Guest Author: Ron Rossi, Vice President of Business Development, IMS
IMS recently hosted a webinar that covered all aspects of raising capital, from the positive impacts that technology has had on the CRE industry to the regulations that sponsors should be aware of to the fundraising opportunities that are now possible. The webinar was moderated by Ron Rossi, VP of Business Development with IMS, who was joined by panelists Graeme Humphreys, Chief Financial Officer with Lafayette RE, Greg Brown, Head of Real Estate with VENTURE.co and Scott Andersen, Principal with finLawyer.com – Andersen, P.C.
Capital raising has evolved tremendously in recent years, due in large part to the JOBS Act along with the emergence of technology. The opportunity to raise capital on a platform that is far-reaching has enabled sponsors to more effectively and efficiently raise capital throughout the entire capital stack. However, there are certain regulations in place to better inform and protect investors that real estate sponsors need to be mindful of. The panel, made up of industry experts with years of experience, shed light on the process, regulatory landscape, and benefits of raising capital in the 21st-century.
The panel spent a lot of time dissecting what the JOBS Act is and specifically how investors and sponsors have been impacted. The opportunity to take your investor base (i.e. “friends and family”) to a global marketplace presents a plethora of new opportunities. Consider, for example, a real estate sponsor can now leverage the JOBS Act and technology to find and engage investors all over the world. Graeme and Lafayette plan to harness that power with VENTURE.co and IMS to more broadly promote their firm to people they would not otherwise have a relationship with or even access to. Their investor base is certainly growing and that creates opportunities for them as well as perspective investors.
Raising equity through technology would not be possible without the enactment of the JOBS Act, but it is important to have a clear understanding of what this legislation means for the commercial real estate industry. Greg and Scott have a tremendous amount of experience understanding and navigating the regulatory landscape. They elaborated on the JOBS Act, which was passed by Congress in April of 2012 and provides an exemption that allows CRE Sponsors to market broadly to “accredited investors”. The process is referred to as “General Solicitation” and means they can engage perspective investors with whom there is no prior relationship.
Greg and Ron discussed how the timing of the JOBS Act, coupled with the emergence of FinTech companies, has made this all possible. Had the JOBS Act been enacted 20 years ago, it would not have been nearly as impactful with the limited digital advertising and online investing platforms available at the time. The shift in demographics and the continued growth of technology has lowered or even taken away the barriers to entry that once existed in commercial real estate. But in doing so, sponsors are increasingly pressured to meet expectations for engagements and level of service that didn’t even exist a few years ago. These include demands for transparency, 24/7 accessibility, frequent communication, and data-driven insights.
Throughout the discussion, it was surprising how many questions were asked pertaining to the specifics about and process for investor accreditation and the differences between 506 (b) and 506 (c) offerings. What is an accredited investor? An accredited investor includes anyone who earned income that exceeded $200,000 (or $300,000 together with a spouse) in each of the prior two years and reasonably expects the same for the current year OR has a net worth over $1 million, either alone or together with a spouse (excluding the value of the person’s primary residence). What are the differences between a 506 (b) vs. (c)? The chart below serves as a quick guide.
The benefits of using a FINRA-registered broker dealer should also be strongly considered when it’s time for the next capital raise. Aside from clearly understanding the regulations, the process and execution is in line with utilizing an online investment bank. The due diligence process is thorough, all regulations will be met, the accreditation process will be administered, and the result will be a successful transaction. And more investors.
Once the deal has closed, Graeme and other sponsors turn to engaging and managing their investors. Investors are demanding information in real-time and transparency. By leveraging technology, as opposed to adding people, CRE sponsors will be better equipped to create those critical back office efficiencies – especially when it comes to calculating and delivering monthly and quarterly distributions and reports.