Sophisticated real estate developers and owners rely heavily on private equity financing for their projects, in order to use as few of their own assets to fund such projects as possible. However, developers must comply with certain securities laws if they are to continue raising private equity.
In her Real Estate Finance & Investment magazine article “Hidden Dangers for Real Estate Developers: Potential Violations of Securities Laws in Equity Financing,” Partner Suzanne Mulvihill discusses some of the applicable exemptions developers should pursue to remain compliant with securities laws.
Under the Securities Act of 1933, any offer to sell securities must either be registered with the Securities and Exchange Commission (SEC) or meet an exemption. Regulation D of the Securities Act, for example, contains three such rules providing exemptions from the registration requirements, allowing companies to offer and sell securities without registering them with the SEC – Rules 504, 505 and 506.
“Taken as a whole, the exemption[s are] clearly intended to provide a means for a smaller developer to raise capital for a one-off deal,” wrote Mulvihill. “It is not meant to provide a vehicle for larger developers to regularly sell portions of their own projects even if such developers meet the letter of the exemption requirements.”
Mulvihill added “Though exemptions exist for both the registration as well as broker-dealer aspects, failure to meet the statutory and regulatory requirements could result in loss of the exemption which could open the door for SEC and state enforcement, as well as private rights of action. The costs of defending such actions alone can be detrimental to a developer, not to mention the potential fines, penalties and rights of rescission.”