AI Quarterly Fall 2015

Q U A R T E R LY

ALTERNATIVE INVESTMENTS QUARTERLY

October 12 (MON) -14 (WED) The Cosmopolitan of Las Vegas

FALL 2015 VOLUME 9 ISSUE 4

Private Capital Raising Q2 Activity Report

I DOL Fiduciary Proposal

I Partnerships and Section 1031 Exchanges I NASAA’s New EFD System I Team Chemistry I ADISA News

Q U A R T E R LY

Executive Director’s Letter FALL 2015 VOLUME 9 ISSUE 4

ALTERNATIVE INVESTMENTS QUARTERLY

ADISA EDITORIAL BOARD Chair I Brandon Raatikka I FactRight, LLC Brandon Balkman I Orchard Securities Linda Dewlaney I Preferred Partnership Services Eric Perkins I Perkins Law PLLC

CONTACT INFORMATION ADISA I 10401 N Meridian St., Suite 202 I Indianapolis, IN 46290 Direct: 317.663.4180 I Toll Free: 866.353.8422

1 The Physics of the DOL Fiduciary Rule

The Physics of the DOL Fiduciary Rule

By John Harrison, Executive Director, ADISA

4 Private Capital Raising Activity Report Q2 2015

8 Partnerships and §1031 Exchanges: Available Options for Partners and Partnerships

12 DOL’s Fiduciary Proposal: Is Uncle Sam Your New Investment Advisor?

Fax: 317.815.0871 I E-mail: adisa@adisa.org John Harrison I Executive Director I 317.663.4172 Adam Abubakr I Director of Accounting & Data Systems I 317.663.4177 Tanisha Bibbs I Education & Meetings Coordinator I 317.663.4174

16 NASAA’s New EFD System Revolutionizing Blue Sky Compliance for Rule 506 Offerings

Jennifer Fitzgerald I Director of Marketing I 317.663.4175 Tony Grego I Director of Business Development I 317.663.4173 Erin Balcerzak I Administrative Assistant I 317.663.4183 Design I DesignMark I Susie Cooper

adisa.org

18 Do You Have the Right Chemistry on Your Team?

22 ADISA News & Events

Copyright © 2015

By ADISA (Alternative & Direct Investment Securities Association), formerly REISA, formerly the Tenant-In-Common Association.

All rights reserved. Readers may copy sections of this publication for personal use. However, it is a violation of U.S. copyright laws to copy substantial portions of the publication for any reason without permission. The Copyright Act of 1976 provides for damages for illegal copying. If you wish to copy and distribute sections of this publication, contact Jennifer Fitzgerald at jfitzgerald@adisa.org.

24 ADISA 2015 Annual Conference Preview

To analyze what’s going on with most any issue—particularly legislative or regulatory, think back on your college physics courses (if you were, hmmm, fortunate enough to have had those). Either something is standing still and the sum of the forces on it is zero, or it is moving and the sum of the forces describes the speed and direction of the motion. Let’s take a look at an issue in Washington right now, the DOL’s Proposed Fiduciary Rule (PFR), and try to analyze what’s really happening.

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First, there is slow motion in the direction of the PFR being re-proposed with perhaps some changes—we hope substantive changes, but it’s also likely they might be only optical changes. What are the forces causing this direction, and the forces which are slowing it down:

Now let’s look at the forces pushing against moving the PFR forward:

PRO

CON

1.

Ideological mission. In the case of the PFR, this may be the strongest force keeping it going. Increased

1. Ideology mission of less government. This is most always a normal player in opposition to the expansion

oversight, purportedly on behalf of the average investor (and voter) against the selfish forces of business, is the prime force

of government and more regulation in general (a reaction to the above Forces 1 and 2). The usual Republican actors—both

for the PFR. You may agree or disagree with the Elizabeth Warren types, but we can’t say we don’t know where they stand

congressional and trade groups—rally here.

and why they stand there. Note that sometimes ideological mission—in the case of a drive for smaller government—can be a force against regulation; however in this case it’s the driver of “forward” motion (like the acceleration in Force = Mass

2.

x Acceleration).

distribution model would undergo strain as it relates to retirement accounts. Investment products which depend on advisor-

2. Bureaucracy creep. There has yet to be a bureaucracy created that doesn’t want to grow, and in government structure management rewards itself by increased power, and that means increased numbers of government employees to handle increased authority. This is not nefarious and not unique to the current administration, it’s just the nature of the

Supplier economics. Although the issuers of investment product stand to lose some, the current sales

types to handle them (e.g., many alternatives) stand to be more limited unless they’re exempted. It’s hard to predict the sum of the implications, so fear of this uncertainty and the effort required to adapt to a potential sea change in handling retirement accounts pushes many specialized trade groups (including ADISA) to oppose.

beast. Government employees have limited salaries without equity share, so increased power—by department scope

3.

and size—is a prime motivator. A tactic of this bureaucracy creep is turf battles, and the PFR issue involves some intra-

indications the smaller and younger investors particularly may suffer in the long run. In essence, what’s being proposed is

government turf skirmishes as one group seeks to expand authoritative scope potentially into the territory of others.

moving to a fee-only basis for qualified money—a model which may favor the rich over the middle class and may eventually

3.

Consumer economics. It appears that not only could sellers of investment product be hurt, but by all

shift to more dependence on robo-advice (dangerously amplifying the risk of herd effect). Here, some general trade groups

Political payoff. If successful, there would be short-term bragging rights presumably worth some votes (long-

term bragging rights would only be possible if the PFR actually turns out to be a help to the average voter/investor). Political

along with private citizens and companies handling retirement accounts speak out strongly.

payoff is also why some groups (like the AARP) have backed the measure; their position paper in favor of the PFR is rather

4.

toothless, it looks like they just want to back the presumed winning side.

system if it ain’t broke). Many, including some Democrats, wonder what problem the DOL is actually trying to solve.

Other miscellaneous forces: inertia is one—a body at rest should be left at rest (don’t fix the current

Additionally, other agencies (like the SEC) may look at this as overreach into their territory and will oppose both out front

Other weak forces. It may come as a surprise, but the profit motive is a weak also-ran in this side’s physics scene.

or behind-the-scenes.

Some advisor groups see a move to fee-based as better, and there may be some assorted others who can benefit financially from the move away from commission. Based on the measurable voices out there though, these are the weaker forces pushing forward.

Of course this is rather broad stroke, but the sum of all these forces plus more forces out there determines whether the PFR moves forward or not. A huge factor now is the clock which ticks loudly. Can the PRO side move through the needed process hoops before the next administration is in place (2017)? Or can the CON side stretch it out? Remember, the longer something is analyzed, the more scrutiny “friction” it faces to grind it down. Make your voice heard: let’s affect the speed and direction of the Proposed Fiduciary Rule’s motion while the clock runs down. ▲

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Private Capital Raising Activity Report Q2 2015

Monetarex has aggregated and

By Monetarex

private offerings, of which 364 were

reviewed the data from 611 recent Form D filings for real estate related active as of June 30, 2015.

795

Number of Deals

752

722

642 611

572

481

524

Total Offering Amount

Total Offering Amount

Total Offering Amount

Total Offering Amount

Total Offering Amount

Total Offering Amount

Total Offering Amount

Total Offering Amount

7.0 B 2013 Q3

6.8B 2013 Q4

7.7B 2014 Q1

8.5B 2014 Q2

6.7B 2014 Q3

7.6B 2014 Q4

8.3B 2015 Q1

8.4B 2015 Q2

TOTAL AMOUNT OF OFFERING, QUARTER OVER QUARTER Monetarex has aggregated and reviewed the data in 611 Form D filings submitted to the SEC for the real estate industry group as of June 30, 2015, of which 364 are currently active. Total offering amount stands at approximately $8.4 billion as of June 30, 2015, with the Total recorded capital commitments of $3.3 billion (or a 39% capital commitments rate). This represents a significant drop in a fundraising activity quarter over quarter (vs. 55% in Q1’15). Although, the average historical capital commitment rate is above 50%, the drop in the fundraising rate in just one quarter is not indicative of a trend and it’s too early to talk about the slowdown in the fundraising activity. It’s worth noting that the largest funds launched this quarter are operating in the multifamily space. The total number of active Real Estate Private Placement filings across all sectors decreased by over 20%, from 795 to 611. Average minimum investment for the quarter stands at approximately $141 thousand.

Count of Total Offering Amount

Total Offering Amount

146

3.39B

MARYLAND

12

0.77B

OHIO

26

0.60B

TEXAS

70

0.54B

NEW YORK

47

0.44B

19

0.34B

26

0.19B

34

0.16B

19 14

CALIFORNIA

40.57% 9.20% 7.21% 6.52% 5.33%

ILLINOIS

4.10%

VIRGINIA

2.32%

COLORADO

1.89%

0.10B

WASHINGTON

1.24%

0.09B

MASSACHUSETTS

1.02%

TOP TEN STATES BY AMOUNT OF OFFERING, Q2 2015 The geographic distribution of recorded capital commitments has changed from the previous quarter with the state of California leading the way. California outpaced the other states in terms of private real estate offerings with $3.4 billion in offerings spread across 146 deals (40% of total market activity). Out of $3.4 billion in offerings, $1.5 billion were already received in capital commitments this quarter.

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$6.8B Residential 19.23% Commercial 38.81%

TOTAL AMOUNT OF OFFERING, QUARTER OVER QUARTER Currently, equity is clearly the preferred security type for real estate offerings. Convertible debt and LLC interests securities types included in “Other” are the second most popular alternative to equity. This capital structure data is in line with the results reported through March 31, 2015.

BREAKDOWN BY REAL ESTATE INDUSTRY GROUP, Q2 2015 Almost 40% of Private Placement filings come from the Commercial Sector representing $3.2 billion across 238 offerings. As in previous quarters, at just around 1% the Construction Sector has the lowest number of Private Placement filings during Q2’15 representing $128 million in offerings.

REITS & Finance 17.03%

Construction 1.53%

Other Real Estate 23.40%

Other Real Estate

$1.1B $0.6 B

Equity

Other

Pooled Investment Fund Interests

Debt

$0.3B

$0.1B

Security Upon Exercise of Option

Option, Warrant or Other Right

$0.0B

$0.0B

Tenant-in-Common Mineral Property Securities Securities

DEALS WITH COMMISSIONS AND FEES, Q2 2015

10B Commercial

5B

$1.1B

Residential

Type of Securities with Commissions

Deals with Commissions

Deals with Commissions to Total

Median Commissions

Mean Commissions

Maximum Commissions

Minimum Commissions

REITS & Finance

Equtiy

81

13.26%

$150,000

$707,313

$10,000,000

$444

Debt

8

1.31%

$265,000

$883,902

$4,500,000

$5,000

19

3.11%

$86,800

$418,566

$4,200,000

$10,120

Construction

Pooled Investments

0B 2014 Q3

2014 Q4

2015 Q1

2015 Q2

AGGREGATED OFFERINGS BY INDUSTRY GROUP OVER LAST 4 QUARTERS In the previous four quarters, the Commercial Real Estate Sector led the Private Placements space both in terms of the number of active offerings as well as recorded capital commitments. However, in Q2’15 there was a change in the trend-out of $3.3 billion in total recorded capital commitments, $2.8 billion was placed into the non-Commercial Real Estate Sector offerings (Other Real Estate).

Type of Securities with Finder Fees

Deals with Finder Fees

Deals with Finder Fees to Total

Median Fees

Mean Fees

Maximum Fees

Minimum Fees

Equity

26

4.26%

$29,763

$206,585

$2,790,000

$2,970

Debt

13

2.13%

$23,750

$120,806

$1,000,000

$3,000

5

0.82%

$15,000

$250,000

$111,000

$25,000

Pooled Investments

NUMBER OF DEALS PER DEAL SIZE, Q2 2015

$1M - $5M

44.90%

$5 M - $10M $10M - $50M Over $50M

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OFFERINGS FILED UNDER RULE 506(C), Q2 2015

38.78%

Under $1M

10.20% 4.08% 2.04%

FALL 2015

We have analyzed the impact of new general solicitation rules that SEC approved as part of the JOBs Act on 73 investment opportunities launched in Q2’15. According to the Form D filings, the total offering amount in New Rule 506(c) offerings for the Real Estate sector is $1.8 billion (57% quarter over quarter decrease in the amount of offerings filed). This figure represents 22% of the adjusted total offering amount across all Form D filings.

Disclaimer: Although information herein contained from sources believed to be reliable, Monetarex, Inc. makes no warranty or representation that such information is correct, and is not responsible for errors, omissions, or misstatements of any kind. All opinions expressed herein are those of the author and no statement should be construed as an offer to buy or sell any security.

Trading all real estate investments and securities entails significant risks which can result in substantial financial loss Such risks should be fully understood prior to investment.

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Partnerships and §1031 Exchanges: Available Options for Partners and Partnerships

By William F. Webster, Esquire and Jeff Stechmann Asset Preservation, Inc.

Like any taxpayer, a partnership (and a limited liability company taxed as a partnership, generally referred to herein as a “partnership”) can engage in a like-kind exchange under Internal Revenue Code Section 1031 to defer paying tax on capital gains. Difficulties can arise, however, when the individual partners desire different outcomes with regard to the sale of property by the partnership. Some partners may wish for the partnership to stay together and do an exchange; others may want to do their own exchange with their portion of the property; still others may wish to receive cash and simply pay the tax.

What alternatives are available to the partners?

Partners Doing Separate Exchanges A taxpayer must own a capital asset to do a 1031 exchange. The fact that a partnership owns a capital asset does not mean that the individual partners have an ownership interest in that asset. The partners merely own partnership interests. Partnership interests are specifically excluded from Section 1031 under section 1031(a)(2)(D). Therefore, if an individual partner wants to do a 1031 exchange, the partner must convert his or her partnership

Related to the “drop and swap” is the “swap and drop.”

This involves the same two steps, but in reverse order.

interest into an interest in the capital asset owned by the partnership.

One method for accomplishing this, known as a “drop and swap,” involves the liquidation of a partnership interest by distributing an interest in the property owned by the partnership. After completion of the “drop,” the former partner will have converted his or her partnership interest into an interest in the actual property itself, as a tenant-in-common with the partnership. The property can then be sold, with the former partner and the partnership each entitled to do what they wish (sale or exchange) with their respective interests.

Related to the “drop and swap” is the “swap and drop.” This involves the same two steps, but in reverse order. The partnership completes the exchange (the “swap”), and then distributes an interest in the replacement property to the departing partner.

drop swap

Holding Period Issues Both the “drop and swap” and the “swap and drop” alternatives raise potential holding period issues. If the “drop” occurs close in time to the “swap” (or vice versa), there may be some question as to whether the relinquished property (or replacement property) was “held for investment.” Also, if the drop appears too close in time to the swap, the partner’s exchange may be deemed an exchange

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Partnership interests are specifically excluded from the application of Section 1031. A very narrow exception applies to a partnership that has elected, under Section 761(a), not to be subject to the partnership taxation provisions of Subchapter K. If a partnership makes such an election, a partnership interest will be treated as an interest in the underlying assets, and can be exchanged under Section 1031.

A better alternative, known as a partnership installment note (“PIN”) transaction, results in the gain associated with the “boot” being recognized only by the departing partners. In a PIN transaction, instead of receiving cash, the partnership receives an installment note in the amount necessary to cash out the departing partner(s). The note is transferred to the departing partner(s) as consideration for their partnership interests. If at least one payment under the note is to be received in the year following the exchange, then the gain associated with the note will be taxed under the Section 453 installment method, and recognized only when the actual payments are received by the departed partner(s).

In some instances, a majority of the partners may want the partnership to complete an exchange, but one or more of the other partners may want to be “cashed out” with the sale of the relinquished property.

by the partnership under the Court Holding case [See Commissioner v. Court Holding Co., 324 U.S. 331, 65 S.Ct. 707 (1954)]. Clearly, the more time that

Exchanges Followed by Contribution When an individual completes an

passes between the “drop” and the “swap” (or vice versa), the better.

exchange and then immediately contributes the replacement property to an entity, or

Regarding the above issues, a line of federal cases (Bolker, Mason,

when an entity exchanges property immediately after receiving it as a contribution, a

Maloney, etc.) provides taxpayer-friendly authority against challenges by the

holding period issue could arise. Such an issue was resolved in the taxpayer’s favor in the

IRS. However, some state taxing authorities (notably, the California Franchise

Magneson case, which involved an exchange by an individual, followed immediately by

Tax Board) aggressively challenge exchanges, and argue that they are not

a contribution of the replacement property to a general partnership. Magneson provides

bound by these federal cases. Also, changes made in 2008 to the federal

useful authority against challenge by the IRS, and the same logic was applied at the state

partnership tax return (IRS Form 1065) make it easier to detect when drop

level in the Marks in Oregon, although its application in other states is not clear.

and swap transactions have occurred, thus making such transactions more vulnerable to challenge by taxing authorities.

Election Under Section 761 As stated above, partnership interests are specifically excluded from the application of Section 1031. A very narrow exception

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Partners Getting Cashed Out In some instances, a majority of

applies to a partnership that has elected, under Section 761(a), not to be subject to

the partners may want the partnership to complete an exchange, but one

the partnership taxation provisions of Subchapter K. The election applies only to a

or more of the other partners may want to be “cashed out” with the sale of

partnership: (i) for investment purposes only and not for the active conduct of business;

the relinquished property. One way to accomplish this is for the partnership

(ii) where the partners hold title to the property as co-owners; (iii) where each owner

simply to receive cash from the sale in an amount sufficient to purchase

reserves the right to separately take or dispose of his or her share of the property; and

the departing partners’ partnership interests. This cash, however, would be

(iv) which has no active trade or business. If a partnership makes such an election, a

“boot,” and would require the partnership to allocate the resulting gain among

partnership interest will be treated as an interest in the underlying assets, and can be

all of the partners.

exchanged under Section 1031. ▲

Disclaimer: As a “Qualified Intermediary” as defined in the Section 1031 regulations, Asset Preservation, Inc. is not able to provide legal or tax advice.

Accordingly, you should review the details of your specific transaction with your own legal or tax advisor.

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DOL’s Fiduciary Proposal: Is Uncle Sam Your New Investment Advisor?

By Todd Phelan Senior Vice President, SK Research

On April 20, 2015, the Department of Labor (the “DOL”) proposed new rules that could drastically alter the landscape for retail investors, potentially limiting their access to investment advice and certain categories of investment products. If enacted, the primary results of the new rules would be to deem anyone giving investment advice related to a retirement plan, its participants or beneficiaries, or to a retirement account holder, a “fiduciary.”

The proposed rules also prohibit financial advisors from receiving compensation from third parties in connection with an investment transaction as a conflict of interest (including commissions, trailing commissions, sales loads, 12b-1 fees and revenue sharing payments), unless the transaction is permitted by an exemption. If a financial advisor enters into a “Best Interest Contract” with a client prior to providing any investment advice, then the advisor would be permitted to receive compensation from a third party in transactions involving specific assets approved by the DOL.1 Notably, these approved assets exclude traditional direct participation

The public comment period related to the DOL’s proposed rules expired on July 21, 2015, and resulted in hundreds of comment letters being filed.

programs such as non-traded REITs and BDCs, private real estate transactions, hedge funds, private equity funds and other alternative investments.

The public comment period related to the DOL’s proposed rules expired on July 21, 2015, and resulted in hundreds of comment letters being filed. Commenters on the proposal have brought up myriad issues, including the overly broad definition of fiduciary; unfair targeting of certain financial advisors; taking a “piecemeal” approach to regulation; use of a questionable economic impact analysis; limiting availability of investment advice and investment products; creation of additional inequities among investors; and the inherent limits of an approved asset list, among other things. We believe that two of the major questions that the proposal raises are (i) who is best and most qualified to make investment decisions for the public and the individual retail investor? and (ii) will this regulation have a chilling effect on the movement of retail investors into the alternative investment sector?

Is the DOL an investment expert? The regulation of retail investments and investment advice has traditionally been the primary jurisdiction of the SEC and FINRA, two organizations that have significant experience and expertise in the area. Why does the DOL believe it can more adequately regulate this area than either of those organizations? Separately, is the federal government, specifically the DOL, the most qualified entity to make investment decisions for the public? Although it is understood that the DOL has the full authority to regulate ERISA

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Is this the end of the diversified investment portfolio for the retail investor?

vehicles that pay a commission or other compensation, an “institutional” portfolio allocation to

Because these types of investments are often only available to retail investors through vehicles that pay a commission or other compensation, an “institutional” portfolio allocation to alternatives may no longer be available to the average retail investor under the DOL’s proposed rule.

terms, if at all.

alternatives may no longer be available to the average retail investor under the DOL’s proposed rule. While they theoretically may be available through fee-based arrangements, many retail investors do not have sufficient investible assets to enter into such arrangements on favorable According to recent surveys, the trend of reduced exposure to equities and increasing allocations to alternative investments is expected to continue. A January 2014 survey by bfinance indicated that, over the next three years, 10% more institutional investor respondents would look to reduce exposure to equities than increase, whereas even greater numbers of respondents planned to increase allocations to fixed income (38%), infrastructure (35%), real estate (32%) and private equity (23%).2 A Blackrock survey of 169 of its largest institutional clients published in February 2015 indicated that 39% would decrease allocation to equities, while many planned to increase investment in private equity (46%), real estate (34%) and real assets (53%).

Some proponents of the DOL proposal and detractors of non-traded REITs and private real estate investment vehicles (and other investments excluded from the DOL’s list of approved assets) argue that traded REIT stocks are better suited vehicles for the retail investor to invest

1—The DOL’s approved assets include bank deposits, CDs, shares or interests in registered investment companies, bank collective funds, insurance company separate accounts, exchangetraded REITs, exchange-traded funds, certain corporate bonds, agency debt securities, U.S. Treasury securities, insurance and annuity contracts, guaranteed investment contracts, and exchange-traded equity securities.

2—Information was based on a representative sample of institutional investors representing nearly $275 billion of assets.

in “direct real estate” as part of an alternative investment allocation. One could believe that large and sophisticated institutional investors are the “smart money” and provide a model for the retail investor; however, a 2014 publication from Cornell University’s Baker Program in

No one would argue that all financial advice is equal, but it would seem that a financial advisor who works directly with a client in an attempt to understand their unique situation is in a much better position to determine the most appropriate investment plan for that client than a government agency.

plans and other retirement structures, it seems less obvious that the agency has the expertise to determine which assets should be available to an individual and which are too fraught with conflicts to be appropriate. Additionally, it is unclear on what criteria the DOL based its decision to approve certain investments over others for possible exemption. It doesn’t seem sensible to attempt to apply broad-based, “one-size-fits-all” rulemaking to an area like retail investment, which includes as many different circumstances and needs as there are investors.

No one would argue that all financial advice is equal, but it would seem that a financial advisor who works directly with a client in an attempt to understand their unique situation is in a much better position to determine the most appropriate investment plan for that client than

Real Estate could suggest otherwise. Larger institutional investors are focused on investing in real estate through direct investment (57% of institutions) or private funds (70%). Additionally, while 53% of institutions were invested in REITs and real estate securities, only 16% planned to allocate new capital to those assets; by comparison 73% were invested in real assets and 56% were allocating new capital to real assets.

It is commendable that the DOL is seeking to ensure that investors can rely on financial advisors having their best interest at heart; we’re just not sure this is the right means to that end or that the DOL is the right entity to pursue it. Investors also shouldn’t accept that any proposed

Disclaimer: The information contained in this article has been assembled using publicly available information.

While SK Research believes it to be reliable, there is no guarantee that all of the information contained in this article is or will be accurate.

This article does not constitute investment advice and is intended for informational purposes only. This article does not constitute an offer to sell or the solicitation of an offer to purchase, nor should it be considered a recommendation of any security referenced herein.

rulemaking could restrict their right to access investment products of their choosing. ▲

a government agency. If a financial advisor is required to execute a contract with a client or potential client, indicating that their compensation suffers from inherent conflicts of interest, and even then can only recommend a very limited selection of investment options, it seems likely that the resulting advice or investment plan may suffer as a result and be met with skepticism from the client.

Is this the end of the diversified investment portfolio for the retail investor?

It is widely accepted that the optimal investment portfolio includes diversification among various asset classes that perform differently in different market conditions. Large institutional investors and investment managers generally agree that alternative and less liquid investments, which

Editor’s Note The author’s views are not necessarily those held by ADISA. ADISA submitted a comment letter to the DOL on July 21, 2015, regarding the proposed fiduciary rule.

offer low correlation to the broader equity and fixed income markets, should be included as part of a diversified investment portfolio. In fact, according to a report by CEM Benchmarking Inc., the allocation to alternative investments (real estate, real assets, hedge funds, private equity, etc.) by public and corporate pension funds increased by nearly 10% from 1998 to

Scan the QR code to view the letter.

A S I D

A

2011. Similar information from Towers Watson indicated that pension funds increased their allocation to alternatives by 15% from 1995 to 2011. The increased allocation to alternative investments by institutions has generally come at the expense of assets allocated to traditional equities. Because these types of investments are often only available to retail investors through

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NASAA’s New EFD System Revolutionizing Blue Sky Compliance for Rule 506 Offerings

By Eric C. Perkins, Esq., Perkins Law, PLLC

What does EFD stand for and what are its benefits? EFD stands for Electronic Filing

of the Regulation D private offering marketplace (the

Depository, the revolutionary new online filing system

structured under Rule 506).

that allows companies raising capital through Rule 506 multiple states through an online portal. For those who

Can I use the EFD system for all types of private offerings? No, at the present time the EFD

have never navigated the treacherous, paper-intensive

system is only available for Rule 506 offerings, both Rule

waters of state blue sky compliance, it may be difficult

506(b) and 506(c). It is also important to note that the

to fully appreciate the significance of EFD and how

EFD system allows nothing more than the submission

much time and effort can be saved by Regulation D

of an electronic copy of Form D (as filed with the SEC)

issuers and securities practitioners.

Rest assured

and payment of filing fees. In other words, if a particular

The EFD system offers a

state imposes additional filing requirements (e.g., a

faster, more reliable, and considerably more efficient

manually signed copy of Form D, a copy of offering

method for complying with applicable state notice filing

documents), then the issuer will be required to satisfy

requirements in the context of a Rule 506 offering.

those requirements outside of EFD.

private offerings to satisfy notice filing requirements of

the impact is enormous.

Using the EFD system is simple and begins with www.efdnasaa.org. Helpful tutorials and online support

Does it cost anything to use the EFD system? In addition to individual state-specific filing

are available on the site to help users get started. Once

fees (which typically range from $50 - $500), there is

set up, a user can easily pull from the SEC’s EDGAR

a one-time fee of $150 per offering to utilize the EFD

system an electronic copy of Form D for a particular

system—a modest fee considering the added value and

offering, select which states in which to file, fill in a few

efficiency offered by EFD.

establishing a password-protected account through

boxes, pay the required state filing fees (through an ACH are not yet accepted through EFD), and click submit.

Does every state participate in the EFD system? Unfortunately, no. As of August 1, 2015,

That’s it.

Electronic confirmations are immediately

forty (40) states were participating in the EFD system.

distributed by email and the user’s account profile is

For one reason or another, the following ten (10) states

updated so the status of filings for a particular offering

have not yet chosen to participate: Arizona, California,

can be easily monitored. Best of all, the EFD system is

Connecticut, Florida, Louisiana, Massachusetts,

available 24 hours a day, 7 days a week.

Michigan, New York, North Carolina, and Oregon.

payment from a bank account—credit card payments

After years of delay, in late December 2014, NASAA unveiled its much anticipated “one stop shop” for state notice filings for Regulation D, Rule 506 offerings. For attorneys, paralegals, and others regularly involved with Regulation D compliance issues, early reviews indicate that the EFD system has lived up to its hype and is providing a significant boost in efficiency to the private offering process.

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overwhelming majority of Regulation D offerings are

EFD also provides a free, user-friendly searchable

Therefore, issuers with Rule 506 offerings in those states

database for public inspection of Form D filings with

need to continue addressing blue sky compliance the

state regulators, thus making it easier than ever for

old fashioned way. ▲

the public to conduct general research and analysis

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Do You Have the Right Chemistry on Your Team?

By Ross Bernstein

In my newest series of books about WHY certain teams win championships in professional sports, I was blown away by the importance of one singular metric that was consistently woven throughout the locker rooms and front offices of every successful organization I researched: CHEMISTRY. Sure, talent is important, but to be successful over the long haul requires having a team of people who get along and can work together as a family.

We’re all trying to grow our businesses. As such, that might mean bringing in new employees or interns—which is no easy task. What criteria do you use in assembling your teams? Millennials, Gen-X’ers, Boomers, Seniors—you’ve got lots of different personalities all thrown into the same

In sports it’s not always about getting the BEST players, but rather the RIGHT players. Big difference. The top coaches figure out which players get along well with others, and which ones create drama.

pot together and it can get dicey. In sports it’s not always about getting the BEST players, but rather the RIGHT players. Big difference. The top coaches figure out which players get along well with others, and which ones create drama. Have any employees who create drama? As Dr. Phil likes to ask “How’s that workin’ for y’all?” Employees who cause drama will eventually contaminate your staff. In sports they are referred to as “team cancers.” Yes, the old cliché rings true: one bad apple will spoil the entire barrel.

Employees who cause drama will eventually contaminate your staff. In sports they are referred to as “team cancers.”

That’s why we all need to be “long to hire, and quick to fire” in the new economy.

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Bobby Orr, arguably the greatest defenseman of all time with the Boston Bruins, won the plus/ minus crown six times. Six! No one else in league history has ever won it twice. Bobby was without

In order for you to create the right chemistry on your team, you need to get your people out of the building and onto “neutral turf.” Take them out for a team building exercise somewhere fun (picnic, bar, bowling, etc.) and see who hangs out together.

He discovered that when people who liked each other and cared for each other played together on the same line, they were more unselfish and even found genuine pleasure in watching their pals achieve success.

In order for you to create the right chemistry on your team, you need to

a doubt the most respected player on his team because of his willingness to do the dirty work and be a two-way PLUS player. Plus-players create good chemistry, build team morale, and most importantly they deter drama. Plus players are infectious... in a good way. Minus players, meanwhile, are also infectious... but in a bad way. As leaders, you need to identify and get rid of your minus-players. It’s not easy, but they’re dead weight and their negativity will eventually consume all of your time and energy.

We call selfless players like this, “plus players.” You see, in hockey there is a little-known measurable called the plus/minus that just might be the most important statistic in the game.

Here’s the bottom line for YOUR team: you want to fill your roster with PLUS PLAYERS— people who are selfless, willing to come in early, stay late, and lead by example. This is a hallmark of winning teams. They will have a positive and nourishing influence on the rest of your staff that will ultimately allow you to focus on customer service and, most importantly, profitability. And

get your people out of the building and onto “neutral turf.” Take them out for

at the end of the day, isn’t that what great team

a team building exercise somewhere fun (picnic, bar, bowling, etc.) and see

chemistry is all about? ▲

who hangs out together. Observe who smiles and laughs and enjoys being around one another. This’s what Scotty Bowman did, the winningest coach in the history of the National Hockey League. Scotty figured out early on in his career that friends like to pass the puck to friends. And they’ll fight for each other too, which is critical in hockey. He discovered that when people who liked each other and cared for each other played together on the same line, they were more unselfish and even found genuine pleasure in watching their pals achieve success. On his 2002 Stanley Cup winning Detroit Red Wings roster, Scotty had five Russian players all playing on a line together, as well as five Swedish players all playing on a line together—because he knew that they would have an instant bond and make sacrifices for the good of the team. In a culture steeped in individual statistics and huge egos, this is rare.

We call selfless players like this, “plus players.” You see, in hockey there is a little-known measurable called the plus/minus that just might be the most important statistic in the game. Here’s how it works: every time you’re on the ice during a game and your team scores a goal, you’re “plus-one.” Every time you’re on the ice and the other team scores a goal, you’re “minus-one.”

At the end of the season if you’re plus-50, that means you’re an unselfish team-player and you’re going to make millions of dollars. However, at the end of the season if you’re minus-50? That means you’re a selfish one-

Here’s the bottom line for YOUR team: you want to fill your roster with PLUS PLAYERS—people who are selfless, willing to come in early, stay late, and lead by example. This is a hallmark of winning teams. They will have a positive and nourishing influence on the rest of your staff that will ultimately allow you to focus on customer service and, most importantly, profitability.

way player who doesn’t want to sacrifice your body by playing defense— ultimately resulting in either a demotion to the minor leagues or worse yet, being cut. Ouch!

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ADISA

News

Events

ADISA News & Events The following pages will update you on the Legislative & Regulatory Committee, ADISA’s Adventures, and our 2015 Annual Conference & Trade Show preview. ➤

ADISA’s Adventures Presented by: Tony Grego, ADISA’s Director of Business Development With more than members 4,000, ADISA must provide the best news and education in the industry. To help, I do my part by attending industry events, educational sessions, sponsor due diligence events, along with broker-dealer and RIA conferences. I do this to support the industry while promoting the association. Our “boots-on-the-ground” approach helps keep our members up-todate while promoting the association to prospects.

So what have I heard?

Have you ever played word scramble?

What happens when you scramble 2015? You get 15-02.

Legislative & Regulatory Committee Update Co-Chairs: John H. Grady, RCS Capital Corporation, and Dan Cullen, Bryan Cave If we thought the summer was going to be slow, we thought wrong.

On the Legislative & Regulatory front, ADISA is as busy as ever with two issues burning—one up close and brightly (Department of Labor’s Fiduciary Rule), and the other bright but in the distance (1031 Exchanges). As of late, to tackle these issues and more, we have done the following: Concerning the Fiduciary Rule, the Legislative & Regulatory Committee:

• Recognized for editorial contributions in assisting these studies • Participating in Real Estate Roundtable-led Coalition to preserve LKEs • Hosted Grassroots Contact-your-Member of Congress web referral on LKE issue with 100+ letters to date • Visited several Congressional offices on Capitol Hill and in home districts • Conducted sessions at Spring Symposium and DDF on this topic with reports on the issue Stay tuned for our general Legislative & Regulatory update at the Annual Conference, plus look for our Legislative Alerts to keep you informed.

• Appeared before the DOL to testify on behalf of our industry • Sent a comment letter to DOL regarding the proposed Fiduciary Rule • Participating on SIFMA-led Fiduciary Rule Coalition • Hosted DOL Fiduciary Rule Webinar • Visited several Congressional offices on Capitol Hill and in home districts • Conducted sessions at Spring Symposium and DDF outlining the issue • Supported grass roots referrals to encourage member comment Concerning 1031 Exchanges, the committee: • Sponsored two studies (one by Ernst & Young and the other by Syracuse University and the University of Florida academics) on the effects of curtailing the 1031 Like-Kind Exchange (LKE)

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Coming soon!

“The Guide to Alternative Investments” ADISA is partnering with Lightbulb Press to publish an informative overview on alternative investments. The brochure will be sent to all ADISA members, and will be officially debuted at ADISA’s Annual Conference in October.

Additional copies will be available to members at a nominal cost. For more information, contact Jennifer Fitzgerald, ADISA’s Director of Marketing.

What is 15-02? It is FINRA’s Regulatory Notice 15-02. The amendments become effective on April 11, 2016. For certain public direct participation programs (DPPs) and unlisted real estate investment trust (REIT) securities, per share estimated values will need to be modified on customer account statements per the amendments.

If you sell non-traded REITs and DPPs, it is a big deal. If you are a sponsor of non-traded REITs and DPPs, it is a bigger deal. After April 11, 2016, your client’s statements will no longer have a projected value. FINRA requires actual value or NAV (Net Asset Value).

What does this mean for the broker-dealer and registered representative? The $10 share you just sold your client will be shown net of fees (12%-15%) the following month on their statement.

The sponsor solutions so far are scrambled. From different share classes and reduced commissions, to co-invested sponsors and others paying the upfront fees, sponsors are working on solutions.

DOL— Will everyone become a fiduciary?

In February 2015, President Obama announced that the DOL should move forward with its proposed rulemaking. On April 14, 2015, the DOL announced a re-proposal of the fiduciary rule, which was followed by a period for public comment. In May, the DOL granted a 15 day extension to the original 75 day comment period, resulting in a total of 90 days for public comment. Public hearings were held from August 10-13, 2015.

ADISA is working with the Securities Industry and Financial Markets Association (SIFMA) and others in Washington, and the industry agrees with the DOL that more can be done to help Americans save for retirement and that there should be a best interests standard in place.

However, the rule as written completely misses the mark. SIFMA’s comments reflect our ongoing concerns that the DOL’s proposal

would cause harm—particularly to low and middle-income retirement savers—by limiting investors’ access to choice and guidance, while raising the cost of saving (see www.SIFMA.org).

1031 like-kind exchanges are threatened Internal Revenue Code (IRC) §1031 tax deferred like-kind exchanges have remained in the tax code since 1921, notwithstanding repeated Congressional scrutiny, because Section 1031 is based on sound tax policy that is predicated on continuity of investment by the taxpayer.

Section 1031 is consistent with goals of efficiency, neutrality, fairness, and simplicity within the tax system. Recent proposals to reform the tax code have included a repeal of §1031, that if enacted, would negatively affect businesses and the U.S. economy. Section 1031 works well for, and is widely used by, a broad spectrum of taxpayers at all levels, in all lines of business, from small businesses to large corporations, and from individuals of modest means to high net worth taxpayers. (For more information, see the Federation of Exchange Accommodators’ website at www.1031.org.)

I was recently talking with the Indiana Secretary of Commerce, who was unaware of the proposal and was surprised that Section 1031 is even up for a change or elimination. ADISA is working with sponsors and other trade associations to deliver the message of how this will hurt the industry to Congress. We need your help to get the word out. Visit our website to learn more and to reach out to your state’s congressional representatives.

When will the Feds raise rates (hopefully sooner than later)?

Attending REITWeek 2015 may have been filled with more questions than answers. When pulling up to the Hilton in midtown Manhattan, the hotel could have been mistaken for a Broadway opening. Inside the conference was abuzz with an estimated 2,200 attendees.

Over the next three days, REITWeek, or as I say REITDays, was filled with a record 139 REIT presentations. Many talked about their stellar earnings, but the underlying story was interest rates.

At just about every event I attend, it seems that a moderator or panelist will ask the audience, “Do you think interest rates will rise or fall?” Most everyone agrees that rates will rise but unsure when this will happen. A few of the speakers at the event agreed that, as sponsors, they need rates to rise now.

Today’s institutions and investors are sitting on plenty of cash to see how REITs will perform in a rising rate market. Until investors are comfortable with these results, they are content to keep the cash.

Reg A+ offers more choices for sponsors to enter the IBD space ADISA is always looking for opportunities help and serve its members. Earlier this year Regulation A+ was passed and will promote additional opportunities for all. Reg A+ is a very hot

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REGISTER NOW!

topic everywhere I go. Here is the definition from Kaplan Voekler Cunningham & Frank (taken from the summer issue of Alternative Investments Quarterly): On March 25, 2015, the Securities and Exchange Commission adopted final rules to amend Regulation A as required under Title IV of the JOBS Act. The final rules provide an exemption for U.S. and Canadian companies that are not required to file reports under the Exchange Act of 1934 to raise up to $50 million in a 12-month period. The final rules create two tiers: Tier 1 for smaller offerings raising up to $20 million and Tier 2 for offerings raising up to $50 million.

The concepts in the proposed legislation have also been suggested in several of the comment letters to the SEC in connection with its review of the AI definition. (See the following price from McGuireWoods Consulting: https://www.mcguirewoods.com/ Client-Resources/Alerts/2015/7/SEC-Considers-Updating-theAccredited-Investor-Definition.aspx.)

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Attendees will have the opportunity to meet face-to-face with nearly 1,000 leading industry professionals and visit with nearly 80 event exhibitors.

• The disclosure obligations of public companies as compared to private companies

Investors in a Tier 2 offering will be subject to investment limits, except when securities are sold to accredited investors or are listed on a national securities exchange, and Tier 2 issuers will be required to comply with periodic filing requirements, including filing current reports upon the occurrence of certain events, semi-annual reports and annual reports. The final rules provide a means for an issuer in a Tier 2 offering to concurrently list a class of securities on a national exchange through a short-form Form 8-A. The new rules also allow for the sale of securities by existing stockholders, subject to limitations on the amount.

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Where businesses grow and deals are made. Designed for all industry professionals who sponsor, analyze, market, distribute or sell alternative investments.

• The different types of securities

• Corporate governance structures

The accredited investor (AI) definition is a crucial component of the private placement market. As required by the Dodd-Frank Act, the Securities and Exchange Commission (SEC) staff is reviewing the AI definition to determine whether to recommend changes to the SEC. In the United States, for an individual to be considered an accredited investor, they must have a net worth of at least $1,000,000, not including the value of their primary residence or have income at least $200,000 each year for the last two years (or $300,000 together with their spouse if married) and have the expectation to make the same amount this year.

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The House of Representatives is now also considering legislation that would expand the AI definition. The proposed legislation is titled the Fair Investment Opportunities for Professional Experts Act and is H.R. 2187 (AI Bill).

The AI Bill calls for the SEC to develop criteria to be used by FINRA to prepare and administer a test. Persons passing this test would be AIs. The proposed legislation states that the subjects covered by the test could include the following:

The new rules amend Regulation A by, among other things, requiring that disclosure documents be filed on EDGAR, allowing an issuer to make a non-public submission with the SEC, permitting certain test-the-waters communications and disqualifying bad actors. The final rules impose different disclosure requirements for Tier 1 and Tier 2 offerings, with more disclosure required for Tier 2 offerings, including audited financial statements. Tier 1 offerings will be subject to both SEC and state blue sky pre-sale review. Tier 2 offerings will be subject to SEC review but will be preempted from state review; however states will be able to require notice filings.

Redefining an accredited investor

October 12 (MON) -14 (WED) The Cosmopolitan of Las Vegas

• The components of a financial statement • The AI Bill would also afford AI status to a natural person who falls within one of the following categories or retains a person within one of the following categories to make investment decisions for him or her: • Registered broker-dealer • Registered investment advisor • Attorney • Certified public accountant

K arl Rove The former deputychief of staff and senior advisor to President G e o r g e W. B u s h , K a r l Rove is an iconic political strategist and one of the most soughtafter political pundits of our time. Mr. Rove served as senior advisor to President George W. Bush from 2000-2007 and deputy chief of staff from 2004-2007. At the White House, he oversaw the Offices of Strategic Initiatives, Political Affairs, Public Liaison, and Intergovernmental Affairs, and was deputy chief of staff for policy, coordinating the White House policy-making process.

Mr. Rove writes a weekly op-ed for the Wall Street Journal, is a Fox News contributor and is the author of the forthcoming book, The Triumph of William McKinley: Why the Election of 1896 Still Matters, and the New York Times bestseller, Courage and Consequence: My Life as a Conservative in the Fight. He has written for many publications, including The Daily Beast, Financial Times, Forbes, FoxNews. com, HumanEvents.com, The Times, Washington Post, and The Weekly Standard.

Featured Keynote Speakers

Mark Spitz is a living sports legend, most remembered by his asThe excitement and opportunities keep growing in our space. ADISA will be active in keeping our members informed of critical issues that affect their businesses. We need your comments to best serve the industry and association. Moving forward, please drop me a note or give me a call with items on which you would like additional information.

Wishing you continued success, Tony Grego ADISA Director of Business Development tgrego@adisa.org 317.663.4173

tonishing win of seven gold medals at the 1972 Olympic Games in Munich, Germany. Between 1965 and 1972, he won a total of 11 Olympic medals, and set 33 world records. In the 80s Mark was one of the largest residential real estate developers in Southern California and was involved with an 8-figure apartment development in Hawaii during this time as well. As the real estate market started slowing down, he shifted his focus to the stock market. He became a stock broker and now concentrates in private equity.

Peter Ricchiuti is the business school professor you wish you had back in college. Teaching at Tulane University’s Freeman School of Business, his insight and humor have twice made him the school’s top professor. Peter started his career with the investment firm of Kidder Peabody and later managed more than $3 billion as the assistant treasurer for the state of Louisiana. In 1993, he founded Tulane’s highly acclaimed Burkenroad Reports student stock research program. Peter also hosts a popular weekly business show on National Public Radio in New Orleans titled Out to Lunch and recently published his first book Stocks Under Rocks.

Agenda Topics* Include: • Academic and Industry Market Research • Due Diligence and Analytics • Alternative Product Education • Legislative & Regulatory Update • Equipment Leasing • Life Settlements • Business Development Companies • Emerging Structures & Products • Marketing & Technology • Energy • Non-Traded REITs • 1031s & DSTs

• Plus, a Bootcamp for Broker-Dealers, RIAs, Registered Reps and IARs *Many sessions will be available for Continuing Education credit.

Registration Information: Pricing is for ADISA members only.

Associate – Broker-Dealer/RIA – Complimentary registration; includes 2 hotel room nights* (limit 2 per company) Broker-Dealer/RIA Additional Staff – $99 registration fee Associate Registered Representative/Financial Advisor/IAR – $99 registration fee; includes 1 hotel room night* Sponsors – With Sponsorship/Exhibit: $999

Without Sponsorship/Exhibit: $1,299 Affiliates – With Sponsorship/Exhibit: $998

Without Sponsorship/Exhibit: $1,298 *Complimentary rooms are on a space-available basis. Register early to ensure your spot.

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10401 North Meridian Street Suite 202 Indianapolis, IN 46290

Join us for the 2nd Annual ADISA Golf Outing Monday, October 12 7:30am Shotgun Start Revere Golf Club 2600 Hampton Road Henderson, Nevada 89052

Don’t Miss It!

Fees

Transportation will be provided from The Cosmopolitan to Revere Golf Club. Discounted rental clubs are also available at $50.00 per set—sold separately to each golfer.

Fees include: • Breakfast and lunch • Greens fees and cart fees • Practice range balls • GPS unit on each cart • Bottled water and golf tees • Bag handling

All proceeds will go to the ADISA Foundation, which benefits collegiate scholarships.

Golf sponsorship opportunities are available.

Contact Adam Abubakr, 317.663.4177, for more information.

$199/Person*

$699/Foursome*

*Rental clubs will be available for a fee.

Scan the QR code for more information on ADISA’s 2015 Annual Conference & Trade Show