One bright spot is that the JOBS Act preempts state securities laws regarding the public advertising of Rule 506 offerings and also crowdfunding. This is crucial because in the past, where the federal government has not preempted state law, the states have either not passed their own laws allowing use of the exemption or have added conditions that made the exemption unworkable. This is what occurred with the Rule 504, Rule 505 and Reg. A exemptions and why often they are not used.

The SEC is required to issue the regulations within 90 days for the public advertising of Rule 506 offerings and 270 days for crowdfunding. The deadlines are based on the signing date of the bill, which was April 5, 2012. Presumably the SEC’s will issue its proposed regulations substantially before those deadlines, but we do not know when. On the other hand, given the SEC’s hostility to the JOBS Act, the final regulations are not expected to be approved until about the time of the deadlines, though one can always hope.

Rule 506 and Related Offerings

On Rule 506 offerings, offerors that need to raise money now and do not feel they need “public” advertising will want to proceed right away without waiting what is now the additional two and a half months. Those offerors will use their existing connections, contact those potential investors that the offeror reasonably believes are accredited or sophisticated, use “general” advertising and possibly use educational seminars along the same lines. “General advertising” in this sense roughly means advertising that explains what the offering company does but does not refer to any past, present or future offerings or provide any specifics on rates of return or purchase prices – and that is not primarily a sales piece. (Be sure to have an attorney review your materials before trying this, as it is a tricky area.)

For companies that need some form of advertising and need to raise money immediately, the California 25102(n) exemption and the Model Accredited Investor Exemption (MAIE) that approximately 30 states have adopted allow the use of a “tombstone” ad to briefly describe the offering and obtain accredited investors.

Crowdfunding

With respect to crowdfunding, it probably will be almost nine months before crowdfunding is allowed. (Crowdfunding is currently not legal except for offerors taking money in exchange solely for discounted prices on future goods or services.) In addition, certain provisions of the JOBS Act may make crowdfunding unappealing to many offerors.

First, any crowdfunding offering(s) by an offeror that total more than $500,000 in any 12-month period will require audited financials, which are expensive. With a Rule 506 offering, audited financials are not required unless the offering is trying to raise more than $7.5 million. Even then, audited financials are not required if the issuer cannot, in its opinion, obtain them “without unreasonable effort or expense.” With public advertising becoming available for Rule 506 offerings, many companies may decide that a Rule 506 offering is preferable, especially if they do not want to deal with investors that are neither accredited nor sophisticated. (Investors who are not sophisticated frequently take more time to deal with on an ongoing basis, as they often do not understand business and investing fundamentals.)

Second, the transaction must be conducted through a licensed securities broker or a funding portal (either of which we’ll call a “Conduit”) that has registered with the SEC for crowdfunding. In addition, an issuer using the crowdfunding exemption may not advertise the terms of the offering, except for notices which direct investors to the funding portal or broker. Some offerors may not want this type of restriction. Further a crowdfunding issuer must annually file with the SEC reports of the results of operations and financial statements of the issuer. This is unusual for private placement offerings and some issuers may not want this filing requirement.

Third, the Conduit must also obtain a background and securities enforcement regulatory history check on each officer, director, and person holding more than 20 percent of the outstanding equity. Some existing investors may not appreciate that. In addition the Conduit must ensure that all offering proceeds are only provided to the issuer when the aggregate capital raised from all investors is equal to or greater than a target offering amount, and allow all investors to cancel their commitments to invest prior to that point. Presumably that means that the offeror will have to provide proof to the Conduit that the total target offering amount is in an escrow account and get the Conduit’s approval before the money is released to the offeror. Some offerings may not find that appealing either.

The New “Small Issues” (Section 401) Exemption

One item not addressed previously is the new exemption in the JOBS Act that is much like the current Reg. A exemption. The problem is that, unlike with crowdfunding and the public advertising of Rule 506 offerings, this “Small Issues” (Section 401) exemption only preempts state law if either the securities are 1) offered or sold on a national securities exchange (which means going public) or 2) are sold only to “qualified purchasers”. A “qualified purchaser” means:

•a person with more than $5 million in investments

•a company with more than $5 million in investments owned by close family members

•a trust, not formed for the investment, with more than $5 million in investments

•an investment manager with more than $25 million under management

•a company with more than $25 million of investments

That’s much higher standard than “accredited investor”, which requires only $1 million in net assets or $200,000 in annual income (or $300,000 in annual income with a spouse).

Outside of this, sales will only be able to be made in each state that passes its own legislation matching the other portions of the federal exemption. States frequently take a year or more to pass legislation. Also, as noted above, the history of states enacting legislation that enables federal exemptions is very poor. It would be great if many states quickly passed coordinated legislation, but that seems unlikely.

Finally, to look up information about the Act, use the phrase “Jumpstart Our Business Startups Act”, and not “JOBS Act”. The reason is that earlier Congress considered and passed other bills also called the “Jobs Act” and searching on the latter is liable to generate information on the wrong bill. (Be suspicious of anything with dates earlier than 2012 on it.)

–Bruce E. Methven

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The foregoing constitutes general information only and should not be relied upon as legal advice.

You are welcome to copy and distribute this document for non-commercial purposes, but it may not be edited and the prior warning and the following must be left on it:

Bruce E. Methven, 2232 Sixth Street Berkeley, CA 94710

Phone: (510) 649-4019; Fax: (510) 649-4024

www.TheCaliforniaSecuritiesAttorneys.com

CaliforniaSecuritiesAttorneys@gmail.com

Copyright 2012 Bruce E. Methven, All Rights Reserved.

This is an educational webinar is designed to answer about real estate investors’ main financial aspects and challenges.

Some topics we will cover include:

• No clear financial goals or plan
• Legal documents (will, trust, power of attorney, etc.) are out of order
• Beneficiary designation/title is wrong; not enough life insurance
• Inadequate home or automobile coverage
• High credit card debt & no handle on the budget
• Q&A

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About The Speaker

Anna Sergunina is a Certified Financial Planner™ professional and a Principal at MainStreet Financial Planning, Inc. (MSFP). MSFP is a Fee-Only financial planning company headquartered in Maryland with offices in Washington, D.C., New York, NY, San Mateo, CA and Santa Barbara, CA.

Anna Sergunina does not sell financial products or manage assets for a percentage fee. All services are rendered commission-free, on an hourly as-needed or project basis.

Anna specializes in working with individuals and couples from all walks of life. She is especially interested in helping real estate investors organize their financial lives, create and analyze alternative strategies to empower them make smart money decisions and most profitable deals.

Anna has been involved in financial services industry since 2003. She holds a Bachelor in Business Administration with concentration in Finance from Towson University in Maryland. She has an experience working for several financial institutions providing services in the investment management arena, 401k administration and college savings.

Anna is a real estate investor herself with a background in investing in different parts of the country.

She can be reached at anna@adviceonly.net or 415-562-4678

Twitter: “asergunina”

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Video Recording

Please forward about 7 minutes to the begging of the recording.

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Streaming Video

Recorded January 18th 2012

A step by step discussion with a local Dallas team that will explain the process of rehabbing, from:

• Finding the property
• Doing proper due-diligence
• Handling pre-rehab issue
• Managing the rehab
• Selling the property

This webinar will take us through the process of a successful fix and flip project.

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Article on Atlas Van Lines or download the PDF file.

Where is America moving?

As it does every January, Atlas Van Lines reviews data on the origins and destinations of interstate moves during the last 12 months. The 2011 Migration Patterns study results provide a snapshot of relocation patterns, showing an overall increase in the number of moves over last year.

Southwestern and Mid-Atlantic coastal states were popular destinations in 2011. The Midwest continues to lose residents, but Michigan became a balanced state after six consecutive years of steady outbound moves. For the sixth year in a row, Washington, D.C. had the highest percentage of inbound moves, while Ohio came out the clear leader in the highest percentage of outbound moves.

Other migration trends:

Northern States

With the exception of New Hampshire, which went from an inbound to a balanced state, and Massachusetts, Connecticut and West Virginia, which transformed from balanced to outbound states, the Northern States saw relatively few changes in moving patterns from 2010 to 2011.

Southern States

The Southeast remains balanced with the exception of Louisiana, which switched from a balanced state to an outbound one in 2011. Southwest states Texas and New Mexico continue to be inbound states, as well as Mid-Atlantic states Virginia and North Carolina. After becoming a newly inbound state in 2010, Kentucky is now balanced.

Midwestern States

Again seeing the majority of its states with more outbound than inbound moves, the Midwest region only has three balanced states – Iowa, South Dakota and Michigan. Despite uncertain economic conditions, Michigan became a balanced state following a six-year streak as an outbound state. Wisconsin, Nebraska and Kansas finished 2011 as outbound states – all of which were previously classified as balanced states for seven, nine and 10 years in a row, respectively.

Western States

The annual study shows that the majority of the Western states remain balanced with only two states changing status. Utah is now an outbound state and Wyoming is now balanced.

How is a state classified?

Each state/province has a threshold value, which is the total number of shipments multiplied by 0.55 (for example, in a state with 100 moves, at least 55 of them would have to be outgoing to classify the state as outbound). A state/province is considered:

• Outbound when outbound shipments exceed the threshold.
• Inbound when inbound shipments exceed the threshold.

All other states are classified as balanced. Shipments noted for Canada are cross-border-to the United States or from the United States (not inter-provincial).

Date: Tuesday, December 13, 2011, 6:50am MST

Valley employers have a more positive outlook for hiring in the first quarter of 2012.

According to the Manpower Employment Outlook Survey for the Phoenix area, 20 percent of employers plan to increase current staff levels next quarter, while only six percent expect to reduce staff.

This positive outlook puts the Valley among the top five markets in the nation for expected employment growth, said Frank Armendariz, director of metro markets for Milwaukee-based Manpower Group, which conducts the quarterly studies.

The Cape Coral-Fort Myers market in Florida had the most positive employment outlook, he said. The Phoenix metro area tied with Houston and Des Moines, Iowa, for second place.

The Phoenix metro area has a 14 percent net employment outlook. This comes from 20 percent of employers surveyed saying they plan to hire and 6 percent saying they plan to decrease staff levels. That overall 14 percent net employment outlook is up from 11 percent during the fourth quarter of 2011 and 12 percent during the first quarter of 2011.

Job prospects appear best in manufacturing, wholesale/retail trade, financial activities, professional and business services, leisure and hospitality and other services, according to the study. Employers in information and government plan to reduce staffing levels, while hiring in construction, transportation and utilities, and education and health is expected to remain unchanged, Armendariz said.

He said he was glad to see the construction forecasts staying the same because it had been trending lower during the recession.

He said it is no secret that construction and real estate were hit hardest in Arizona, and said he is starting to see that industry begin to stabilize.

“We are seeing that positive trend continuing to improve and it’s been a continuous increase and improvement throughout 2011,” he said. “With this 2012 forward-looking survey, it also gives us that positive optimism that we’re going to move into 2012 with the same type of trends.”

Armendariz said the solar industry is helping the state’s economy.

“Solar, as an emerging market for Phoenix, has been one of the drivers to create jobs here in Phoenix,” he said. “If you look at many of the engineering positions, technical positions, program management positions and manufacturing, many of those are created by emerging markets of solar here in the state of Arizona. Many businesses have come here to support that new sector.”

Overall, he is seeing positive trends in the Valley.

Copyright 2011 Phoenix Business Journal – Link to article

Strategy I: REOs (MLS)

Strategy II: Turnkey rehabbed and rented properties

Strategy III: Low-priced fix and flips

Strategy I

Low-priced Fix and Flips

Purchase price: $40,000 – Bought at the courthouse steps at an auction 

Rehab cost: $15,000 – this includes holding costs until sold

Average holding time 4.5 months

Profit: $17,000 – after closing costs and sales commission

Local team handles the transaction cycle from start to finish: researching properties before the auctions, bidding at the auctions, rehabbing and selling.

Profit sharing: the local team splits the profit with the investor, i.e. they only get compensated if there is a profit.

Program’s successful elements

Most of these elements are not typically seen in houses in this area:

1. Priced to sell quickly
2. Better than area’s standard finishes
3. Attractive fixtures
4. House staging
5. Finished garage
6. Quality photos

Call or email me if you are interested to learn more about this opportunity or to start investing now: dani@simplydoit.net, 650-440-5544

Sample Fix & Flip

Address: Cutters Mill Dr. Lithonia, GA 30058

4 Bedrooms | 3 Bathrooms | 1686 Sq. Ft. | 2003 Built | 2 Car Garage

Purchase price: $38,500

Repairs cost: $17,000

Total in: $55,000

Sale price: $74,000

Profit: $19,000

Offer accepted time: 6 days from listing

Before Photos

Strategy II 

Turnkey Rehabbed and Rented Properties

Price ranges: $45,000 to $70,000.

These properties are rehabbed and have a renter inside (or in the process of placing a tenant).

Rents are from $750-$1150 a month

Properties are located in good areas and in nice communities.

Note from Dani: I have driven into some of these communities and saw well maintained homes and streets.

Financing options:

Option A: Cash purchase

Option B: Purchase a $65,000 or higher priced property. Properties under $65,000 will not qualify for conventional financing.

Option C: Private lender (high rates)

Option D: IN SOME INSTANCES there are properties with seller financing – 50% financing at 7% interest rate. Qualifying is simple and easy (limited amount of houses under this option)

Call or email me if you are interested to learn more about this opportunity or to start investing now: dani@simplydoit.net, 650-440-5544

Sample Turn-key property

Brookstone Pkwy Ellenwood, Georgia 30294

4 Bedrooms | 3 Bathrooms | 1864 Sq. Ft. | 1987 Built | 1 Car Garage

Rent ready property.

Hemingway Rd Stone Mountain 30088

3 Bedrooms | 2 Bathrooms | 1344 Sq. Ft. | 1980 Built | 1 Car Garage 

Rent ready property.

Strategy III 

REOs

Prices for good properties in good area are from $30,000 

Homes need $12,000-$15,000 in work: new carpets, new paint, appliances, A/C compressor and some additional touch-ups

Financing: cash

Market value and Comps

Local team includes:

Purchase broker

Property management in place to handle the leasing and managing

Repair team to handle the work

Rents are there to support these low purchase prices.

Call or email me if you are interested to learn more about this opportunity or to start investing in this program.

Sample of REO Property

Waldrop Creek Court, Decatur GA 30034

3 Bedrooms | 2.5 Bathrooms | 1646 Sq. Ft. | 2000 Built | 2 Car Garage

This house needs new paint, new carpets, appliances, touch-ups, power wash exterior.

Call or email me if you are interested to learn more about this opportunity or to start investing now: dani@simplydoit.net, 650-440-5544

When someone raises money for a real-estate venture, often called a syndication, the securities laws apply.  There are a few rare exceptions, but this is generally true even when selling promissory notes or TIC (tenants-in-common arrangements) interests.  If the securities laws are violated, the money raised may have to be returned to the investors, the founders/promoters can be barred from making any future offerings and they may be subject to civil fines and even criminal penalties.  On the other hand, if done correctly, offerings can be an excellent way to raise money (and not just for real estate but for other businesses as well).

Structure

In terms of structure, to shield the syndicators and investors from liability, a legal entity is almost always formed.  For tax reasons, usually a limited liability company (LLC) or, for larger offerings, a limited partnership is used.  Generally “C” and “S” corporations are not used.

(A “C” corporation has two levels of taxation: If profitable, it pays its own income taxes and then the owners pay income tax on their distributions.  An “S” corporation often can’t be used because the venture is expected to – or might — have more than 25% of its income in some years from rents. If it violates this rule, it becomes a “C” corporation with very negative tax consequences.)

It is relatively easy to set up an LLC or limited partnership so that there are different classes of ownership if needed.  For example, investors can be given limited or no voting rights (or super majorities can be required to remove the manager), can be given priority on distributions (before the syndicators), or can be paid in a different manner than the syndicators, such as a specified rate-of-return percentage.  The manager or managers (who may or may not be the syndicators/founders) can be given virtually total control over the operation, or the investors may be given the right to approve certain transactions or major decisions.

Often the syndicators/founders/promoters have an ownership interest in the entity.  They may receive that without contributing any money, or they may contribute at least some money if having some “skin in the game” makes potential investors feel more secure.  The syndicators/founders/promoters may also be given salaries or a percentage of profits or revenues if they are also managing the venture, which is frequently the case.

All of this is driven by what the syndicator believes will be most attractive to the target investors.

Securities Exemptions

The types of offerings that are almost always used by California ventures are the federal Rule 506 exemption, the California 25102(f) and 25102(n) exemptions, and the California qualification by permit procedure.

(The federal Rule 504/SCOR exemption, federal Rule 505 exemption and federal Reg. A exemption are virtually never used, for reasons that will not be covered here.)

In choosing an exemption to use, the primary factors are: 1) whether the offeror is willing to limit its potential investors to California residents; 2) what investor qualifications (requirements) the offeror can live with; 3) what type of promotion the offeror believes will be needed; and 4) where the majority of the offeror’s business (real property) will be located.

Federal Rule 506 and Non-Public Advertising

With a Rule 506 offering, an unlimited number of “accredited” (based on high levels of assets or income) investors may invest, plus up to 35 non-accredited but “sophisticated” investors may invest.  This type of offering can be made in all 50 states (although New York requires filing in advance).

An “accredited” investor includes an entity with more than $5 million in assets.  It also includes an individual 1) whose net worth, or joint net worth with his/her spouse, exceeds $1,000,000; or 2) who either had income in excess of $200,000 in each of the two last years or joint income with his/her spouse in excess of $300,000 in those years and is reasonably expected to have the same income in the current year.  Unfortunately, as of the summer of 2010, the personal residence may no longer be included in the calculation of net worth.

A “sophisticated” investor is one who is sophisticated in terms of investments, either personally or with the help of a sophisticated and independent financial advisor.  This is somewhat subjective, but what is examined is the person’s investment experience, education, career, etc.

A Rule 506 offering cannot be made using “public” advertising but the offeror can send communications to specific persons and entities it reasonably believes meet the investor qualifications.  It can also distribute general information about itself and what it does (including on a web site and through educational seminars) so long as it does not refer to any specific past, present or future offerings.  Still, this should not be done without consulting a securities attorney:  It is easy to cross the line and violate the securities laws regarding public advertising.

With a Rule 506 offering, filings are made with the SEC and in state where the offering has at least one investor.

California 25102(f) Offering

A California 25102(f) offering is very similar to a Rule 506 offering.  It also allows an unlimited number of accredited investors and up to 35 non-accredited investors.  (As with a Rule 506 offering, no “public” advertising is permitted.)  But in addition to sophisticated investors a 25102(f) offering also allows a third class of investors:  Those who have a substantial preexisting relationship with one of the principals.  This is the so-called “friends, family and colleagues” category.  It can be useful if the principals want to allow investors of this type even though they are not accredited or sophisticated.

With a 25102(f) offering a filing is made with California.

California 25102(n) Offering

A California 25102(n) offering is unusual in that it allows some limited public advertising.  Specifically it allows the use of a brief “tombstone” ad.  (It’s called that because sometimes it feels like one has only as much space as is available for carving on a real tombstone.)  There are strict requirements for what the ad must contain, what it may contain, and what it cannot contain.  Basically the following is stated: The type of investment, its price, a very brief description of what the company does, and how to obtain more information.  Potential investors must complete an investor questionnaire and qualify before receiving any other information.  Still the ad can be run in newspapers and magazines and/or on a web site – and it can be mailed, emailed or faxed to anyone.

Investors are limited to accredited investors or, in the case of California corporations only (which frequently does not help with real-estate syndications), also investors that have roughly half the income or assets requirements for an accredited investor.

Filings must be made with California at both the beginning and end of the offering, and the offering may not be open for more than six months.

A California 25102(n) offering is exempt from federal regulation, and there are also about 30-35 states that have exemptions that can be used in conjunction with a 25102(f) offering (and which allow a tombstone ad) IF the offering is limited to $5 million and accredited investors only.  Still, the states’ exemptions for this are not identical, so care must be taken to make sure the requirements for all states are met (or at least the ones where investors are expected).

California Qualification by Permit

A California qualification by permit is not an exemption but a registration.  That means that a lengthy application must be submitted to the State (which makes the offering more costly) and the State must approve the offering before the offering can start, which usually takes two to three months after the application is submitted.

On the other hand, it allows full public advertising and investor qualifications are quite low.   All investors must be California residents, and must have 1) a minimum net worth of at least $75,000 and minimum gross income of $50,000 or (2) a minimum net worth of $150,000.  Net worth must be determined exclusive of the principal residence, home furnishings and automobiles and the investment must not exceed 10 percent of the net worth of the investor.

——————————

You are welcome to copy and distribute this document for non-commercial purposes, but all of the following must be left on it:

Methven & Associates

2232 Sixth Street Berkeley, CA 94710

Phone: (510) 649-4019 Fax: (510) 649-4024

bmethven@methvenlaw.com

Web Site: www.methvenlaw.com

Copyright 2011 Bruce E. Methven, All Rights Reserved.

The foregoing article constitutes general information only and should not be relied upon as legal advice.

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