Why You Haven’t Heard About Multifamily Apartment Syndications and What Investors Should Know About the JOBS Act

by | May 19, 2021 | Uncategorized | 0 comments

I wish I knew about these kinds of investments 15 years ago! – It’s what I, and many others, are saying about Multifamily Apartment Syndications.

But there’s a good reason why you have not heard about Multifamily Apartment Syndications, until recently – they were not advertised publicly and typically only found among the very wealthy, until the JOBS Act.

There’s a lot to know about the Jumpstart Our Business Startups Act (the “JOBS Act”), especially when it comes to syndications, or pooling of capital for investment purposes, and the  following is a brief overview.

What is the JOBS Act?

Syndication has become a useful tool to raise capital for investments, but it wasn’t always an available option due to strict SEC (Securities and Exchange Commission) regulations.

In 2012, the JOBS Act was created to ease securities regulations and to encourage the private funding of U.S. small businesses.  It made the process of raising capital simpler, cheaper, and faster. As the JOBS Act continued to evolve, it allowed more investors to participate in equity capital contribution to private companies. Historically these investments were only accessible to Accredited Investors, a term defined by federal securities law to include individuals earning $200,000 or more annually or holding at least $1 million in assets (not including their primary residence). The JOBS Act made it easier to raise capital from Accredited Investors, but it also opened the door to all investors, accredited or not, to invest in certain private offerings.

A History of Investment Advertising and Solicitation

Prior to the JOBS Act, the Securities Act of 1933 was the first major piece of federal legislation regarding the sale of securities. It was enacted as a result of the stock market crash in 1929 with the following goals: 1-provide more transparency in financial statements to help investors make informed decisions and 2-establish laws about misrepresentation and fraudulent activities in the securities markets.

The Securities Act of 1933 addressed the need for improved disclosure by requiring issuers of securities to register with the Securities and Exchange Commission, ensuring they provide both the SEC and potential investors with all relevant information through a prospectus and registration statement. The federal government relied upon this legislation to help renew stability and investor confidence in the markets.

All securities in the United States must be registered with the Securities and Exchange Commission (SEC) or qualify for an exemption. This means that securities are either registered (public markets) or unregistered (private markets).  The Act also provided companies with a number of exemptions which permitted the sale of securities in limited circumstances under certain “exempt offerings”.  Before 2012, it was nearly impossible for anyone of average wealth to gain access to private investments. Not only did this limit investors, it also constrained those seeking to raise capital. The exemptions that make up the private markets are found in Regulation D, Regulation A, Regulation S, Regulation Crowdfunding, Rule 144A, and section 4(a)(2) private offerings.

Regulation D

Regulation D accounts for the majority of capital raised in the private market and was put into effect in 1982. Its purpose was to allow small and medium-sized companies to raise capital without bearing the red tape and expense involved in filing and reporting.  Knowing that small businesses are the lifeblood of our economy, the regulators wanted a streamlined, universal process that maintained consumer protections. Notably though, unregistered status does not exempt companies from securities laws (state and federal), civil liability, or SEC scrutiny.  Even with an exemption, companies are required to file a form D with the SEC and may have various reporting requirements with the particular states.

When the JOBS Act was signed into law on April 5, 2012, two sections, Title II and Title III, changed the rules surrounding general solicitation and the way companies could raise capital under certain exempt offerings. Prior to Title II, general solicitation (e.g., public advertising) for participation in a securities offering was illegal for early-stage private companies.

To encourage economic growth after the Great Recession, the JOBS Act was implemented to allow private startups and small businesses to use platforms to publicly raise investment capital. Rule 506 of Regulation D permits issuers to use general solicitation and general advertising to offer their securities provided that: 1-the issuer takes reasonable steps to verify that the investors are Accredited Investors; and 2-all purchasers of the securities fall within one of the categories of persons who are Accredited Investors under an existing rule.

Rule 506 of Regulation D

There are two exemptions within Rule 506 that are commonly used for Multifamily Apartment Syndications. These are Rule 506(b) and Rule 506(c).

Rule 506(b)

Rule 506(b) requirements include:

  • A general ban on solicitation.
  • A limitation of no more than 35 non-accredited “sophisticated” investors while an unlimited number of accredited investors can participate.
  • Restricted security.

Rule 506(c)

Rule 506(c) requirements include:

  • Only accredited investors.
  • The company must take reasonable steps to confirm the investor’s accredited status.
  • Restricted security.

Rule 506(b) and 506(c)

To invest in a Regulation D, Rule 506(c) offering, an investor must be accredited without exception. But, 506(b) offerings can take up to 35 non-accredited investors. These “sophisticated” investors should have prior knowledge and or experience with the investment type.

Exemptions under 506(b) allow companies to rely on the investor’s word as to their accreditation status. 506(c) regulations do not allow this. Instead, companies must make a good faith effort to confirm the investor’s status.  That means the sponsor will need to see tax returns, brokerage account balances, bank statements, or some other means that confirms that the investor is in fact an Accredited Investor.

In exchange for these additional requirements, Rule 506(c) lifts the ban on solicitation. That means that marketing and advertisement to investors that don’t have a preexisting relationship with the company is allowable.

How Does the JOBS Act Affect Investors and Multifamily Apartment Syndications?

First, the JOBS Act allowed entrepreneurs and small businesses to use public funding platforms for fundraising. Next, it mandated that the SEC write rules to allow Non-Accredited Investors (Sophisticated Investors) to invest in private transactions for the first time. As a result, funding platforms in the real estate industry are able to create connected networks of investors and give them insider access to pre-vetted investment properties all in one place.

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