By David Drake
Direct Public Offering, also known as Regulation A+, is poised to significantly bring down the cost of raising capital for businesses in the US when it becomes legal. And when it does, it could overshadow even its more popular regulatory sibling under the JOBS Act – Crowdfunding.
Such incidences like paying up to $250,000 in legal fees for a target capital raise of $5 million, under its current version Regulation A, will be thwarted with this new regulation as the limit increases to $50 million.
Regulation A+ is expected to greatly influence direct public funding and give businesses an opportunity to raise capital more affordably.
One of the sectors that will benefit greatly from Direct Public Offering or Regulation A+ is the real estate industry.
Realty Bites
The demand for real estate properties has always been strong in the States. But many people have been unable to start real estate businesses due to the strict regulations that have been in existence especially as far as raising capital is concerned.
People have been paying tens of thousands of dollars in legal fees just to raise a couple of million. This has always been the biggest discouragement.
Regulation A also demanded that a state approve every application in a system of merit-based approval. Fundrise, the only real estate crowdfunding platform to use Regulation A, had to seek state approval to take advantage of this regulation. This process, much like the ongoing debate around will sportsbooks become legal in CA, highlights the challenges of navigating state-specific legal frameworks. Just as real estate development has been limited to those who can afford the legal and financial barriers, the legalization of sportsbooks in California hinges on resolving complex legislative hurdles and balancing public interest with regulatory oversight. Until these barriers are addressed, both industries remain accessible only to those with substantial resources and influence.
“Regulation A has been a very effective way for us to raise money from local investors,” said Fundrise Co-Founder Ben Miller.
How Regulation A+ can be more Crowd-friendly than Crowdfunding
In general, the Jumpstart Our Business Startups Act, or JOBS Act, brings a different business climate to the USA. From the time the JOBS Act was signed into law by President Barack Obama in April 2012, there were great steps that have been made already. Currently, a lot of capital is being raised by startups through crowdfunding. Equity crowdfunding when it does become legal could open up funding from non-accredited investors of up to $1 million per year per project.
Regulation A+ exceeds this as developers and operators can raise up to $50 million in capital per year per project, sell securities to the public, and raise capital even from non-accredited investors. With this broad potential investor base, you will now be able to develop real estate properties with more capital raised, for less hassle and at a lower cost versus other structures.
Experts have also been making comparisons between Regulation A+ and Regulation D 506c. Definitely, both regulations have their advantages and disadvantages. But one important distinction is that Regulation A+ enables you to raise capital from non-accredited investors, while Regulation D 506c is restricted only to accredited investors.
“Fundrise has used existing regulations to make real estate investments available to both accredited and non-accredited investors, and we continue to monitor the rapidly changing regulatory landscape around equity crowdfunding as the Securities and Exchange Commission implements the JOBS Act,” added Miller.
Real participation and gains from Regulation A+
There is high anticipation for Regulation A+ to be approved sooner than later. This is because it is believed that the law will enable more people to participate in building wealth in the country. Outside of Regulation A+, only the rich investors have been dominating the real estate industry and giving no room for the public to get involved for private projects.
Many developers that have not been able to operationalize their developments for lack of funds will be able to do so with Reg A +.
The reduced legal fees and lower compliance costs from the JOBS Act will also make it more affordable to raise capital sooner, get established faster, and start operations immediately and efficiently.
With more firms who can take advantage of this, there will be more players and consequently competition which can lead to higher quality products and services.
Regulation A+ can also give the public an opportunity to participate in commercial and multi-family real estate investments and thus, in building wealth and creating jobs. Previously, this was left to well-financed companies and accredited individuals who were able to pay for the high costs of operating developments in the States. The new regulation will definitely connect the public directly with developers and create an explosion in real estate developments and acquisitions.
Invest in your City with Reg A +
If you have been thinking and reflecting on making an investment, especially in the real estate sector, this is the best opportunity for you to explore. Regulation A+ or Direct Public Offering will provide a conducive environment to crowdfund capital from non-accredited investors and fund your startups, and for investors to gain wealth as well.
Just make sure that you understand Regulation A+ thoroughly and then make the necessary steps to start your real estate business. My research on this for three years shows that only a few lawyers have ever done this successfully with low cost involved.
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David Drake is an early-stage equity expert and the founder and chairman of LDJ Capital, a New York City private equity advisory firm, and The Soho Loft – The Voice of Capital Formation – a global financial media company with divisions in Corporate Communications, Publishing and Expos & Events. You can reach him directly at David@LDJCapital.com.
