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CRE Finance World, Autumn 2013

JOBS Act Private Offering Regulatory Reforms to Benefit Commercial Real Estate Mortgage Industry: Creates Opportunities for Sourcing Private Capital through Innovative Methods n September 23, 2013, historic improvements to the Securities and Exchange Commission’s private capital market regulations will take legal effect. Many observers expect these long overdue regulatory reforms, which were mandated by Congress in the Jumpstart Our Business Startups Act (JOBS Act), to usher in a new era for private capital formation in the United States. In substance, the regulatory reforms amend the SEC’s principal private offering exemption to remove a regulatory straightjacket that has unnecessarily constrained private capital formation by corporate, private investment fund and other securities issuers. Stated simply, the SEC has removed the prohibition against general solicitation and advertising in securities offerings conducted pursuant to the new Regulation D rule, a step that will enable innovators to develop new alternatives for soliciting investment from “accredited investors” through private offerings conducted with general solicitation or advertising. While much of the impetus for the JOBS Act centered on reducing barriers to capital formation as a means of fostering job creation by emerging growth companies, the SEC’s regulatory reforms are clearly available to commercial real estate mortgage industry participants. This has not been lost on forward-thinking firms with plans to intermediate capital in innovative ways and expand the pool of capital available to the industry. As one contemplates this JOB Act development and what it means for the commercial real estate mortgage industry, it is important to note that there is an expansive pool of investment capital that will be more become accessible as a result of the regulatory reform. Individuals with an annual income over $200,000 (or $300,000 for a married couple) or a net worth over $1 million, excluding a primary residence, and entities with $5 million in assets qualify as accredited investors. The SEC estimates that there are approximately 7.6 million U.S. households (6.55%) that qualify as accredited investors1. The potential pool of capital available for investment by accredited investors is vast. If each of the 7.6 million households invested just $10,000, that would represent $76 billion in invested assets. Owners and operators of commercial real estate, like other enterprises operating in industrial, technology and service industries, require debt and equity capital to develop, improve and operate their properties. For those industry participants that for strategic and other reasons seek to monetize their properties in value maximizing transactions, their counterparties’ access to debt and equity capital is equally important. With the exception of investment capital ultimately sourced from public investors by publicly-traded real estate investment trusts, much of the capital required by commercial real estate CRE Finance World Autumn 2013 38 mortgage industry participants historically has been obtained from the private capital markets as regulated by the SEC. The commercial real estate mortgage market has evolved so that today conduit and balance sheet originators can source capital for their lending operations through loan participations and securitization offerings directed to institutional investors. Private equity fund managers focused on commercial real estate mortgages have been able to amass equity capital from institutional investors, such as governmental pension plans, endowments and family offices, for investment in mortgages and mortgage related instruments consistent with their investment strategies. However, in many cases, the pool of capital available to originators and private equity fund managers has been unnecessarily restricted because in the face of the prohibition on general solicitation and advertising they have been unable to publicize their private offerings at all, let alone through modern mass communication technologies. Many believe that the vast pool of capital available from eligible individual and institutional accredited investors can be accessed in cost-effective and efficient ways as a result of the lifting of the ban on general solicitation and advertising. Other provisions of the JOBS Act raise the holder of record threshold that triggers SEC public company reporting requirements to 2,000 if the holders are all accredited investors. These provisions allow up to 2,000 publicly solicited accredited investors to invest in an issuer’s securities without incurring public company compliance costs. Now that the SEC has acted to remove the prohibition on general solicitation and advertising, commercial real estate mortgage industry participants and their brokerdealer intermediaries will be able to expand the universe of investors to whom they can offer their securities beyond the inherently limited group of investors with whom they already have a prior substantive relationship. Industry participants can revisit their corporate websites and promote their businesses and publicize their successes without regard to whether the content would be considered general solicitation or advertising with respect to any ongoing securities offerings. They will even be able to conduct online offerings though publicly accessible internet websites and other mass communication media. O Michael L. Zuppone Partner Paul Hastings LLP “There is a vast pool of capital available from eligible individual and institutional accredited investors that many believe can be accessed in cost-effective and efficient ways as a result of the lifting of the ban on general solicitation and advertising.”


CRE Finance World, Autumn 2013
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