Rule 506 of Reg D Real Estate and the benefits of the CARES Act

Investing can be very profitable when one does their research, and an important form of investing is Regulation D.

IN THIS ARTICLE, WE ARE GOING TO REVIEW REGULATION D, THE JOBS ACT, BRIEFLY OUTLINE THE BENEFITS OF THE CARES ACT IN RESPONSE TO THE RECENT CORONAVIRUS AGENDA. WE ARE ALSO GOING TO REVIEW OPPORTUNITY ZONES, SO YOU CAN BETTER INVEST YOUR MONEY.

With the Jumpstart Our Business Startups (JOBS) Act passing back in 2012, it is easier for non-accredited investors to invest. Most importantly, for private offerings, it lifted an 80-year ban on public solicitation of private investments. Companies using Regulation D (Reg D) to raise capital are able to raise funds from accredited investors and non-accredited investors. For those who are confused about what that is, read this article about the basics of Reg D, and specifically Rule 506 of Reg D.

Reg D is a regulation governed by the SEC, maintaining private placement exemptions. This is opportunistic for smaller companies, as they can raise capital both faster and cheaper than releasing their company to the public. It allows capital to be raised through equities and debt securities without needing to register them with the SEC. One must still follow the requirements required by the state and federal government.

Companies and Investors must still follow guidelines, fill proper paperwork, and disclose important information. Companies must fill out a “Form D” electronically with the SEC. Although one must fill out the Form D, it is far less tedious than preparing for a public offering.

The company offering the private security must also provide disclosures about any “bad actor” events within the timeframe of issuing the security.

Importantly, Rule 506 of Reg D gives two distinct exemptions for companies offering securities. Through these exemptions, companies can raise an unlimited amount of money.

RULE 506 (b) OF REG D

Rule 506(b) is for an unlimited number of accredited investors and up to 35 non-accredited investors, who are labeled as “sophisticated”. To be a sophisticated non-accredited investor, one must have sufficient knowledge and experience in business and financial situations. By having said knowledge, they can be trusted to evaluate the cost-benefit analysis of a potential investment.

Under Rule 506(b), the company offering the securities is not able to use general solicitation to advertise. Also, companies decide on what information they choose to disclose, so long as it doesn’t go against anti fraud regulations, and doesn’t include any false and misleading information. The company must be available for questions from potential investors.

Reg D 506(c) is for accredited investors. Rule 506(c) of Reg D investments states that companies can broadly solicit and generally advertise a private offering, and still be within compliance of the requirements. It does state some prerequisites, such as requiring all the investors in the offer to be accredited investors and requiring the company to take the necessary and reasonable steps to verify the accredited investors.

If someone purchases securities related to the Rule 506, they are given “restricted” securities.  This means those securities cannot be sold for at least six months to a year.

Rule 506(c) of Reg D also means that investors may invest immediately into a project, instead of waiting the cool-off period. An unlimited amount of investors may invest, raising an unlimited amount of money.

THE CARES ACT

Another important event is the signing of the $2 trillion Coronavirus Aid, Relief, and Economic Security (CARES) Act. It allows grants and loans equal to 10% of the country’s economy. It could lead to tax breaks for potential investors, as well as support for smaller businesses.

The CARES Act offered a total of about $350 billion in low-interest loans for small businesses to go towards rent, utilities, and mortgage interests. It also offered specific guidance on evictions and foreclosures. This means that any struggles due to the Coronavirus can be handled by requesting a forbearance. The Department of Housing and Urban Development (HUD) will also receive extra funding through the CARES Act, allotting $5 billion to expand Community Development Grants and $4 billion in McKinney-Vento Homeless Emergency Solutions Grants. This funding benefits  communities with the need to to provide housing for in-need citizens and the homeless.

The CARES Act also presents multiple tax benefits, such as being able to file amended returns, claiming the operating losses, and getting refunds on already-paid taxes. This is a good time to mention the Opportunity Zones Program, which attracts investment toward low-income and distressed cities and towns. They do this by modifying the standard tax treatment of capital gains in several ways.

OPPORTUNITY ZONES

To qualify for the benefits that Opportunity Zones reap, one must reinvest one or more capital gains in a Qualified Opportunity Fund. This is described as an investment vehicle organized as a corporation that holds 90% or more of its assets in a qualified opportunity zone property, rather than another qualified opportunity fund. There are three tax benefits to reinvesting capital gains in a Qualified Opportunity Fund: first, there is a temporary tax deferral on any gains in a qualified opportunity fund within 180 days of realization; second, there is a 10% step up in basis for gains reinvested in a qualified opportunity fund if the investment is held for five years; third and finally, investors who invest in a qualified opportunity fund can exclude permanently from taxation any capital gains that accrue after their investment in a qualified opportunity fund, if the investment is held for at least 10 years.

In short, Reg D is something that needs to be looked into. The opportunities of investing through Rule 506 means that companies can raise unlimited funds through accredited and non-accredited investors by offering private securities through equities and debts. Rule 506(b) allows for an unlimited number of accredited investors and a maximum of 35 investors; Rule 506(c) is only for accredited investors, but the company can generally advertise their offerings to said investors. Additionally, the CARES Act offers tax refunds for those investing in businesses, as well as mortgage forbearance and an increase in grant funds. It is a very viable form of investing, and it benefits smaller companies as it allows those companies to raise the maximum amount of funds needed for operation at a cheaper cost. Overall, it is important for investors to take advantage of this opportunity to maximize their returns.