Reg D 506(b): What It Means & Why We Adopted It
As you probably know, EquityMultiple only offers investments to accredited investors. We do this to comply with SEC regulations that govern how securities can be marketed, and to whom, and to make sure that our investments are the right fit for the investors who participate in them. This article briefly discusses how EquityMultiple structures real estate investments with respect to SEC regulations, and why we made the transition to Reg D 506(b).
If you’ve been with us for awhile, you may have noticed a recent change in how we verify your status as an “accredited investor.” We’ll get to that below.
SEC Regulation, and How the Securities Act of 1933 Affects Real Estate Investments
The Securities Act of 1933 Act was passed in the wake of the great stock market crash of 1929, during the ensuing Great Depression. This landmark legislation mandated that an issuer (the person or entity selling or offering a security) cannot sell or offer that security to the public (“general solicitation” in SEC parlance) unless (a) the offering is registered with the SEC, or (b) there is an available exemption from registration. Registration is cumbersome and burdensome, both in terms of the time it takes and the additional cost.
Fortunately, there are exemptions from registration that are very suitable for most real estate investment offerings, including Regulation D, Rule 506. EquityMultiple offers real estate securities to accredited investors under this exemption, as do numerous other investing platforms.
506(b) vs. Reg D 506(c)
Within this exemption, there are two different ways to structure securities offerings. As mentioned above, EquityMultiple recently transitioned from 506(c) to 506(b).
506(c) offerings allow for broad advertising of specific securities. So, while all investors must ultimately be accredited in order to participate, an issuer (or platform) that utilized rule 506(c) may advertise the security via email, digital ads, social media, or offline media. In order to participate in a 506(c) offering, the issuer (or platform) must take “reasonable steps:” to confirm that each investor who participates is accredited. Typically, this involves getting a letter from a financial professional who knows the investor: an accountant, lawyer, investment advisor, or tax advisor. While accreditation need not take place for each and every investment, the SEC mandates that accreditation should be re-certified every three months.
506(b) offerings, on the other hand, may not be broadly advertised; instead, the issuer must establish a “substantive, pre-existing relationship” with prospective investors before presenting them with any material details of an offered security. EquityMultiple now uses a detailed sign-up questionnaire to establish a pre-existing relationship and determine that a prospective investor is fit to invest in the securities we offer. The investor must only complete this questionnaire once, and need not involve a CPA, lawyer, or tax advisor.
Officially there were three changes with respect to the EQUITYMULTIPLE workflow:
- New users have a longer and more comprehensive onboarding process. While the experience we’ve designed makes sign-up simpler, we want to qualify our users before we allow them to see investment opportunities. If you have not completed our pre-qualification requirements, the next time you login you will be prompted to do so.
- We only market to existing users. This is a direct stipulation of 506b rules, and truly benefits our users as they will be the only ones to see the investment opportunity.
- Removed our third party accreditation. For those of you that have invested recently, you will notice that there is no requirement for a third party to verify your accreditation. This is a time saver for everyone.
Why We Made the Switch
We made the switch from 506(c) to 506(b) to provide a quicker, more efficient investment process – allowing prospective investors to answer a series of questions to affirm their suitability to invest and self-certify just once. This affords a more frictionless investing experience, allowing us to automate many of the parts previously done manually, while giving us more time to guide investors to safely investing on our platform. Specifically, this helps our investors avoid the tedium of re-certifying accredited investor status on a recurring basis, which carries a real time cost and can hamper efficient investment.
An Update & Retrospective:
As of April, 2019, we regard our transition to 506(b) as a success. While we acknowledge that our initial signup process is more onerous, our investment “checkout” process is much smoother and less time consuming. As our offerings have subscribed at a more rapid pace (sometimes within a few hours), this speed and efficiency has become critical for frequent investors.
As always, we are interested in hearing your feedback. If you have thoughts on this or have any feature ideas please don’t hesitate to send us a message at email@example.com
Was this content useful?
We'd like to hear from you. Your feedback will help us provide new material that is useful to you.