Attorney says education key to success in real estate crowdfunding
An attorney with national experience drafting and filing Regulation D and Regulation A+ documents welcomes recent legislation opening up real estate investing to more people, but says both issuers and investors need to properly educate themselves before participating.
Ms. Taylor said part of her role at the conference is to lay a foundation for the two-day event by introducing attendees to concepts they may be hearing for the first time, while also explaining their importance from a legal perspective.
“If you are raising money from private investors, you have to comply with the Security and Exchange Commission’s (SEC) regulations,” Ms. Taylor said. Those regulations provide exemptions which allow people to exponentially increase their business and grow their company, she added.
Ms. Taylor said that while the SEC laws are meant to protect investors, they also safeguard the issuer.
“A good issuer is also protected. The way the laws are set up, if you do not commit fraud and misrepresentation you can safely participate.”
Ms. Taylor elaborated by saying issuers are clear to talk with potential investors. They are insulated from liability in the event a deal goes bad if they disclose all the facts they know about an offering so the investor can give informed consent.
“There’s an old saying that there are four types of issuers who ignore securities law,” Ms. Taylor said. “Those who don’t know, who don’t care, who are in denial, or who are in jail.”
When asked how much the idea of informed consent is open to interpretation, Ms. Taylor said past SEC rulings lay the groundwork for determining appropriate disclosure.
“Take the position that informed consent is conveying everything you know to investors.”
Ms. Taylor explained investors rely on an issuer’s expertise in assessing the deal being considered.
Part of that expertise involves conducting thorough due diligence, which includes receiving confirmation of the aspects of the deal they are promoting to investors. All documentation generated during this process should be made available to investors, she suggested.
“That thwarts the investor who says ‘I would not have invested if I had known that.'”
The JOBS Act makes it possible to advertise to a much wider audience, which is good, and it also comes with some good protections, Ms. Taylor said.
“With Regulation A, you have to go through a pre-approval process with the SEC before advertising to unaccredited investors.”
One key point issuers need to understand is more advertising invites more scrutiny, Ms. Taylor said. Unlike private offerings where issuers are soliciting friends and established contacts, general solicitation involved promoting a deal to strangers, with the issuer having no idea if they are dealing with financial predators or other fraudsters.
Both issuers and investors have to clearly understand leverage, Ms. Taylor said, with the short version being the more leverage there is, the more risk there is too.
She used the example of a multi-family property where the project developer is financing 20 percent of the purchase price from investors. Developers typically need to raise much more than the purchase price in order to cover renovations, fees, commissions and other costs, meaning investors could be financing more than than the property is worth until the improvements are completed.
“Investors are vulnerable until those improvements are made and their equity increases” Ms. Taylor explained.
People considering investing in such projects need to look at the issuer’s project development history for an indication of their reliability, she said.
“Good advisors have good people on their team. Look at the dealer as much as the deal.”
Investors should educate themselves on the syndication process before they invest, Ms. Taylor said.
“That is why conferences like IMN’s are great opportunities for both issuers and investors.”