securities.

Sections 4(a)(2), 4(a)(5), 4(a)(6), and 4(b). Section 4(a)(2) of the Securities Act, 15 U.S.C. § 77d(a)(2), provides an exemption from registration for transactions by an issuer not involving a public offering.. The purpose of the exemption is to permit an issuer to make sales of securities to persons who do not need the protection of the registration requirements under the securities laws. Because of the problems in determining the availability of the exemption, however, a "safe harbor" under Regulation D was promulgated (discussed below).

Section 4(a)(5) of the Securities Act, 15 U.S.C. § 77d(a)(5), provides an exemption from registration for an issuer for sales to accredited investors if (1) the aggregate offering price does not exceed $5 million; (2) there is no advertising or public solicitation in connection with the transaction; and (3) the issuer files a notice of the transaction with the SEC. Because transactions that comply with §4(a)(5) can be structured to also comply with Rule 506 under Regulation D, 17 C.F.R. § 230.506, it is usually preferable to file a Form D with the SEC claiming an exemption for the transaction under Rule 506. Unlike §4(a)(5), Rule 506 allows up to 35 non-accredited investors, but in such case imposes additional requirements.

Regulation D. SEC Regulation D, 17 C.F.R. §§ 230.501-.508, is a series of eight rules regarding registration exemptions for transactions involving limited offers and sales. These rules establish three exemptions from the registration requirements of the Securities Act. The first two of these exemptions, Rule 504 and Rule 505, were promulgated under the authority granted to the SEC pursuant to Section 3(b)of the Securities Act. The final rule, Rule 506, was promulgated under the SEC's authority under Section 4(a)(2) of the Securities Act, with the result being that an offering conducted under Rule 506 involves the issuance of a "covered security" for purposes of the National Securities Markets Improvement Act of 1996, 15 U.S.C. §§77z-3, 78mm, 80b-3a. See §15.5(1), below. Rules 501 through 503, 507, and 508 set forth definitions, terms, and conditions that apply generally throughout the regulation. For interpretive advice on Regulation D, see Interpretive Release on Regulation D, S.E.C. Release No. 33-6455...