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socrateaser
socrateaser, Lawyer
Category: Real Estate Law
Satisfied Customers: 33883
Experience:  Attorney and Real Estate broker -- Retired (mostly)
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Real Estate Investment Company

Resolved Question:

I want to use equity crowdfunding to raise capital for an investment real estate company. What are the costs and limitations of using Regulation A versus the Intrastate Offering Exemption [Section 3(a)(11) of the Securities Act] in my efforts to raise capital from ANY type of investor (not just accredited investors)? Am I correct in thinking the Intrastate Offering Exemption will require almost no filing with the SEC (therefore having no filing fees) and would save me considerable time and cost compared to Regulation A?

Submitted: 1 year ago.
Category: Real Estate Law
Expert:  socrateaser replied 1 year ago.
What are the costs and limitations of using Regulation A versus the Intrastate Offering Exemption [Section 3(a)(11) of the Securities Act] in my efforts to raise capital from ANY type of investor (not just accredited investors)?

A: I can't provide specific costs. The limitation is simply that Reg. A permits interstate sales, and the Intrastate Offering Exemption does not.

Am I correct in thinking the Intrastate Offering Exemption will require almost no filing with the SEC (therefore having no filing fees) and would save me considerable time and cost compared to XXXXX?

A: That's correct. However, the NJ Bureau of Securities will require you to register securites which are only sold intrastate. See generally, NJSA 49:3-50. So, while you may avoid federal registration responsibilities, you will be stuck with a similar state registration. And, to be frank, the state is far less competent with securities regulation than is the federal government -- because practically all registrations are federal in nature.

Hope this helps.

Customer: replied 1 year ago.

This does help and I thank you. It raises additional questions as well.

As I understand, I'd have to register securities with the state under both circumstances. While I agree the state is less informed in securities than the SEC, it is a matter I cannot avoid.

Do you know the specific forms required to be filed in an intrastate offering exemption?

Here is my idea boiled down:

  • I want to start an investment real estate company (likely a C Corporation)
  • Because I do not have massive savings to put toward an investment property, I would need to raise money to use as a down payment on a loan.
  • The money raised from investors would be considered the contributed capital of the company
  • The investors would therefore receive shares in the company

 

How would you recommend doing this with the least possible headaches and the best possible outcomes? (If at all possible.)

Once the JOBS Act is finalized, the idea is that equity crowdfunding will be legal for ANYONE and not just accredited investors. I realize that changes take years in the government and I would like to work within the current boundaries of the

law to launch my business.

Also, what type of business formation would you recommend and why? I'm leaning toward a C Corporation over an LLC because I want the investors to have as little headache as possible.

I feel that if their investment in my company resembles that of a stock on the stock exchange, it would be simpler for them. Why? Because they only have tax responsibilities when they sell the shares or when my company sells the property and dissolves. Under an LLC they would have tax responsibilities yearly through pass-through rules. What are your thoughts?

By the way, I really do appreciate your help.

Expert:  socrateaser replied 1 year ago.

Do you know the specific forms required to be filed in an intrastate offering exemption?

 

A: Since it varies by state jurisdiction, I do not have specific info for NJ. You will have to contatct the NJ Bureau of Securities.


Here is my idea boiled down:

  • I want to start an investment real estate company (likely a C Corporation)
  • Because I do not have massive savings to put toward an investment property, I would need to raise money to use as a down payment on a loan.
  • The money raised from investors would be considered the contributed capital of the company
  • The investors would therefore receive shares in the company

How would you recommend doing this with the least possible headaches and the best possible outcomes? (If at all possible.)

 

A: I think that a Reg. A filing is a preferable method. There is, however, no easy way to create a securities investment vehicle. The more registration hoops you jump through, the less your limitations on the selection/accreditation of investors -- and visa-versa.

 

Once the JOBS Act is finalized, the idea is that equity crowdfunding will be legal for ANYONE and not just accredited investors. I realize that changes take years in the government and I would like to work within the current boundaries of the

law to launch my business.


Also, what type of business formation would you recommend and why? I'm leaning toward a C Corporation over an LLC because I want the investors to have as little headache as possible.

 

A: A C Corporation is the best possible organization for investment purposes. It permits you to issue share certificates, and if the business gets large enough, then it is easy to go public without changing form.

 

I feel that if their investment in my company resembles that of a stock on the stock exchange, it would be simpler for them. Why? Because they only have tax responsibilities when they sell the shares or when my company sells the property and dissolves. Under an LLC they would have tax responsibilities yearly through pass-through rules. What are your thoughts?

 

A: Agree in full -- for the reasons stated above.

 

Hope this helps.

Customer: replied 1 year ago.
I appreciate all your help and will accept your answer after this round so that you can get paid.

I spoke with someone from the New Jersey Bureau of Securities today and got some valuable insight.

While I agree Regulation A may be better, I want to try Section 3(a)(11) for now because of the reduce costs and reduced filing requirements.

I plan on gaining interest from investors by contacting broker/dealers and also financial advisors and harnessing the potential of their clients. If successful, those clients would become investors/shareholders.

In New Jersey, in order to qualify for the Federal Intrastate Offering Exemption I cannot do a general solicitation to investors and the investors must be either friends or family.

If I get investors through the method above would that be considered a general solicitation? Would the investors be considered "friends"?

Also, if this route is successful I would want to reward the broker/dealer and/or financial advisor. Could I offer them an equity stake in the company without them having to pay? Basically, a barter of being able to become a shareholder for free in return for access to their clients. What would be the negative effects of this? The other option is to have them charge a fee and pay it once the company is launched.

Perhaps it would be best to wait until the JOBS Act is finalized and equity crowdfunding becomes more user-friendly.

If I want to speak directly with you again in the future how can we do that?
Expert:  socrateaser replied 1 year ago.
If I get investors through the method above would that be considered a general solicitation? Would the investors be considered "friends"?

A: Investors acquired for the purposes of investment are not your friends. You cannot accomplish your goal under the Interstate Offering Exemption.

Also, if this route is successful I would want to reward the broker/dealer and/or financial advisor. Could I offer them an equity stake in the company without them having to pay?

A: The broker/dealers can, at least theoretically, be interested parties, as long as full disclosure is provided to each investor. However, the risk of overreaching by the broker/dealers is extremely high, so, you could be asking for a lot of trouble if an investor later gets cold feet and starts looking for a reason to sue you.

Basically, a barter of being able to become a shareholder for free in return for access to their clients. What would be the negative effects of this? The other option is to have them charge a fee and pay it once the company is launched.

A: Giving away shares and thereby diluting the investment for the paying investors is a really bad idea.

Perhaps it would be best to wait until the JOBS Act is finalized and equity crowdfunding becomes more user-friendly.

A: I think this is a very good plan. Either that or forget about crowdfunding, and just use an ordinary Regulation D exemption with accredited investors.

If I want to speak directly with you again in the future how can we do that?

A: Put my userid at the beginning of the text of any new Q&A session (e.g., "To socrateaser"), and if anyone else jumps into the question just "opt them out" or "relist" and explain that you only want to correspond with me.

If you are looking to hire me directly outside of the website, that would violate the website's solicitation policies, so I'll have to pass on the opportunity -- though I'm flattered by your consideration.

Hope this helps.
socrateaser, Lawyer
Category: Real Estate Law
Satisfied Customers: 33883
Experience: Attorney and Real Estate broker -- Retired (mostly)
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