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SPRING 2017 volUME 11 issue 1
TICA➜REISA➜ADISA:
The Evolution of the Association
I A Complilation of Key Articles 2006-2016 I ADISA News
Q U A R T E R LY
1 — President’s Letter Join Us for 2017... and Beyond SPRING 2017 volUME 11 issue 1
Alternative Investments QUARTERLY
ADISA Editorial Board Chair I Brandon Raatikka I FactRight, LLC Linda Dewlaney I Preferred Partnership Services Peter Magnuson I Securities America
CONTACT INFORMATION ADISA I 10401 N Meridian St., Suite 202 I Indianapolis, IN 46290 Direct: 317.663.4180 I Toll Free: 866.353.8422 Fax: 317.815.0871 I E-mail: adisa@adisa.org John Harrison I Executive Director I 317.663.4172 Tanisha Bibbs I Director of Event Planning I 317.663.4174 Jennifer Fitzgerald I Director of Marketing I 317.663.4175 Tony Grego I Associate Executive Director I 317.663.4173 Erin Balcerzak I Member Services Coordinator I 317.663.4183 Design I DesignMark I Susie Cooper
adisa.org Copyright © 2017 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.
2 — Executive Director’s Letter Maybe It’s Income Inequality? 4 — TICA➜REISA➜ADISA: The Evolution of the Association 6 — From 2006 1031 Exchange —The Beginning of the End of a Financial Plan? 8 — From 2007 Remember: It’s Not a Bond! 12 — From 2008 Our Ethical Challenge 14 — From 2009 The Art of Defending Due Diligence “A Work In Process” 20 — From 2010 Inflation & Deflation: Issues of Our Times 24 — From 2011 Understanding Non-traded REIT Share Valuations 26 — From 2012 Five Things Most Advisors Don’t Know About E-Marketing 28 — From 2013 The Uncharted Waters of General Solicitation 34 — From 2014 The Hidden Cost of Liquidity How Alternatives Can Reward Long-Term Investors 40 — From 2015 A New Era in Capital Raising: Regulation A+ — an Overview 48 — From 2015 1031 Q & A 52 — From 2016 Descent Into Madness: The Department of Labor’s Fiduciary Rule and Ensuing Chaos 56 — ADISA News & Events
President’s Letter
Join Us for 2017... and Beyond By John H. Grady, DLA Piper
This is my first chance to reach out to you, the members, as President of ADISA. All of us owe a debt of gratitude to my predecessors as President, including Mike Bendix and Tom Voekler, and to ADISA’s superb staff and everyone who has supported the association with their time and/or their wallet. Today, ADISA is a thriving organization, one with
to Congress, and while not as necessarily sure to occur, NASAA
a clear mission to serve the alternative and direct investment
debated and fought over; it will in some cases be controversial, and
industry. People tell me how much they enjoy participating in
in many cases changes will generate lawsuits challenging the action
our events, as sponsors, panelists and attendees. They find our
or actions in question on various legal grounds, ranging from their
programs informative and useful, and they appreciate the ability
constitutionality to simple procedural defects. Our members will
to network and learn about new and existing programs and
not see these changes and this debate uniformly. Some members
offerings while getting the knowledge and information central to
will support or embrace much if not all of the changes; others will
their business and personal success.
be opposed, in whole or part. Everyone – all of our members - will
and FINRA are always looking at ways to implement their mission and adapt to growing changes in law, regulation and technology, and changes introduced by these organizations will need to be addressed by our members as well. The theme, therefore, is change. Change will be everywhere in 2017 – it will be implemented, or perhaps just discussed. It will be
The question worth exploring, then, is what we, as an association,
be affected, however, and everyone will need objective sources of
can offer and do for our members in 2017 and beyond. This is a
quality information to help them understand what is happening and
time when the federal government is engaged in discussions on
what may lay in store for the future. Through the efforts of its volunteer
changing a number of laws and regulations that touch the heart of
leadership and its professional staff, as well as the time and effort
our economic and, in some ways, social structure. New leadership at
of members from across the business and geographic spectrum,
important agencies such as the SEC and cabinet departments such
ADISA can and will be one of these trusted sources. Through our
as the Department of Labor are likely to usher in different approaches
events, webinars, member alerts and other means, ADISA will use
to regulation and impact the relationship our members have with their
all of the tools and resources at its disposal to sift through the news
constituents. Congress is exploring making far-reaching changes
and bring unbiased and objective information to members about
to the federal tax code, as well as tackling trade, health care and
the entire landscape of change; we will try to cover the waterfront,
immigration reform. Any of these changes or reforms may change
of course, but we will necessarily emphasize those matters—laws,
if not up-end long standing approaches to building, operating and
regulations, statement of policy or intent, even guidelines—that
distributing investment programs that focus on alternative assets
directly impact the alternative and direct investment industry.
and seek to generate returns that do not correlate to the broader
For ADISA to be all that it is capable of being, however, we will
stock and bond markets. There are new businesses and investment
need your help. Make this the year that you involve yourself in all
programs, as well as new approaches to existing businesses and
that ADISA has to offer—make this the year that you participate
investment programs, that have begun to emerge from the changes
instead of attending; the year that you speak up instead of listening;
brought about by the JOBS Act. Tax reform will likely bring dramatic
and the year that you are involved instead of watching. Change is
changes in its wake, but also will bring opportunities to do things in
not easy, but we can and will do everything we can to help you
new or adjusted ways that respond to the changes. And in addition
navigate these next months. Join us. ▲
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Executive Director’s Letter
Maybe It’s Income Inequality? By John Harrison, Executive Director, ADISA
2
There are fewer concepts misunderstood more than “income inequality”. It has become an incantation of
retirement plan savers and non-savers. Additionally, as a society
sorts: restore the middle class to its rightful days of solid values and
goes through history and gets a few centuries under its belt, more
economic glory by reducing income inequality; play Robin Hood
wealth is inherited and the assets, if invested wisely, snowball.
and get more free stuff for the masses by fixing income inequality;
Just like the poor (I’m told by a good source, Mark 14:7), wealth
just solve all our problems in general by fixing income inequality.
inequality will always be with us; and it will be shaped a lot by tax
Income inequality—the decrease of which coincides with the
and investment strategies and just the simple factor of our society
primacy of the middle class—looks more like an historical anomaly
having weathered more time.
of post-war America and not so much the natural order of things.
First, we should recall the difference between income inequality
of the economic forces of the day. The rise of the American middle
and wealth inequality. The former has to do with wages, the latter
class, and an era of less income inequality, occurred mostly in
has to do with amassed equity. Greater wealth inequality—and
the mid-twentieth century. It is called by economists the “Great
it is now about the same in the U.S. as it was before the Great
Compression.” The main forces are generally regarded as follows:
Depression—has grown significantly in part because of the
1) increase of unions, 2) decrease of immigration, and 3) decrease
change in our retirement system. In the 1970s came an obscure
of competitive trade. These factors drove up the wages of workers
tax law which allowed for the individual retirement account: the
at a greater rate than the wages of the upper wealth percentiles.
blessed 401(k) and its siblings. Before this tax feature, the pension
The unions—whether you agree with their current purpose and
retirement benefits of most workers were not much recorded in
tactics or not—increased wages; there was less immigration, so
terms of an individual’s net worth. Work for a large company for
in-country workers became more important, and there were fewer
20+ years, and you got a pension—a portion of your average
international trade elements. This compression lasted for several
salary, paid every month by the company. With the exception of
decades and then petered out.
government workers (a topic for another day), defined benefit
pensions are not around much anymore.
more: increased international trade, increased immigration, and
Nowadays, such “qualified money” shows on the personal
deunionization; and the two new kickers: stagnation of minimum
balance sheets of workers in the form of portable retirement plans.
wage, and automation. The world became a smaller place in
Those who put money in (plus company contributions) now have
opening up trade, borders, new entrants to markets, etc. This
significant savings they can’t easily touch until retirement. And
led to worldwide awareness of U.S. opportunity and increased
those who do not have the mind or the wherewithal to contribute
immigration (immigration tends to depress wages for available
don’t have this. Thus, there is a baseline wealth inequality which is
jobs in the destination country). The unions had overplayed their
then exacerbated by the power of interest. Those who have this
hands in terms of salaries and benefits, leading to jobs moving
idle money will experience an effect of interest and growth over
to cheaper markets. Those two factors of depressed wages
time—given they have chosen a respectably diversified portfolio
from immigration plus union overreach led to a stagnation in the
(and that’s where ADISA members come in).
minimum wage, and then automation piled on to make machines
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There is going to be a wealth inequality naturally between
Income inequality is quite different; it is much more a feature
Why? For a reverse of the above reasons, plus a couple
Income inequality — the decrease of which coincides with the primacy of the middle class—looks more like an historical anomaly of post-war America and not so much the natural order of things.
cheaper than humans for many jobs.
further deunionization, at least in the education sector.
When I was a sports manager in the Middle East years
What’s interesting to me about this issue is that the solutions—
ago, a salesman visited our facility, hawking a small underwater
given a solution is desired—may come from a myriad of options,
vacuum cleaner that could be plugged in overnight to clean the
and they don’t necessarily fall in line with political labels or party
bottom of the swimming pool. Intrigued, I asked him the price,
platforms: increasing the minimum wage may be good, or maybe
the guarantee terms, and so forth. Then I did the math: it turned
it’s bad; the decline of unions may be good, or maybe it’s bad;
out to be cheaper to have a couple of guys take an hour in the
open trade is good, or maybe it’s bad; liberal immigration policies
early morning to vacuum the pool than to use a machine which
are good, or maybe they’re bad; more technology is good, or
would probably fail before it paid for itself. Plus, someone still
maybe it’s bad.
has to put the machine in, take it out, maintain it. It was probable
though that eventually the machine would become cheaper and
economic remedies to try to reconstruct those years of a strong
more reliable, and the math would not always work out in the
American middle class (and relatively low income inequality)? Or
favor of the couple of guys doing the work. I’m not sure what
maybe we shouldn’t, if we feel our medicines caused the disease.
we can do about the automation except to better educate the
It’s no wonder our recent elections seemed pivotal as we take a
lower income population, and that might send us back to needing
shot at some solutions—or not? ▲
Maybe it would be good to open up our medicine cabinet of
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TICA➜REISA➜ADISA: The Evolution of the Association
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In 2003, a group of TIC Sponsors and Broker-Dealers gathered at the Denver airport, and TICA is envisioned. Included at the initial meeting were: Greg Paul, Tim Snodgrass, Bill Winn, Patricia DelRosso, Clay Womack, Dick Lipton and Louis Rogers. A follow-up meeting was scheduled in Salt Lake City to form the Association, with the main goal to help professionals working with Tenant-in-Common offerings.
In July 2007, TICA was officially formed before FINRA.
With the quality and quantity of funding sources,
With TIC offerings unregulated, the association’s focused
REISA survives the “great depression” and takes a
on creating best practices, many of which are still used in
dramatic increase in membership with all categories
the industry today, and events were held to offer education
during the 2011 Annual Conference. In 2012, REISA’s
and networking to those working in the TIC industry.
Board of Directors opened Associate membership to
The first offices were established at the Inland office in
RIA firms and their IAR affiliate relationships, and the
Chicago, and a professional office
product mix of Sponsors continued to grow with private
lease was signed in December
placements, additional oil & gas interest, life settlements,
2007 for dedicated space in
equipment leasing, and more.
Indianapolis. During the extended TICA board meeting held February 2008, Tim Snodgrass
With the growth in product mix and the need for education for additional offerings, REISA’s Board of Directors decided on a name adjustment in 2014.
challenged the current board and committees to adapt or
Many names were considered, with Alternative &
die. It is important to note that the word “adapt” rather
Direct Investment Securities Association (ADISA), as the
than “change” was used by Mr. Snodgrass. In 2008,
one chosen.
sponsor members included not just TICs, but non-traded
Membership continues to grow in all categories,
REITs and oil & gas royalty firms. Many new association
and in 2015, ADISA’s Board of Directors opened the
names were considered, including:
Associate membership to Family Offices. As with
DRESA – Diversified Real Estate Securities Association RESA – Real Estate Securities Association REISA – Real Estate Investment Securities Association SIREA – Securitized Investment Real Estate Association
the change from TICA to REISA, the association adapted the ADISA name to stay true to our core principles: Education, Networking and Advocacy. ADISA’s volunteer leadership continues to work for its members to maintain the integrity and reputation of this industry by promoting the highest ethical
The 2009 National Event was recognized as the first
standards, providing education and networking
REISA event, although there was no formal announcement
opportunities, and in representing the industry in the
regarding the name change.
public and political arenas. ▲
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From
20 06
1031 Exchange—The Beginning of the End of a Financial Plan? By Joe Techar
A tidal wave of opportunity has hit the shores of the financial services industry. The convergence of advantageous tax code provisions, an unbridled real estate market, and a favorable revenue procedure has presented some very appealing options to owners of highly appreciated investment real estate as they contemplate sailing away with their profits.
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A whole industry has sprung up in the wake of this fertile
There are those who see a 1031 exchange as the inciting
convergence. New products have been created and innovated.
incident to a transaction that ultimately leaders to the sale of
TICs have been transformed from a “habitual spasmodic
a TIC, the end of the planning process. The determination of
motion” into a highly profitable and complicated offering sold
what’s best for the client is limited to a discussion of how to defer
to accredited investors. Financial services reps who couldn’t
the taxes of the sale, a discussion of the TIC and its cash flow
spell “real estate,” find IRS code 1031, or define “tax deferral”
potential and some admonitions about risk. If individual needs are
two short years ago are now at ease talking about “like kind
considered, it’s only a surface discussion. Due diligence that is left
exchanges,” leases, loans, leverage and carve outs. An
up to the broker-dealer and the amount of the investment that’s
organization that just a few years ago couldn’t garner enough
placed in a TIC is defined by availability. Because no ongoing
interest to field a football team now has to turn people away
commission is paid, service to the client is limited to the flurry of
from the doors of its annual meeting.
activity surrounding the myriad forms that must be initially filled
Opportunity in this new industry clearly abounds for savvy reps.
out. Commission is a prime motivator.
If you learn the jargon, understand that a TIC isn’t synonymous
Another group sees the 1031 exchange as an event that
with “twitching” and can explain to a client the difference between
needs to be considered in the context of what’s best for the
paying taxes and tax deferral, a TIC can be sold and commissions
client who’s selling their investment property. The determination
earned. Taxes are everyone’s hot button; no one wants to pay
of what’s best goes beyond a discussion of tax deferral as the
them. This new industry involves large transactions and large
main justification for a TIC investment. Areas analyzed include
commissions. As with most evolving areas that are not generally
such things as the client’s overall asset mix, financial objectives,
understood, an “expert” can just be someone who learns the
tax situation, age, risk tolerance, estate planning considerations,
jargon and can execute a few simple calculations. It’s as easy as
liquidity needs, the client’s investment sophistication, etc.
1, 2, 3: 1. Client owns highly appreciated investment property, 2.
Due diligence involves an analysis of the private placement
Client sells the property and places the proceeds with a qualified
memorandum and the amount invested is determined only after
intermediary, 3. Client invests in a TIC to defer taxes, generate tax-
the client’s entire financial picture has been analyzed. It may be
advantaged income, and hopefully obtain appreciation. It’s so easy
in the client’s best interest to pay taxes for a portion of the sale
to get caught up in this new way of doing business; so easy to
and diversify by investing some of the proceeds in other asset
be an “expert” when few have knowledge; so easy to be lured by
classes in order to achieve an overall diversified investment
big paydays and so easy to focus on a new area. Or is this a new
portfolio. Diversification also becomes key when determining
area? Is the focus on the wrong subject? Is this all too easy? Is a
how much of the client’s assets should be concentrated in real
1031 exchange and an investment in TIC replacement property
estate. How much in TICs and how much should be invested
the beginning or the end of a financial plan?
in REITs or raw land. Service is ongoing and the relationship is
All too often, it’s the client who suffers when the salesperson
viewed as long term. Compensation is not the prime motivator.
becomes lost in the exuberance of new ideas, new products,
It’s clear that the wave of opportunity has created a divergence
and large commissions. Motivation becomes misplaced. In the
of practice that brings into play the short and long term motives
zest to sell a TIC, sometimes the client’s best interests suffer. It’s
of salespersons and whether the needs of clients are the focus of
imperative to step back and ask what’s best for the client rather
our attention or tangential to our own interests. Salespersons will
than what’s best for the salesperson. No one argues with “we
come and go, but how we treat the needs of each and every client
have to do what’s best for the investor.” It’s in our perception of
will truly determine the longevity of our new industry. Whether our
“how” we determine what’s best for the investor that the waters
opportunity is washed back to sea or used to create an enduring
get muddy. So it is with answering the question of whether an
landscape in our corner of the financial services industry may well
exchange is the beginning or the end of a financial plan. Our
depend on how each of us answer the question: 1031 Exchange—
perceptions are key.
The Beginning or the End of a Financial Plan? ▲
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From
20 07
Remember: It’s Not a Bond! By Emily A. McGranaghan
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The underlying asset in a TIC is real estate, with all real estate’s inherent risks. Novice and seasoned real estate investors need to be reminded that as much as we would all desire, TICs are not bonds.
Why does a distinction self-evident to registered representatives and TIC industry professionals at large need to be reinforced continually to TIC investors? Because even with ample and clear risk disclosures to the contrary, investors have visual, colloquial and circumstantial factors influencing them to frame TICs as bonds. The responsibility falls on the registered representative, who has the best access to the investor, to help dismantle any false premises, so the investor is fully aware that TICs are real estate with every one of real estate’s many associated risks. Investors can see TICs as bonds based on a number of factors including the presentation of financial projections, specific words in the marketing narrative and simply a TIC’s passive investment structure. These factors are bracketed by an investor’s own circumstances and perspective. Investors are often rushed before and during their 45-day ID period within their exchange. They are removed from the due diligence process of the TIC offerings in front of them and assume that a highly competant third party will be managing the property. In the minds of the investor, this all-powerful sponsor/asset manager can sometimes take on the role of insuring the cash flows projected. This is not to suggest investment naiveté, the inability to read bold print or denial, but only the potential for over-reliance on specific words, phrases, images and concepts during a highly pressurized time.
Cash Flow Projection Charts Although multi-year cash flow projections are used to market certain sole ownership properties i.e. NNN leased properties with fixed annual increases, seven to 10-year cash flow projection charts are somewhat atypical for many other sole ownership real estate offerings. Marketing material for sole ownership multi-family offerings seldom projects beyond the first year’s income, whether actual or pro forma numbers. If the investors wish to project cash flow beyond the first year, they conduct their own due diligence. They consider the property’s operating history and current market conditions and look for opportunities to add value, grow rents, increase occupancy and reduce expenses. Investors are actively involved in creating their own projections. Once investors reach a decision on a sole ownership property, they do so with a very conscious assumption of the risks involved if things deviate from their projections. In contrast, when investors see a cash flow projection chart on a securitized TIC multifamily offering, these figures can somehow appear more arbitrary and fixed; a given. This
If the investors wish to project cash flow beyond the first year, they conduct their own due diligence. They consider the property’s operating history and current market conditions and look for opportunities to add value, grow rents, increase occupancy and reduce expenses. Investors are actively involved in creating their own projections.
may be related to the visual image, but in many cases seeing these numbers as more fixed is also a function of investor’s distance from the process in which the projections
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are created. They might forget, if only for a brief instant, that while the TIC sponsor is a real estate professional, adept in the acquisition and management of institutional property, sponsors are using the same due diligence and analyses processes to develop cash flow projections….and that neither the sponsor, nor the process is infallible. These variables in each case can change, and a string of numbers on a chart doesn’t guarantee that each year’s distribution will mirror this chart.
Words in the Marketing Narrative Words and phrases such as “bond-type NNN lease” “security”, “securitized”, “masterlease backing”, “guaranteed master lease”, “corporate lease(s)”, “AA- Rated Tenant(s)”, “institutional”, “publicly traded company” in the context of a PPM can take on a reassuring quality. Even with all of the severe risk disclosures on the very same page, these words
...sponsors are using the same due diligence and analyses processes to develop cash flow projections…. and that neither the sponsor, nor the process is infallible. These variables in each case can change, and a string of numbers on a chart doesn’t guarantee that each year’s distribution will mirror this chart.
can be used to imagine an investment that is far more secure than is possible with any real estate investment.
Passive Investment Structure The very structure of a TIC and passive ownership help foster an image of a bond-like investment in the minds of both novice and occasionally seasoned real estate investors.
An Opportunity to Clarify Without continued corroboration, a rep cannot assume that the investor is consciously on board with the non-bond investment theme. Reps must use a serious tone and draw upon specific real estate risk illustrations per property to clarify. Sometimes this clarification will indeed mean the loss of a potential TIC investor, but usually for the right reasons.
Reps have several means to reinforce the message that TIC’s involve real estate risks. When should this be done? Before the PPM’s Start Flying: First Conversation— No Surprises The element of surprise is a critical component of comedy, but can kill a sale, TIC or otherwise. Obviously, surprises can also have more serious repercussions if things fail to go according to plan in a TIC’s holding period and exit that run counter to the investor’s erroneous expectation of a guaranteed investment. In the initial conversation with a prospective investor, the message needs to be conveyed that a TIC is real estate. Period. Risks such as tenant failures and unexpected departures, unexpectedly high and long vacancies, higher than anticipated re-tenanting costs, deferred maintenance issues, changes in local market conditions, economic downturns, competitive product flooding the market, cap rate expansion, etc. have been mitigated wherever possible, but these risks and others associated with investment real estate ownership are ever present. Making real estate risk a motif in the first conversation with the investor leaves far less room for disillusionment midway through the subscription process or beyond. Moreover, clearly discussing this before the investor’s third party advisor (CPA, attorney or fellow dinner party attendee) is critical to insuring credibility and the investor’s confidence and trust. In fact, when a rep explains the differences between bonds and real estate, this
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can lead directly into a discussion of what TIC can provide, “tax-sheltered income and appreciation” that a bond cannot.
During the PPM Review and TIC Selection Process: • Engage investors in the due diligence process—As offerings are reviewed, discussing the successive layers of due diligence in each is important to emphasize the sponsor’s attempt to evaluate and mitigate the ever-present risks associated with this real estate investment, though elimination of risk is impossible. Encourage investors to do their own due diligence and analysis, starting with the sponsor’s assumptions page in the PPM by testing and discounting those assumptions, using higher vacancy factors, smaller rent increases and higher expenses. This does not necessitate a full Argus run, but a critical look at the numbers to help understand some of the sponsor’s thinking, to better determine how a property functions in a particular marketplace and its long term prospects. • Address Specific Trigger Words and Terms—“Master-Lease Guarantee” is an example of a trigger word. Clarify that “guarantee” is only as good as the sponsor and the funds behind that master lease, and that in the end the property needs to stand and generate the projected income levels on its own. That if a master leased multi-family property priced at $25M with a projected NOI of $1,800,000 per annum underperforms by 15 percent each year over more than two years, it’s a problem that stretches beyond a $250,000 master lease guarantee. Obviously, there are strong credit tenants, no credit tenants and weak credit tenants in any retail/office/industrial TIC offering. But whenever the word “bond” is used to characterize a tenant or lease, this calls for very specific discussions clarifying that word does not mean that the TIC itself is a bond, or necessarily carries any additional security. • Advocate Maximum Diversification—Recommending that the investor break up his/her exchange equity into multiple TIC’s to diversify by asset class, geographical region and sponsor is critical. This can often mean the investor is sacrificing a higher overall return in a single
Recommending that the investor break up his/her exchange equity into multiple TIC’s to diversify by asset class, geographical region and sponsor is critical.
investment in order to achieve the diversification. However, the recommendation alone further reinforces the message of real estate risk involved as regards to their equity investment.
Post Subscription • Written Communication—After a TIC interest has closed, the rep can take the important step of sending a letter to investors recommending that they establish their own independent “reserve” account for each TIC interest. Some veteran TIC Reps make a regular practice of this. Such communication helps investors prepare financially and psychologically for less than stellar scenarios in the future, and reinforces the need to view TICs as real estate. For example, if the cash flow is projected at 7 percent per annum, you spend 5 percent and set aside 2 percent in a reserve account to help address any unforeseen circumstances associated with the offering that go beyond the sponsor’s (hopefully very conservative) underwriting, not unlike the reserve account investors would maintain on most any sole ownership property. Registered Reps have the best access to investors. Along with that access is the ethical and professional obligation to educate investors during the review, subscription and postsubscription process in the critical concept: TICs are not a form of a bond. ▲
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From
20 08
Our Ethical Challenge By Joe Techar and Brandon Raatikka
Michael Josephson’s keynote presentation on ethics at TICA’s spring symposium had engaging content, was well delivered and very well received by all accounts. For those of you who didn’t have the pleasure of being present for his discussion, Mr. Josephson, founder and president of the renowned Josephson Institute, defined ethics plainly as “moral principles of duty and virtue that prescribe how we should behave.”
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He enlivened the presentation with many notorious profiles of unethical behavior from the business and entertainment world, and spoke about how ethics is about doing what you should simply because it’s the right thing to do. Pacing the ballroom floor among the symposium attendees instead of taking a place behind the lectern, he enumerated his “Six Pillars of Character”—“Trustworthiness, Respect, Responsibility, Fairness, Caring, and Citizenship— and challenged the audience to have the courage to act on these individual values.
enough for us to be contented to do the right thing—we also can’t acquiesce when others are performing bad acts. Mr. Josephson argued that “ethics is bigger than compliance,” but “the other side of the coin” is enforcement. Best Practices is a great start, but without more specificity and an enforcement mechanism, Best Practices can’t enable TICA and its membership to surround and smother unethical behavior in our industry. While we may personally disagree with this type of behavior and understand how damaging it can be, at the end of the day, we currently have no mechanism to effectively deal with it. Of course, as individuals we often have an aversion to being the busybody. No one likes a tattletale. Furthermore, we don’t
We wanted to know how these issues had practicable
like to attract the kind of scrutiny of our own actions that comes
application to our organization, so we met with Mr. Josephson
when we shine a light on someone else’s, especially because
in the hotel lobby after his talk. Our discussion centered
we’re not always above reproach ourselves. Yet, allowing these
around the knowledge that the tenant in common industry is
sentiments to paralyze us only enables the environment in which
a relatively fledgling enterprise, under ever-increasing pressure
unethical acts can take place to undermine the integrity of the
to perform because of the current financial environment. That
tenant in common industry.
worries Mr. Josephson. He’s documented many well-known
We discussed with Mr. Josephson ways in which TICA
cases of disgraced figures acting imprudently, and recognizes
could promote and ensure an ethical landscape. For one, Best
that pressure to perform often causes people to rationalize
Practices could be made mandatory, with penalties or possibly
unethical behavior. A scandal or the publication of unethical
expulsion from TICA for violations. That way, TICA membership
industry practices, perhaps one that could find its way into an
itself could function as a “Good Housekeeping Seal of Approval,”
ethics presentation, could have dire consequences for all of us
as Mr. Josephson put it, which could even benefit members from
who believe that TICs are an important investment tool for our
a marketing standpoint. A strong, meaningful organization at the
clients. Mr. Josephson agrees: “If somebody does a really bad
industry’s forefront could further legitimize the TIC investment
deal, it will hurt [all of] TICA.”
vehicle in the eyes of the larger investment community, which
Most of us believe we act ethically. Most of us believe that
is just starting to warm up to it. Mr. Josephson even suggested
TICA as an organization acts ethically. Is a “belief” good enough?
a certification and continuing education process for members,
Or do we have a duty to ourselves, our organization, and our
something TICA is already discussing. TICA’s Ethics Committee
investors to do more than just “believe” in the good intended
could assume a more interactive and vigilant role. Of course, all
efforts of our industry’s members to avoid the ethical minefield?
of these proposals would require additional refinement, extensive
A strong argument can be made that we do need to do more,
resources, and staff and member dedication.
both as individuals and as an organization. There’s too much at
Mr. Josephson’s talk was illuminating, thought provoking, and
stake to not do all we can to spur TICA’s members on to ethical
even entertaining. But like he said, “it’s not in the rhetoric, but
behavior and preserve the integrity of the industry. Mr. Josephson
in the action.” Do we as members of the tenant in common
said that the two components of ethics are knowing what’s right
industry have the moral strength to insist on integrity and enact
and having the will power to do what’s right. Additionally, it’s not
measures to ensure it? It’s the right thing to do. ▲
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From
20 09
The Art of Defending Due Diligence “A Work In Process” By Brenda Neel Hight
D D
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Recent FINRA arbitrations vividly demonstrate that broker-dealers and their financial advisors can become targets as investors experience losses from their securitized real estate investments, unless the brokerdealer demonstrates effective processes to screen investments. While issues of suitability and fiduciary duty were raised, claims in recent tenant-in-common (TIC) arbitrations have focused on the defendant broker-dealer’s (and its representatives’) due diligence in approving the sale of TIC investments. This article provides “lessons learned” from defending broker-dealers in two recent arbitrations,1 assessing typical claims made, and suggesting due diligence procedures to address challenges of a potential arbitration. Broker-dealers should be aware of proactive steps they can take to mitigate risk while still profiting from the sale of private placement products and enhancing services to investors.
The Failed Investment These two arbitrations involved a single offering. The sponsor purchased a warehouse in 2001 for $3.3 million, made $1.1 million in improvements, and by late 2004 executed a 15-year lease with a logistics tenant. The sponsor then syndicated the property at $12.1 million, a price supported by a Member of the Appraisal Institute of America (“MAI”) certified appraisal. The defendant broker-dealer had worked with the sponsor on a previous offering, including negotiating a personal guaranty from the sponsor to protect cash flow in the event the master tenant defaulted. After review of the private placement memorandum (PPM) of the warehouse, the broker-dealer signed a selling agreement for the offering. Some of the broker-dealer’s sales representatives reviewed the following: the appraisal, which supported the pro-forma; a recent sponsor review conducted by a due diligence attorney; on-site property inspection, guided by the property manager and accompanied by potential investors; sponsor interviews; financial information concerning tenants’ operations, including unaudited financials of the sub-tenant and the sub-tenant lease; third party leasing reports from local divisions of major real estate agencies, such as CB Richard Ellis, Collier Turleys’, and Reis; the tax opinion, property condition reports and environmental reports that accompanied the PPM; and a personal financial statement of the sponsor’s principal, showing him with a net worth of $43 million. Several investors purchased interests in the offering, receiving timely distributions for approximately 30 months before payments stopped. Six months after the default, the investors learned that the sponsor had purchased the TIC owners’ notes from the lender a year and a half after closing, and
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Broker-dealers should be aware of proactive steps they can take to mitigate risk while still profiting from the sale of private placement products and enhancing services to investors.
had used the notes to collateralize additional unrelated financing needs. After the actions of its principal put the sponsor (and master tenant) in default of its obligations, a bankruptcy court seized the property and its cash flow. A subsequent noteholder won the right to foreclose on the investors’ notes. By then, local market conditions had changed dramatically from the time of syndication—the property’s value had plunged, due to a large increase in market warehouse construction that diluted the demand for older warehouse space. The foreclosure prevented the TIC owners from liquidating, and eventually caused the complete loss of their investments, leading the investors to file arbitration claims. One panel has already found in favor of the broker-dealer and its sales representative. The second decision resulted in a split decision awarding one claimant full reimbursement of his purchase price, a second one half and dismissing the largest investors complaint with a zero award.
The Battleground at Arbitration A securities arbitration revolves around whether information that the prudent investor would consider material was either missing from the offering materials or presented
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in such a way as to render the materials misleading. The burden initially lies upon the investor to establish a material misrepresentation or omission. If misleading facts are demonstrated, the burden then shifts to the broker-dealer to show it exercised reasonable care in the investigation of the security (through review of the offering materials and supporting documentation) and despite such investigation, it did not and could not have discovered the misrepresentation or omission. In addition, proving the investor had actual knowledge of the same material representation or omission is a defense. Securities regulations, case law and FINRA notices are somewhat ambiguous on what constitutes “reasonable care” in the private placement arena. It is not this article’s purpose to elaborate on specific guidance found in FINRA Notices 03-71 and 05-18, and TICA Alert 06-01. Incidentally, the broker-dealer in these arbitrations followed these guidelines, and documentation existed to prove it.
In both of these arbitrations, investors asserted the following misrepresentations or omissions: 1) The sponsor’s mark up was unsustainably high; 2) The Appraisal was unreliable and internally inconsistent; and, 3) The sub-tenant did not have the financial strength to carry the lease, in fact had never paid rent, and was given a $1 million incentive payment at closing of the syndication.
Of course, through experts, the claimants argued these facts existed at the time of the offering. Claimants’ attorney established those in hindsight, through discovery during arbitration. The broker-dealer countered that mark-ups are usually calculated in the context of property acquisition contemporaneous with the investors’ purchases— disclosure of a “load” is less meaningful and not typical when the sponsor acquires and invests capital into the property, and then holds it for a significant amount of time before syndication. In any event, the appraisal, which the broker-dealer testified it had reviewed and found to be reasonable, supported the price paid by the investors, and the lender thought so too. The assertion concerning the sub-tenant’s incentive to lease and failure to pay rent were true, but the broker-dealer claimed it did not learn those facts despite the exercise of reasonable care, which included reviewing the subtenant’s financials, the lease, a site visit, and inquiries into property operations.
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Lessons Learned An important lesson gained from the arbitrations is that registered representatives should have all the documentation and information about the offering that the broker-dealer has, since they will be working with the investors. For instance, not every representative will be able to inspect the property underlying the offering, but will reasonably rely on the broker-dealer to do so and should have information regarding the inspection. In the arbitration cases, one set of claimants purchased their interests from a representative who had no personal involvement in the due diligence investigation. His information was much less balanced than the brokerdealer’s, in that he did not have the appraisal or the financials of the sub-tenant. At the arbitration, the claimants argued that this was a misleading omission, since ultimately information about the appraisal and the sub-tenant was not passed down to the potential investors. Had the representative
In the arbitration cases, one set of claimants purchased their interests from a representative who had no personal involvement in the due diligence investigation... At the arbitration, the claimants argued that this was a misleading omission, since ultimately information about the appraisal and the sub-tenant was not passed down to the potential investors.
possessed the appraisal and a summary of facts regarding the sub-tenant, these sorts of attacks could have been minimized. These arbitrations emphasize the importance of the appraisal. If the sponsor is not disclosing the appreciation from acquisition value in the PPM, does the appraisal justify the investors’ purchase price? If the property’s performance or fair market value decreases, claimants’ lawyers will certainly attack the original offering price as inflated. Pricing is an essential factor in the materiality issue to any investor, and it needs to be clearly documented to the potential investor. The strength of the actual financial model of the property’s income-producing capacity should also be fairly described. What corroborating data was reviewed? Was it fair to rely upon that documentation? The brokerdealer’s records should show a thorough review of financial strengths and weaknesses by the due diligence team.
Steps to Mitigate Risk We suggest broker-dealers and their reps take the following steps to limit exposure in the event of arbitration: Draft clear procedures. Broker-dealers should carefully review their procedures for screening syndicated real estate investments, which were the main focus in our arbitrations. Such procedures should facilitate systematic analysis of the PPM and other offering documents, and investigation of their material statements. To defend any product approved for sale, the investigation of the appropriateness of the product for sale must be established and compared to other products in the market. It goes without saying, but broker-dealers and their reps should consistently follow their procedures for every product. Third party due diligence reports are an important part of well-developed procedures, as independent analysis of the offering can bolster the reasonableness of the broker-dealer’s own investigation and conclusions. Create a Broker-dealer Disclosure Sheet. One of the arbitrations involved the claim that certain facts were known to the broker-dealer but not disclosed to the registered representative and/or the investor. Due diligence procedures should be predicated on information flowing from the broker-dealer to the registered rep and investor level. If the broker-dealer uncovers areas of questionable reliability during its investigation, those areas should be included in a balanced “summary report”
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delivered to the representatives selling the product. Documented sharing of the due diligence review with the investor, in an informative way, should be required prior to any sale. Also critical is a documented discussion with the investor regarding other options. The Office of Supervisory Jurisdiction should document this communication with the investor. Additional experts who may counsel investors, including realtors, should be included in the discussion. Full disclosure of “red flags” can place the burden of reliance on the investor. Document the home office and client files. A critical component of due diligence is documentation of the process. Strong records of the review process will aid immeasurably in the event of arbitration. Documentation of the representative’s communications with the sponsors, third parties, and the investors on the product will establish reasonable efforts were undertaken to verify information found in the PPM and establish suitability. Documentation of disclosures to investors is a necessary practice to confirm suitability review. If the investor does not want to take the time to study information provided by the broker-dealer and rep, that should be documented as well. Supervise/train your representatives. Broker-dealers must educate their representatives so they understand that they must not rely exclusively on the brokerdealer’s due diligence on the sponsor and its offering. Broker-dealers must require their representatives to continue investigations into the underlying assumptions supporting an offering. This includes an analysis of the suitability for the accredited investor. In addition, brokerdealers
Footnote: 1— Branch Avenue Plaza, L.P. v. United Securities Alliance et al., FINRA Case No. 08-00532; and George R. Joyce, Rogers and Thompson v. United Securities Alliance, et al., FINRA Case No. 08-02517
need to supervise their representatives’ retention of notes and documentation of the due diligence done on each sale.
Conclusion These arbitrations may be the first of many in syndicated real estate as the market sours. Broker-dealers and their representatives can reduce the risk of claims by comprehending the depth of the due diligence responsibility and working toward transparency of investments through documented procedures. A work process that focuses on transparency of disclosure to the investor will create true value and protection for all parties to the transaction. ▲
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From
20 10
Inflation & Deflation: Issues of Our Times By Dr. Mark G. Dotzour & Gerald Klassen
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What is the difference between debt deflation and deflation? These are two different things, but they are related. Debt deflation is a theory developed by economist Irving Fisher during the Great Depression. It asserts that recessions and depressions are caused by the overall level of debt shrinking in an economy. Debt deflation is the reduction in total debt in an economy. Today we have an unprecedented reduction in consumer credit and mortgage debt in the U.S. economy. People are either paying down debt using their savings or defaulting on the debt. And that is a problem. From an accounting balance sheet perspective, if the market value of debt (right side of the balance sheet) in an economy shrinks, then the market value of the assets (left side of the balance sheet) in the economy must shrink by the same amount if new equity (right side of the balance) is not added. Assets must be sold to reduce the debt. When many assets are sold all at once, values fall. Deflation is a little different. Consumer price deflation is what the media most commonly means when it mentions deflation. The principle behind consumer price deflation is that consumer prices fall because people are consuming less, and businesses are forced to reduce prices to sell their products. Anticipating lower prices in the future, people continue to consume less, and falling demand causes businesses to continue to cut prices. It becomes a selfreinforcing cycle of delayed consumption and price cutting. This is very damaging because businesses have to cut jobs and production to stay profitable, while people consume less because they lose their jobs. When business profits and employment income fall, it becomes difficult to repay loans.
With inflation, wages rise and debt becomes easier to pay off. If businesses can adjust to rising costs, their profits grow because they are getting higher prices for their products.
So which is worse, inflation or deflation? Deflation is much worse because it leads to falling profits and asset values. When profits and asset values fall, people go bankrupt. However, deflation is beneficial for those on fixed incomes with no debt, because their money buys more. Deflation results in lower interest rates. With inflation, wages rise and debt becomes easier to pay off. If businesses can adjust to rising costs, their profits grow because they are getting higher prices for their products. But inflation is bad for those on fixed incomes because their money does not buy as much. Inflation results in higher interest rates.
Is real estate a good investment during deflation? The answer depends on how much equity you have. During deflation, commercial rents will fall, and some tenants will go out of business because of falling profits. The most important thing when buying real estate during deflation is to avoid the need to go back to the bank to get relief on the mortgage payment.
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If buyers pay all cash and have cash to make tenant improvements, foreclosure is not a threat if the property gets into trouble. There will be plenty of time in the years ahead when credit is expanding to leverage up the property, extract equity and increase returns. Deflation is a time for caution and reduced return requirements to protect investment principal.
What is the best investment strategy during deflation? Investments with safe principal and steady cash flows are the best options during deflation. Even though the cash flow stream may be small, you can add the rate of deflation to the total return because the cash flows will be worth more in the future. U.S. Treasuries are a good option for principal safety and steady cash flows. Longerterm bonds such as the ten-year and 30-year are preferred. However, investors should be poised to liquidate their investments in Treasuries when the economy begins to turn. It is likely that interest rates will rise at that point and cause a loss of market value in Treasury bonds. Reducing debt is also a good investment strategy. The longer deflation persists, the more expensive it gets to service debt. Falling wages and prices make it harder to repay loans. Paying off the mortgage on your house becomes a good investment decision.
How does deflation affect mortgage rates? Deflation causes mortgage rates to fall by impacting the yield on ten-year Treasuries. During deflation, investors shift their portfolios to Treasuries, which drives up the price and reduces the yield. The falling benchmark rate causes mortgage rates to fall. During Japan’s two decades of deflation, the yield on ten-year government bonds has remained below 2 percent even with the Bank of Japan (BOJ; Japan’s central bank) buying huge amounts of government bonds, a practice known as quantitative easing. According to Reuters, BOJ started their quantitative easing program by purchasing 400 billion yen ($4.3 billion) per month and drove the yield on ten-year bonds down to 1.02 percent. In October 2002, they boosted purchases to 1.2 trillion yen per month, and by 2003 the yield had fallen to .43 percent. BOJ is still buying 1.2 trillion yen of government bonds per month, and the yield is at 1.375 percent.
Ben Bernanke has suggested he can stop deflation through quantitative easing (Fed purchases of U.S. Treasuries) to reduce interest rates. Will this work? When the central bank of a country starts buying the country’s national debt securities, it is typically interpreted as a purposeful weakening of the nation’s currency. A weaker currency usually causes inflation. When a central bank aggressively buys Treasuries, it is seen as a precursor to hyperinflation. Bernanke is not talking about aggressive purchases of Treasuries—yet. His goal would be to bring down all interest rates in an effort to spur consumption. When loans are cheaper, people typically consume more. Increased consumption could reverse deflation and lead to inflation. The success of Bernanke’s strategy depends on three things. First, would the drop in interest rates be enough to spur people to borrow? Second, do financial institutions have the capacity to lend? Third, do consumers have the desire to increase their debt burden? Interest rates have been low for an extended period already. The Fed’s actions to reduce interest rates further will have a smaller impact than they would have in 2007. Banks have eased lending standards from crisis levels, but credit is still hard to get for many borrowers in the United States. It is also possible that many American households do not want to go further into debt, even if low interest loans become readily available. So will Bernanke’s strategy work? It’s a risky bet that has never been tried in the United States before, so stay tuned. So far it has not worked for Japan. Rest assured that the Fed chairman will do everything possible to prevent prolonged deflation.
What is the best way for the United States to end deflation and get the economy going again? First, the United States must reduce its trade deficit by selling more goods and services to other countries. Our trading partners need to purchase goods and services produced by American workers. As a nation, we must begin producing products that the rest of the world will buy. Trade agreements need to be strengthened to ensure equal
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trade of products between nations. This will create jobs and raise national income, thus easing the country’s debt problem. Second, the U.S. government must create an atmosphere of trust for American business owners. It must do everything possible to create an environment that increases the certainty of business profits. The final chapter of the Great Depression was written when the government quit demonizing business and awarded contracts that guaranteed profits for businesses to produce equipment for the war effort. Guaranteed profits gave businesses the certainty and incentive to hire more workers.
What could cause this strategy to fail? The Japanese experience has shown us that massive increases in savings can severely retard economic growth. Japan is an export-led economy, yet it is still experiencing deflation. Consumption is restrained because of the propensity for aging seniors in that country to save. And the tight immigration policy is leading to a decline in population. These two powerful factors have resulted in falling domestic consumption and, therefore, generated deflation. Low interest rates (easy monetary policy) and massive government borrowing and spending (stimulative fiscal policy) have not solved the problem. Baby boomers in the United States have been largely overweight in stocks and real estate and underweight in safer, fixed-income securities for many years. Their consumption and investing patterns now appear to be changing in a way similar to the Japanese after their property bubble burst. After suffering huge losses to their wealth brought on by declining stock and housing prices, boomers are also expecting lower returns on their retirement assets. That means they will have to save more to achieve their desired lifestyle during retirement. The end result is likely to be a higher savings rate and lower consumption in the future. Younger Americans may have to scale back on their spending as well because they can no longer borrow against the equity in their homes to finance purchases. America’s reduced appetite for consumption could make it more difficult to avoid deflation. ▲
After suffering huge losses to their wealth brought on by declining stock and housing prices, boomers are also expecting lower returns on their retirement assets. That means they will have to save more to achieve their desired lifestyle during retirement.
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From
20 11
Understanding Non-traded REIT Share Valuations By Vee Kimbrell
Share valuations for non-traded REI Ts has been a hot topic in the media lately and is also top of mind for Financial Industry Regulatory Authority (FINRA). In fact, in July, the FINRA Board of Governers authorized staff to issue a Regulatory Notice requesting comment on a proposed amendment to the customer account statement rule to revise the manner in which broker-dealers report estimated per share values of non-trade REITs and direct participation programs on their customer account statements.
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The proposed amendments would (1) require, if par value is
significantly lowered the value of their shares, reflecting the economic
shown, that it be netted by the up-front fees and expenses
reality of a deep recession and the cyclical nature of the real estate
that are deducted from the offering proceeds, (2) permit broker-
industry. A few non-traded REITs, with portfolios that predate the real
dealers to use par value only under the initial offering period,
estate boom, reported share values north of $10 per share.
and not during a second offering period, and (3) clarify that if the broker-dealer has reason to believe that the estimated per share
How Share Values are Estimated
value in the annual report is inaccurate, then the brokerdealer
Keep in mind that FINRA 09-09 does not require a specific
must remove that value from its account statements.
valuation methodology for non-traded REITs. Every valuation
As financial professionals, we can all agree that asset valuation is the foundation of the investment management process.
methodology lacks precision and each REIT may not have the same approach, assumptions or inputs.
Without a clear idea of what investments are worth, it’s tough
As of June 30, of the 19 non-traded REITs that are closed to
to make meaningful decisions about asset allocation, portfolio
new investments, 14 of them have reached the 18-month mark
re-balancing, risk control, and manager evaluation.
while only 11 of them have announced estimated per share
But illiquid investments, like non-traded REI Ts, present challenges in determining value, especially given the long-term, fixed $10 share
values. All offered similar language in their public filings addressing the valuation limitations.
price. Non-traded REI Ts’ estimated share valuations can give
The methodologies used to determine the estimated value per
advisors insight into performance and also help identify adjustments,
share were based upon a number of assumptions, estimates
if any, to ongoing participation in dividend reinvestment programs.
and judgments that may not be accurate or complete. Further,
These valuations can also provide fresh insight for the more liquid
different parties using different property-specific and general real
components of a client’s investment portfolio given the non-traded
estate and capital market assumptions, estimates, judgments
REIT’s current status and the client’s risk tolerance.
and standards could derive a different estimated value per share,
A key feature of non-traded REITs is shares sold at par value— typically $10. Non-traded REIT prospectuses contain similar
which could be significantly different from the estimated value per share determined by our board of directors.
language about the arbitrary nature of how the share offering
Some of the REITs employed outside consultants; others
price was determined: The offering price of the shares was not
have hired investment bankers; and yet others determined the
es ablished on an independent basis and bears no relationship to
estimated share value internally. Regardless, all depend upon
the net value of our assets.
information provided by the sponsor.
The offering price is likely to be higher than the amount you
And even when a specific approach is mentioned—for instance,
would receive per share if we were to liquidate at this time because
discounted cash flow analysis—the details are in short supply. Some
of the upfront fees that we pay in connection with the issuance of
REITs indicated that they did not include a liquidity discount in their
our shares. Further, the offering price may be significantly more
calculations in order to account for the fact that the shares are not
than the price at which the shares would trade if they were to be
currently traded, or ignored additional adjustments for assets and
listed on an exchange or actively traded by broker-dealers.
debts. Others were quiet on those issues. In other words, the valuation
In other words, the $10 share price does not reflect the true
price is not necessarily the amount an investor would receive upon the
value of the properties nor the quality of the property portfolio. So
REIT’s listing on an exchange or liquidation. Plus, the estimated share
it’s hard to know how much the shares are really worth until the
valuation can go up or down depending upon market and portfolio
company decides to list or sell its assets.
conditions. And the changes in underlying property values can also
In the past, the fixed share price could stretch on well after the
shift leverage ratios for a non-traded REIT, affecting its risk profile.
closing of an offering—often at the REIT’s discretion as to when to
Estimated share valuations may seem too much, too little,
revalue the shares. But FINRA clarified valuation rules for non-traded
too late given that these non-traded REITs are closed, often with
REITs in February 2009. FINRA Regulatory Notice 09-09 requires
limited or even suspended redemption programs. But these interim
non-traded REITs to conduct an appraisal of their assets and
valuations are important tools for advisors and investors to revisit
operations within 18 months after closing to new shareholders, in
their original asset allocation strategy and can also serve as a
order to supply broker-dealers with estimated per share values for
checkup on a non-traded REI Ts performance until it is listed on
investors’ customer account statements. Non-traded REI Ts are also
an exchange or liquidated. Estimated share valuations highlight the
required to issue a new share estimate every subsequent 18 months.
investment risks outlined in each prospectus and bring new focus
In the wake of the FINRA pronouncement, some non-traded REI Ts
to clients’ risk tolerance for non-traded REIT products. ▲
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From
20 12
Five Things Most Advisors Don’t Know About E-Marketing By Amy McIlwain
Have you ever received an e-mail that piqued your interest? Perhaps it spoke to a relevant business conundrum you were facing, or contained an offer that came just in the nick of time. Despite what you may assume, this is no coincidence. With segmented or “trip-wire” e-mail marketing, it is possible to deliver targeted messages that directly meet the unique interests and needs of prospects. Here are a few steps you can follow to develop lead nurturing e-marketing campaigns that transform prospects into clients.
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Create Offers. I was recently listening to a business mentor give a presentation, and was really interested in one piece of advice he gave: “if you want people to do something for you, do something for them first.” This advice is the foundational premise of e-mail marketing. Give your prospects something that is of value to them. Offers come in many forms, and in order to create effective ones, you have to know a little bit about your target audience. What are they interested in? What do they want to learn about? What are their goals? What problems do they face? Here is what you may consider offering: • An e-book download • A whitepaper • A free consultation • Access to free calculators • A free weekly newsletter with information of value to them
Develop Call-To-Actions (CTA). Once you’ve created some offers, you must somehow entice your audience to access them. This is where the CTA comes in. A CTA creates a sense of urgency and direction for your audience. An example of a CTA would be “Download our FREE Retirement E-Book!” Alongside the CTA should be a form. The form is where the prospect must (at least) submit their e-mail address to access the offer. It is up to you if you want them to provide more information, like their name or company. Here are some avenues you may consider for your CTA: • Download buttons • Forms on your website • CTAs on social media • Landing pages that specifically prompt people to take advantage of the offers
Funnels. Let’s say that Sally, a 45-year old widow on the brink of retirement, signs up to access a retirement calculator on your website. Once she signs up, her e-mail address should be segmented into a drip e-mail campaign. A drip e-mail campaign is a sequence of e-mails that prospects receive over a fixed amount of time. The content in the e-mails should relate to the offer they opt in to. For example, if Sally opts in to access to a retirement calculator, she should start receiving emails pertaining to retirement planning.
Automated E-Mails. So we know Sally opted to access the free retirement calculator, so how many e-mails should you send her? How should the emails be organized? How often should you send them? My recommendation is to send five emails over the course of 1-2 months. There are various schools of thought when it comes to how you should schedule the automation, but this is what I’ve found to be the most effective. Here are some additional pointers for the e-mails: • Always give direction. What actions do you want the prospect to take? Do you want them to visit your blog? Do you want them to opt into your weekly e-newsletter? Getting your prospects more and more involved with your company is one of the many goals you should have with e-marketing. • Be conversational and keep it concise. Would you read an e-mail that was super long and boring? Probably not. Neither will your prospects. • Start Soft, End Strong. The first two to three e-mails that your clients receive should be somewhat soft (from a sales perspective). In other words, don’t ask the prospect to come visit you in your office for a one-on-one in the very first e-mail. Instead, establish some credibility and comfort first. Direct them to your blog or video library so they can learn more about your firm. After they’ve already received several e-mails, you can then consider requesting a consultation or meeting.
When the Campaign Ends. When the drip e-mail campaign ends, you have several options for how you proceed. • If you have not heard from Sally, you may consider giving her a call to see if she has any questions or is interested. • If Sally is not currently interested in your service, do what you can to stay in front of her in the months to come. Do this by sending e-mails to her one or twice every month or prompting her to sign up for other offers you have. According to MarketingSherpa, 70 percent of your leads will end up buying something from you or one of your competitors, but they won’t do it right away! • Evaluate the analytics of your campaigns. This is essential for being successful with e-marketing. In essence, see what people are engaging with and clicking on the most and re-work your campaigns according to what gets the most traction and conversions. If you are looking for software or more information on e-mail marketing, Financial Social Media has some really great downloads in the “resources” section of their website. ▲
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From
20 13
The Uncharted Waters of General Solicitation By Darryl Steinhause and Amy Giannamore
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The JOBS Act Mandate The Jumpstart Our Business Startups Act (the “JOBS Act”) directed the Securities and Exchange Commission (the “SEC”) to enact an amendment to Regulation D of the Securities Act of 1933 (“Regulation D”) which would permit general solicitation advertising in offerings made under Rule 506 of Regulation D. On July 23, 2013, the SEC issued Release No. 33-9415 which set forth new Rule 506(c) of Regulation D permitting general solicitation for private offerings if certain requirements are met. Rule 506(c) becomes effective on September 23, 2013. In addition, the JOBS Act mandated a change to the Securities Act of 1933, as amended (the “Securities Act”) which provided an exemption from registration as a broker or a dealer under the Securities and Exchange Act of 1934, as amended (the “Exchange Act”) for persons that maintained a platform for solicitation of investors in a Rule 506 offering (the “JOBS Act Exemption”). While many had hoped that these changes would allow issuers to make private offerings in an unfettered manner, upon closer examination there are still pitfalls of which issuers (and in particular their principals and employees) and broker-dealers must be aware.
The Requirements of Rule 506(c) Rule 506 provides a safe harbor from registration of securities issued pursuant to Section 4(a)(2) of the Securities Act. New Rule 506(c) expands this safe harbor to permit issuers to engage in general solicitation when offering and selling securities in a private offering, provided that: 1. All purchasers are accredited investors (or investors that the issuer reasonably believes are accredited at the time of the sale); 2. the issuer takes reasonable steps to verify the accredited investor status of each purchaser; and 3. the issuer complies with other applicable provisions of Regulation D.
While many had hoped that these changes would allow issuers to make private offerings in an unfettered manner, upon closer examination there are still pitfalls of which issuers (and in particular their principals and employees) and broker-dealers must be aware.
Purchasers Must Be Accredited Although the general solicitation will be permitted to be sent to persons who are not accredited, the securities may only be purchased by persons who are accredited investors or investors that the issuer reasonably believes are accredited at the time of the sale.
Reasonable Steps to Verify Accredited Investor Status New Rule 506(c) requires the issuer to take reasonable steps to verify that the purchasers of the securities are accredited investors. Offerings conducted under Rule 506 typically have relied on a “check the box” subscription agreement where the investor indicates that they are (or are not) accredited. This
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Rule 506 provides a safe harbor from registration of securities issued pursuant to Section 4(a)(2) of the Securities Act. New Rule 506(c) expands this safe harbor to permit issuers to engage in general solicitation when offering and selling securities in a private offering,
method of accreditation confirmation is not likely to satisfy the requirements of Rule 506(c). Rule 506(c) provides several non-exclusive methods which would satisfy the issuer’s reasonable requirement to verify including (i) reviewing two years of tax returns and obtaining a certificate from the purchaser that such purchaser has a reasonable expectation of reaching the income level necessary to qualify as an accredited investor in the current year, (ii) reviewing bank, brokerage or other statements with respect to assets, and a consumer report from at least one of the nationwide consumer reporting agencies dated within 3 months with respect to liabilities, and obtaining a certificate from the purchaser that all liabilities necessary to make a determination of net worth have been disclosed or (iii) obtaining written confirmation from a registered broker-dealer, registered investment advisor, licensed attorney or certified public accountant that such person has taken reasonable steps to verify the purchaser’s accredited investor status. Investors in Rule 506(c) offerings will be required to provide significantly more information to the issuer. Some investors may feel uncomfortable with providing this information or may question why it is necessary. However, the information being provided is similar to what the investors have traditionally provided to their broker-dealers.
Regulation D Compliance Requirements New Rule 506(c) requires that the issuers comply with the other requirements of Regulation D. In a separate release, the SEC has proposed that issuers that want to conduct an offering pursuant to Rule 506(c) must also file an Advance Form D at least 15 days prior to the offering being made. The Advance Form D would include basic information about the offering. Issuers would still be required to amend the Form D within 15 days after the first sale of the securities to provide all required information. In addition, the SEC has adopted new rules with respect to the disqualification of persons from all Rule 506 offerings. The so-called “bad actor” disqualification provisions will eliminate the ability of persons (including officers, directors, principals and owners of more than 20% of an issuer or sponsor) to conduct a Rule 506 offering, including those who are subject to certain orders of federal or state agencies or have been found liable for things such as fraud. The disqualification provisions require that the trigger event occur after the effective date of the new provisions. Events that occurred prior to such date which would have been a disqualification event if they occurred after the effective date have become mandatory disclosure events for the issuer.
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General Solicitation and General Advertising Rule 506(c) will allow issuers to use all means of general solicitation and general advertising to conduct Rule 506 offerings. This would include internet, print media, television, radio and other forms of advertising. The SEC has indicated that it will be focused on ensuring that the materials used for any general solicitation are not fraudulent in nature. In a separate release, the SEC has proposed that all general solicitation materials be filed with the SEC no later than the first day of use.
Broker-Dealer Implications Under the current Rule 506, which prohibits general solicitation, issuers generally rely on broker-dealers to bring clients to the issuer for the purchase of the issuer’s securities. Rule 506(c) gives the issuers the ability to conduct offerings directly with the public instead of working through a selling group of brokerdealers. However, lifting the ban on general solicitation may not be the magic bullet that issuers may have been hoping for. If the officers, directors and employees of an issuer are engaged in the marketing and sale of securities to the public, the associated persons of the issuer must comply with the broker-dealer requirements set forth in the Exchange Act or find an exemption.
Definition of a Broker and Safe Harbor Under the Exchange Act Section 3(a)(4) of the Exchange Act defines a “broker” as any person engaged in the business of effecting transactions in securities for the account of others. Section 15(a)(1) of the Exchange Act requires brokers and dealers to register as a broker or dealer. The definition of “broker” has customarily been interpreted by the SEC as not requiring the issuer itself to register as a broker because the issuer is not effecting a transaction for the account of others. However, the officers, directors and employees of an issuer do not benefit from the same interpretation. Rule 3a4-1 is a “safe harbor” for persons associated with an issuer (i.e., the officers, directors and employees of the issuer) which allows them to not register under Section 15(a)(1) of the Exchange Act as a broker. Rule 3a4-1 requires that an associated person will only fall within the “safe harbor” if several criteria are met.
If the officers, directors and employees of an issuer are engaged in the marketing and sale of securities to the public, the associated persons of the issuer must comply with the broker-dealer requirements set forth in the Exchange Act or find an exemption.
In order to qualify under Rule 3a4-1, the associated person (i) cannot be subject to a statutory disqualification, (ii) is not compensated in connection with his or her participation by the payment of commissions or other remuneration either directly or indirectly on transactions in securities and (iii) is not at the time of his or her participation an associated person of a broker or dealer. In addition to complying with all of (i) through (iii) above, the person must also comply with one of the following: (1) the security must be sold through a registered broker-dealer (or other specified person), (2) the associated person (a) primarily performs, or is intended to perform at the end of the offering, substantial duties for or on behalf of the issuer other than the sale of securities for the issuer, (b) is not, and has not for the prior 12 months, been an associated person of a broker-dealer and (c) does not participate in more than one offering every 12 months, or (3) the associated person (x) only prepares or delivers written communications through the mail or means that does not include oral solicitation, (y) only responds to inquiries initiated by potential investors which are limited to the contents of the offering material or (z) only performs administrative work with respect to the transaction. Associated persons that work with a sponsor that conducts only one offering every 12 months or more may be able to take advantage of Rule 3a4-1 because such persons may be able to meet the requirement set forth in (2) above. The requirements of Rule 3a4-1 will not be easy to meet for persons associated with a sponsor that conducts multiple offerings, unless the transaction is completed through a broker-dealer. In the release proposing Rule 3a4-1, the SEC stated that the safe harbor was not intended to be available to promoters of real estate syndications and other so-called “tax sheltered investments” that are regularly engaged in actively marketing securities. As a general matter, both examples raise traditional broker-dealer regulation
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concerns. Even if satisfied, Rule 3a4-1 only provides a “safe harbor” for federal purposes. Certain states have their own requirements regarding registration as a broker-dealer. In comments to the American Bar Association, David Blass, the Chief Counsel of the SEC discussed a recent case involving the payment of transaction-based fees to a consultant who was not a registered broker or dealer. The fees were paid for actively soliciting investors for private fund investments. The SEC found that the arrangement violated the registration requirements of the Exchange Act. Mr. Blass noted the following items are important in determining whether a person is required to register as a broker-dealer: • One should consider the duties and responsibilities of personnel performing solicitation and marketing efforts. Mr. Blass indicated a dedicated sales force of employees working within in a “marketing” department may strongly indicate that such persons are in the business of effecting transactions, regardless of how the personnel are compensated. • One should consider whether employees who solicit investors have other responsibilities and whether the primary responsibility of the employee is to solicit investors. • One should consider how employees who solicit investors are compensated. If the employee receives bonuses or other types of compensation that is linked to successful investments it could be considered transaction-based compensation. • One should consider whether it charges a transaction fee in connection with the sale of the security.
JOBS Act Exemption
The JOBS Act Exemption only provides an exemption from the registration requirements but not does not exempt a person from being considered a broker or dealer who would be subject to certain provisions of the Exchange Act (i.e. anti-fraud provisions, etc.).
The JOBS Act also required the adoption of the JOBS Act Exemption. The JOBS Act Exemption provides that no person is subject to registration pursuant to Section 15(a)(1) of the Exchange Act solely because: (A) that person maintains a platform or mechanism that permits the offer, sale, purchase or negotiation of or with respect to securities, or permits general solicitations, general advertisements or similar or related activities by issuers of such securities, whether online, in person or through any other means; (B) that person or any person associated with that person co-invests in such securities or (C) that person or any person associated with that person provides ancillary services (generally due diligence services) with respect to such securities. On its face, it appears that this provision may eliminate the problem of registration as a broker or dealer for associated persons. However, the JOBS Act Exemption has important limitations, the most significant of which is that the person and each person associated with that person must not receive any compensation in connection with the purchase or sale of such securities. The SEC has indicated that the compensation limitation is to be interpreted broadly. This compensation prohibition is not limited to traditional transaction-based compensation (i.e. commissions) but includes any direct or indirect economic benefit to the person or any of its associated persons. This includes salaries paid to employees in marketing or investor relation departments or carried interests or promotes held by the issuer in a fund. The SEC indicated that it believed that the JOBS Act Exemption will have limited practical applicability and it is unlikely that a person outside the venture capital area would be able to rely on the exemption from brokerdealer registration. The JOBS Act Exemption only provides an exemption from the registration requirements but not does not exempt a person from being considered a broker or dealer who would be subject to certain provisions of the Exchange Act (i.e. anti-fraud provisions, etc.).
Recent No Action Letters Related to Broker-Dealer Status Recently, the SEC issued two no action letters that addressed the use of internet solicitation of potential investors in the venture capital context. The facts of the no action letters were similar. The no action letter applicant (the “Applicant”) was a company that maintained a website that solicited investors to determine investor interest in funding certain venture capital opportunities that had been identified by
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the Applicant. If sufficient investor interest was generated, the Applicant would form a fund that would make an investment in the target company (the “Private Fund”). The issuance of securities in the Private Fund would be made in reliance on Rule 506 of Regulation D. The Applicant became the advisor to the Private Fund and was registered as an investment advisor under the Investment Advisers Act of 1940. The Applicant did not receive any compensation at the time that the investment was made (other than for reimbursement of actual expenses) but received a carried interest in the Private Fund. The SEC noted that because the Applicant received the carried interest in the Private Fund, the JOBS Act Exemption was not available. Even though the JOBS Act Exemption was not available to the Applicant, the SEC found that the Applicant was not required to register as a broker or dealer. The SEC took particular note that neither the Applicant nor any of its associated persons were receiving any transaction-based compensation, the Applicant was a registered investment advisor and the Applicant would have no right to withdraw any deposited funds from the custody accounts established to hold investor money. Thus, the SEC took the position that the Applicant was not a broker or dealer as defined by the Exchange Act.
What Does it All Mean? Issuers, and in particular the persons associated with issuers, must ensure that they do not have to register as a broker or dealer for purposes of the Exchange Act. As discussed above, the traditional exemption provided in Rule 3a4-1 may be difficult for many issuers (and their associated persons) to meet. The JOBS Act Exemption appears to be extremely limited in application because of the prohibition on compensation and the broad interpretation given to that prohibition by the SEC. As a result, it is not practical for issuers and their associated persons to rely on the JOBS Act Exemption. Further, the recent no action letters appear to provide a limited structure under which to sell investments. It is likely that the real estate syndication industry will adjust so that there will be two alternative structures. First, some investors may want to maintain relationships with their registered broker-dealer. As a result, some investors will still be obtained through traditional broker-dealer relationships. However, many investors may not want to incur the additional cost of engaging a broker-dealer. In that case, issuers
Issuers, and in particular the persons associated with issuers, must ensure that they do not have to register as a broker or dealer for purposes of the Exchange Act.
would be able to use general solicitation and general advertising to attract investors, but the investor would be directed to purchase the investment through a broker-dealer. Assuming that the sales activities occur through the broker-dealer, the issuer and its associated persons would have an exemption from the broker-dealer registration requirements. In this type of arrangement, the registered broker-dealer will still need to comply with the requirements imposed by the Financial Industry Regulatory Authority (“FINRA”), including all of the “know your client” rules and suitability requirements. Because the brokerdealer will not have a pre-existing relationship with the client, it may be more difficult for the broker-dealer to comply with the FINRA requirements. FINRA rule changes may be required in order for broker-dealers to operate under the new general solicitation provision.
Conclusion Lifting the prohibition against general solicitation may provide issuers with direct access to investors that is not currently available. However, the issuers, and the persons associated with the issuer, must be mindful of the Exchange Act and state requirements related to registration as a broker-dealer. Most sponsors that do more than one offering per year will still need to utilize broker-dealers. However, the roles of the registered broker-dealer and the structure of the transaction are likely to change. ▲
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From
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The Hidden Cost of Liquidity How Alternatives Can Reward Long-Term Investors By Kari Whitman
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The term liquidity refers to the ease with which an asset can be converted into cash. Assets or securities that can be easily bought and sold, such as bonds, Alternative Thinking Series public stocks and U.S. Treasuries, are considered liquid. Those that are more difficult to buy and sell, such as real estate, private debt and private equity, are said to be illiquid. Given investors’ natural bias for cash, most investors Lessliquid Liquidity, More But Potential Return gravitate toward owning assets. at what cost? The financial crisis and persistent market volatility have intensified investor bias toward liquid securities. for investors, this increased demand has coincided with deteriorating Less Liquidity, More Potential ReturnUnfortunately The financial crisis and persistent market volatility The mismatch have intensified investor bias toward yields liquid for securities. Unfortunately for investors, this increased highly liquid assets in the public markets. Generally speaking, yields in more liquid assets between the demand has coincided with deteriorating yieldsdecreasing for highly due liquidto assets in the have been a shortage of public supply,markets. while yields in less liquid parts of the market demand for and Generally speaking, yields in more liquid assets have been decreasing due to a shortage of supply, have been increasing due to a lack of demand. The result has been an increase illiquidity supplyinoftheliquid while yields in less liquid parts of the market have been increasing due to a lack of demand. The premium — that is, the difference in yield between liquid and less liquidsecurities securities. creates The mismatch result has been an increase in the illiquidity premium—that is, the difference in yield between liquid between the the demand for and supply of liquid securities creates an opportunity for those willing to an opportunity and less liquid securities. The mismatch between demand for and supply of liquid securities a long-term alternative investment strategy. for those willing creates an opportunity for those willingemploy to employ a long-term alternative investment strategy. As investors’ demand for liquidity has increased, so too has the relative cost of owning a fully to employ a long As investors’ demand liquidity has increased, has the relative cost owning a fully liquid liquid portfolio. The result is that the illiquidity premium is well for above its historical average. so Thetoo chart termofalternative 1 in Figure 1 illustrates the illiquidity premium in the high yieldisbond market from 1997–2012. portfolio. The result that the illiquidity premium is well above its historical average. strategy. The chart in investment
Figure 1 illustrates the illiquidity premium in the high yield bond market from 1997–2012.1 Figure 11 Figure
What the data tells us: The yield premium for less liquid high yield bonds in December 2012 was 1.4 percent, considerably higher than the long-term average of 0.6 percent. Moreover, since the overall yield in high yield bonds has decreased so dramatically, with the Barclays High Yield Index ending 2012 at 6.1 percent, the spread differential due to liquidity represents a substantial component of an investor’s total return.
Spread Differential Between Liquid and Illiquid High Yield Bonds (1997–2012) 3.0%
+2.4%
+2.0%
2.0%
+1.8%
+1.4%
1.0% Average since Jan. 95
0.0% -1.0%
The bet for sec an for to ter inv
Average since Jan 99
0.6% 0.8%
-2.0% -3.0%
-2.2% 1997
2002
-2.2% 2007
2013
What the data tells us: The yield premium for less liquid high yield
Illiquidity Premiums in the Senior Secured Loan Market The illiquidity premium phenomenon December 2012 was 1.4%, considerably higher than the long-term av extends beyond the high yield bond market. Senior secured loans, also known as Moreover, bank loans,since are the overall yield in high yield bonds has decreased so a $1.2 trillion asset class that provides a form of debt financing to corporate borrowers. Although with the Barclays High Yield Index ending 2012 at 6.1%, the spread d senior secured loans are used as a financing option by many public companies,tothey are more liquidity represents a substantial component of an investor’s total re commonly found in the capital structures of private companies that lack access to public markets. Figure 2 examines the spread differential between syndicated middle market senior secured loans (defined as loans to issuers with less than $50 million in EBITDA2) and syndicated loans to large corporate borrowers (issuers with more than $50 million in EBITDA3).
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Figure 2
What the data tells us: Prior to the financial crisis in 2008, syndicated loans to middle market borrowers offered higher yields than syndicated loans to large corporate borrowers by an average of 0.67 percent, and since the financial crisis the spread differential has grown to an average of 2.89 percent.
The primary driver behind the middle market yield premium is liquidity. In response to regulatory changes, such as those required under Basel III and Dodd-Frank, large banks have generally re-focused their strategies to dedicate capital to only their largest and most profitable clients. Left behind are the private, middle market companies that historically relied on bank loan financing as their primary source of funding. To entice new lenders to fill this funding void, middle market borrowers have been forced to pay higher interest rates than larger corporate borrowers of similar credit quality. The higher yields available in the less liquid parts of the senior secured loan market create an opportunity for those willing to accept less liquidity in return for better risk-adjusted returns.
Why Endowments Invest in Alternatives Alternative investments are often defined by what they are not—a traditional investment in publicly traded stocks or bonds. Alternatives can include both non-traditional assets, such as real estate, private equity or art, as well as non-traditional strategies, such as investing in illiquid securities. While individual investors have only recently begun to allocate a portion of their portfolios to alternative investments, institutional investors and endowments have been using alternatives for years. As of June 30, 2012, the average endowment allocated 54 percent of its total portfolio to alternative strategies.4 Yale’s endowment, widely considered the pioneer in alternative investing, allocates nearly 65 percent of its portfolio to less liquid investments.5 The basic premise behind endowments’ relatively high and growing allocation to alternatives is their pursuit of enhanced risk-adjusted returns and their belief that illiquid securities can provide higher yields and less correlation to traditional markets. Figure 3 compares 10-year investment returns for endowments against the S&P 500 and an investment grade bond index. Two factors may explain the performance gap between endowments and traditional investments: • The alternatives effect. It is clear from the data that alternatives play some role in long-term investment returns. By harvesting the yield premium on illiquid assets, endowments are typically able to construct a higher yielding portfolio with less correlation to the broader markets. • The quality of the manager. Illiquid securities, by their nature, are more difficult to evaluate than publicly traded securities. Skilled managers that are adept at taking advantage of pricing inefficiencies in illiquid securities will have a greater impact on returns than skilled managers operating in the public markets, where price inefficiencies are fewer in number and generally offer less return potential.7
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Figure 3
What the data tells us: Large endowments, which have over a 60 percent allocation to alternative investments, significantly outperformed both public equities and investment grade bonds over the past 10 years.
Where Alternatives Fit for Individuals Alternative investments are a clear driver of endowment performance. And while the investment horizon of the average individual is generally shorter than the average endowment, individual investors may still benefit from an allocation to long-term investments. Today individuals have access to alternatives through mutual funds, closed-end funds and business development companies (BDCs), among others. Each investment structure comes with its own benefits, risks, costs and liquidity. Among the most common investment vehicles for individual investors are traditional open-end mutual funds, which are typically low in cost and allow investors to redeem capital on a daily basis. One result of daily liquidity, however, is that mutual fund managers are forced to manage without a permanent capital base: when investors withdraw capital, a manager may be forced to sell assets, and when investors purchase fund units, the manager may be forced to buy assets, regardless of his or her opinion on relative value. If investors withdrew funds only when securities prices were high and invested only when securities prices were low, the job of a mutual fund portfolio manager would be relatively easy. In general, the opposite is true. On average, investors tend to sell losing positions and add to positions that have already appreciated in value. Figure 4 demonstrates this behavior by comparing the senior secured loan mutual fund flows to the price of the Credit Suisse Leveraged Loan Index in 2011.8 The difference between investors’ realized and potential returns illustrates the performance gap between short-term and long-term investment strategies. Portfolio managers are keenly aware of the risks posed to long-term investment strategies from clients managing to short-term trends, and portfolio managers are often deterred from making long-term investment decisions out of fear of experiencing short-term underperformance and capital withdrawals.9 The more liquidity investors have in their investment portfolio, the more likely they are to be focused on short-term performance, and the greater the challenge of portfolio managers to maintain a long-term investment strategy.
“…serious investors benefit by avoiding overpriced liquid securities and by embracing less liquid alternatives.” — David Swenson, Chief Investment Officer, the Yale University Endowment6
Options for the Long-Term Investor Closed-end funds have access to permanent capital, thereby allowing their managers to pursue less liquid opportunities. Matching long-term investor capital with a long-term investment vehicle is critical to the success of an alternative investment strategy. The historical challenge with closed-end funds for the individual investor has been the volatility associated with their listed shares—closed-end fund shares often exhibit a high correlation to public market indices. Given that one of the objectives of an illiquid alternative investment strategy is to exhibit a low correlation to public markets, the volatility in listed closed-end fund returns can nullify the benefit of an illiquid alternative investment strategy.
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Figure 4
What the data tells us: During the market volatility of 2011, loan mutual fund investors consistently withdrew funds during periods of market stress and invested additional capital during periods of market strength, negatively impacting investor returns.
Individual investors may benefit from an allocation to long-term investments.
Portfolio managers of unlisted investment vehicles may have the flexibility to seek the higher returns available in the illiquid parts of the market.
Unlisted closed-end funds and BDCs are increasing in popularity due in part to their ability to preserve the attributes of a fund’s underlying assets and still provide a permanent capital base. In an unlisted closed-end fund, or non-traded fund, there is typically no secondary trading market for the fund’s shares—individuals wishing to exit their investment can generally only do so through a limited tender offer process. By matching long-term capital with long-term strategies, portfolio managers of unlisted investment vehicles may have the flexibility to seek the higher returns available in the illiquid parts of the market and potentially improve risk-adjusted returns. As with any investment, unlisted funds and BDCs have risks, including limited liquidity, potential loss of principal and portfolio volatility. Investors should consult their financial advisors to understand these risks and how such investments might fit into their investment strategies.
Summary 1—Barclays Research, January 2, 2013. Liquid Index (GO-GO Index) contains bonds with more than $500 million in par that were issued less than 18 months prior to January 2, 2013. Illiquid Index (SLO-GO Index) contains bonds with less than $250 million in par that were issued more than 18 months prior to January 2, 2013. The difference in yield is calculated using the option adjusted spread (OAS) differential. 2—EBITDA is earnings before interest, taxes, depreciation and amortization, a cash flow proxy commonly used in corporate finance. 3—S&P/LCD, monthly data as of December 31, 2012. 4—2012 NACUBO-Commonfund Study of Endowments. 5—As of June 30, 2012. Investments include allocations to Natural Resources, Private Equity and Real Estate. 6—Swenson, Pioneering Portfolio Management. 7—The Yale University Investments Office 2012 Endowment Update. 8—Mutual fund flows from S&P/LCD, loan index is Credit Suisse Leveraged Loan Index. Data from January 2011– December 2011. 9—Stein, Why are Most Funds Open-End? Competition and the Limits of Arbitrage (The Quarterly Journal of Economics (2005) 120(1)), 247-272.
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The illiquidity premium has grown. Since the financial crisis, macroeconomic uncertainty and public market volatility have increased investors’ demand for liquid securities. At the same time, secondary market liquidity has deteriorated as many banks and broker dealers have deleveraged their balance sheets and reduced risk. The result has been the widening of the yield premium available to investors in less liquid securities. Endowments favor alternatives for better risk-adjusted returns. Alternative investments are designed to provide access to non-traditional assets and strategies, one of which is investing in less liquid securities. Endowments and institutional investors have been using alternative investment strategies for years as a way to diversify their investment portfolios and capture the yield premium available in illiquid securities. A key to success for these managers has been to match their long-term investment strategy with long-term investor capital. Unlisted closed-end funds and BDCs make illiquid alternatives accessible. With the unlisted closed-end fund structure, the interests of managers and investors are aligned: managers can invest in less liquid alternatives to drive returns, and investors can execute a long-term investment strategy without being subject to the daily share price volatility associated with the public markets. Investors should consult a financial advisor if they are interested in learning more about unlisted alternative investments. ▲
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From
20 15
A New Era in Capital Raising: Regulation A+ — an Overview By Robert R. Kaplan, Jr.
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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 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. 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
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 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.
Offering Amounts Prior to final adoption of these rules, Regulation A was limited to offers of up to $5 million in securities in a 12-month period. Title IV mandated that the SEC adopt rules to permit for raises of up to $50 million, in addition to the $5 million exemption. Under the originally proposed rules by the SEC, the rules contained two tiers—Tier 1 for original raises of up to $5 million and Tier 2 for raises of up to $50 million. The SEC has opted to liberalize these standards under the final rules. Under Tier 1, an issuer may offer and sell up to $20 million in a 12-month period, of which up to $6 million may include secondary sales by affiliates of the issuer. Under Tier 2, an issuer may offer and sell up to $50 million in a 12-month period, of which up to $15 million may constitute secondary sales by affiliates of the issuer. However, the SEC has also adopted a unique corollary to this rule. That being that secondary sales offered as part of an offering, irrespective of whether those securities are owned by an affiliate of an issuer, cannot exceed 30% of the aggregate offering price of the issuer’s first offering or any subsequent Regulation A offering qualified within one
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year of the issuer’s first offering. So, for example, if an issuer were to qualify $15 million of new issuances in its first Regulation A offering, and then qualifies another $35 million offering six months thereafter, only $10.5 million can be comprised of securities currently held by existing holders and offered for secondary sale through that offering.
The proposed rules required an investment cap of 10% of the higher of any investor’s net worth or income in an initial issuance under Tier 2. The final rules have relaxed this requirement.
Investment Limitation The proposed rules required an investment cap of 10% of the higher of any investor’s net worth or income in an initial issuance under Tier 2. The final rules have relaxed this requirement. The investment limit will not apply to accredited investors. Non-accredited natural persons are subject to the investment limit in an initial issuance of not more than 10% of the greater of the investor’s annual income and net worth, determined as provided in Rule 501 of Regulation D. The offering material must notify Investors of the investment limitations. An issuer need only rely on a representation from the investor as to compliance with these requirements, unless the issuer knew at the time of sale that any such representation is untrue. In addition, both accredited and non-accredited investors are exempt from the investment cap if the subject securities of the offering are listed on a “National Exchange” as defined in the Exchange Act of 1934 (see page 8—“The Backdoor-IPO”).
Eligible Issuers and Securities The new Regulation A+ exemption for both Tier 1 and Tier 2 will be available to issuers organized in and having their principal place of business in the United States or Canada. The following issuers will be “ineligible” to offer or sell securities under Regulation A+: 1) an issuer that is an SEC-reporting company; (2) a blank check company; 2) any investment company registered or required to be registered under the Investment Company Act of 1940 (this includes business development companies); 4) issuers that have not filed with the SEC the ongoing reports required by Regulation A during the two years immediately preceding the filing of a new offering statement, 5) issuers that have had their registration revoked pursuant to an Exchange Act Section 12(j) order that was entered into within five years before the filing of the offering statement, and 6) certain bad actors disqualified by the provisions of Rule 262 (see page 10—“Bad Actor Disqualification”). Equity securities, including warrants, debt securities and debt securities convertible into or exchangeable into equity interests, including any guarantees of such securities may be offered under Regulation A+. Asset backed securities and fractional undivided interests in oil or gas rights, or similar interests in other mineral rights are expressly excluded.
State Securities Blue Sky Requirements Title IV of the JOBS Act mandated that Regulation A+ offerings sold solely to “qualified purchasers,” as defined by the SEC in its discretion, would be exempt from state securities registration requirements under Section 18(b) (3) of the National Securities Markets Improvement Act (NSMIA). The proposed rules had defined a “qualified purchaser” as any offeree in a Tier 1 offering, and any offeree or purchaser in a Tier 2 offering, thus preempting the state securities regulators from requiring registration of Regulation A securities prior to a sale in the Tier 1 context, and entirely in the Tier 2. The final rules eliminate the offeree in Tier 1 offerings from the qualified purchaser definition. As such, the entirety of the Tier 1 offering process will remain subject to state securities law registration and merit review requirements. Those offerings should be eligible for use of NASAA’s newly established coordinated review program.
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The issuer must file its solicitation materials with the SEC, but, may now can use a plethora of materials to market the offering throughout the process.
Consistent with the proposed rules, however, Tier 2 offerings will not be subject to state registration requirements or merit review. States will, of course, continue to have authority to require notice filing of offering materials and enforce antifraud provisions in connection with a Tier 2 offering. In addition, the SEC has mentioned that it intends to allow the states to designate a representative to participate in the SEC review process.
Offering Communications Regulation A+ will allow substantial flexibility regarding marketing of the offering—referred to by the SEC as offering communications—prior to and during the pendency of an issuer’s filing. Under the previous rules for Regulation A, an issuer must stop using broad marketing materials once an initial filing under Regulation A pertinent to that offering was made, and had to confine themselves to the use of “tombstone” information and/or a preliminary offering circular. The issuer must file its solicitation materials with the SEC, but may now can use a plethora of materials to market the offering throughout the process. Solicitation materials used after an offering circular is filed must be accompanied by the offering circular or a notice that includes a link to where the most recent offering circular may be found on EDGAR. Solicitation materials will need to contain certain legends proscribed in the rule. The release of regular factual business communications that do not implicate an offering will not constitute solicitation materials.
Regulation A will allow substantial flexibility regarding marketing of the offering— referred to by the SEC as offering communications— prior to and during the pendency of an issuer’s filing.
Filing and Delivery Requirements Regulation A+ offering statements will be filed on EDGAR. The Form 1-A has been amended to consist of three parts: • Part I, which will be an XML-based fillable form with basic issuer information; • Part II, which will be a text file that will contain the disclosure document and financial statements; and • Part III, which will be a text file that will contain exhibits and related materials. Periodic reports and any other documents required to be submitted to the SEC in connection with a Regulation A+ offering must be filed on EDGAR. As proposed, the final rules adopt an access equals delivery model for Regulation A+ final offering circulars. In the case where a preliminary offering circular is used to offer securities to potential investors and the issuer is not already subject to the Tier 2 periodic reporting requirements, an issuer and participating broker-dealer will be required to deliver the preliminary offering circular to prospective purchasers at least 48 hours in advance of sales. In addition, if the investor has previously agreed to it, electronic delivery of documents may be done. A notice of qualification is now similar to a notice of effectiveness in an SEC-registered offering.
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Section 12(g) provides a “fail-safe” for when issuers must submit to registering and reporting under the Exchange Act upon achieving a certain size.
A point of particular focus by both the private securities bar and regulators since the publishing of the proposed rules was the application of Section 12(g) of the Securities Exchange Act of 1934 to Regulation A+ securities.
Exchange Act Threshold A point of particular focus by both the private securities bar and regulators since the publishing of the proposed rules was the application of Section 12(g) of the Securities Exchange Act of 1934 (the “Exchange Act”) to Regulation A+ securities. Section 12(g) provides a “fail-safe” for when issuers must submit to registering and reporting under the Exchange Act upon achieving a certain size. Under Section 12(g) an issuer with (i) $10 million in assets, and (ii) 2,000 “shareholders of record*,” 500 of which may be nonaccredited, in a given class of equity securities, must register and report under the Exchange Act. The proposed rules maintained that standard for Regulation A securities of either Tier. Many representatives of the securities industry commented on this aspect of the rules. In response, the final rules provide a specific exemption for securities issued in Tier 2 offerings from the Section 12(g). An issuer must: 1) retain the services of a transfer agent registered under Section 17 of the Exchange Act, 2) have a public float of less than $75 million or, in the absence of a float, revenues of less than $50 million, in the most recently completed fiscal year, and 3) is current in its periodic reporting obligations. At the same time, an issuer that exceeds the Section 12(g) threshold and this exemption standard will still have a two-year transition period in order to register under 12(g) of the Exchange Act, and can do so as an “emerging growth company” if they still meet the definition.
The “Backdoor IPO” The final rules facilitate the ability of a Tier 2 issuer to list a class of Regulation A+ securities on a national securities exchange. The final rule permits a Tier 2 issuer that has provided disclosure in Part II of Form 1-A that follows Part 1 of Form S-1 or Form S-11 to file a Form 8-A to list its securities on a national securities exchange. Thereafter, the issuer would be subject to Exchange Act reporting requirements, but would be considered an emerging growth company.
Filings *The shareholder of record standard means that one
An issuer that seeks to rely on Regulation A+ must file and qualify an offering
ostensibly could also avoid registration by having the
Form 1-A
securities held in “street name” by nominees, pursuant
statement on Form 1-A. The offering statement is intended to be a disclosure document similar
to established jurisprudence under Section 12(g).
to those on Form S-1 and Form S-11.
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Part I As noted above, Part I requires certain basic information regarding the issuer, its eligibility, the offering details, the jurisdictions where the securities will be offered, and sales of unregistered securities. Part II Part II contains the narrative portion of the Offering Circular and requires disclosures of basic information about the issuer; material risks; use of proceeds; an overview of the issuer’s business; an MD&A type discussion; disclosures about executive officers and directors and compensation; beneficial ownership information; related party transactions; and a description of the offered securities. This is similar to Part I of Form S-1 and Form S-11, and an issuer can choose to comply with Part I of Form S-1 or Form S-11 as applicable. Tier 1 and Tier 2 issuers must file balance sheets and other required financial statements as of the two most recently completed fiscal year ends (or for such shorter time as they have been in existence). U.S. issuers are required to prepare financial statements in accordance with GAAP. The financial statements for an issuer in a Tier 1 offering are not required to be audited; however, if a Tier 1 issuer already obtained an audit of its financial statement for other purposes and such audit was performed in accordance with GAAP or the PCAOB standards and the auditors meet the independence standards, then the audited financial statements must be filed. The financial statements for an issuer in a Tier 2 offering are required to be audited in accordance with either GAAP or PCAOB standards. The auditing firm must satisfy the independence standard but need not be PCAOB-registered. The final rule also addresses that financial statements may not be older than nine months. Issuers in Tier 2 offerings are not required to provide financial statements in an interactive data format using XBRL. Part III The exhibit requirements in Part III of Form 1-A are the same, however, the final rule allows for incorporation by reference of exhibits that were previously filed on EDGAR.
Ongoing Reporting Requirements Tier 1 issuers will be required to provide certain information about their Regulation A+ offerings on a new form, Form 1-Z. Tier 2 issuers will be subject to an ongoing reporting regime and would be required to file: • annual reports on Form 1-K; • semi-annual reports on Form 1-SA; • current reports on Form 1-U; • special financial reports on Form 1-K and Form 1-SA; and • exit reports on Form 1-Z. The Form 1-K is required to be filed within 120 calendar days of the issuer’s fiscal year-end and would require disclosures: • relating to the issuer’s business and operations for the preceding three fiscal years (or since inception if in existence for less than three years); • related party transactions; • beneficial ownership; • executive officers and directors; • executive compensation; • MD&A; and • two years of audited financial statements.
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The semi-annual report is required to be filed within 90 days after the end of the first six months of the issuer’s fiscal year and would be similar to a Form 10-Q, although it would be subject to scaled disclosure requirements. A current report on Form 1-U must be filed within four business days of the triggering event and will be required to announce: • fundamental changes in the issuer’s business; • entry into bankruptcy or receivership proceedings; material modifications to the rights of securityholders; • changes in accountants; • non-reliance on audited financial statements; • changes in control; • changes in key executive officers; and • sales of 10 percent or more of outstanding equity securities in exempt offerings. An exit report on Form 1-Z would be required to be filed within 30 days after the termination or completion of a Regulation A+-exempt offering.
The periodic reports of a Tier 2 issuer’s will satisfy Exchange Act Rule 15c2-11 brokerdealer requirements in connection with publishing quotations on any facility other than a national securities exchange.
Rule 15c2-11, Rule 144 and Rule 144A The periodic reports of a Tier 2 issuer’s will satisfy Exchange Act Rule 15c2-11 broker-dealer requirements in connection with publishing quotations on any facility other than a national securities exchange. The final rule does not establish that these reports would constitute “current information” for Rule 144 and Rule 144A purposes. A Tier 2 issuer that voluntarily submits quarterly information in a form consistent with that required for semi-annual information would be able to satisfy the “reasonably current information” and “adequate current public information” requirements. The securities sold in a Regulation A+ offering are not considered “restricted securities” under Securities Act Rule 144. As a result, sales of the securities by persons who are not affiliates of the issuer would not be subject to any transfer restrictions under Rule 144. Affiliates, of course, would continue to be subject to the limitations of Rule 144, other than the holding period requirement. This is important to an issuer that would like an active trading market to develop for its securities following completion of a Regulation A+ offering.
Securities Act Liability Sellers of Regulation A+ securities would have Section 12(a)(2) liability in respect of offers or sales made by means of an offering circular or oral communications that include a material misleading statement or omission. While an exempt offering pursuant to Regulation A+ is excluded from the operation of Section 11 of the Securities Act, those offerings are subject to the antifraud provisions under the federal securities laws.
Bad Actor Disqualification Pursuant to Rule 262 of Regulation A+, an issuer will not be eligible to use the Regulation A+ exemption if it, or any of its “covered persons” are subject to one of several events of disqualification set forth in the Rule. In addition to the issuer itself, an issuer’s covered persons are: 1) a predecessor of the issuer; 2) an affiliated issuer; 3) any director, executive officer, other officer participating in the offering, general partner or managing member of the issuer; 4) Any beneficial owner of 20% or more of the issuer’s voting securities; 5) Any promoter connected with the issuer at the time of the filing of the offering statement, any offer after qualification, or a sale;
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6) Any person that has been or will be paid (directly or indirectly) remuneration for solicitation of purchasers in the offering (a “compensated solicitorâ€?); and 7) Any general partner or managing member of a compensated solicitor or any director, executive officer or other officer participating in the offering of a compensated solicitor or any general partner or managing member of such compensated solicitor. The following are events of disqualification: 1) Criminal conviction within ten years prior to the filing date of the offering statement (or five years, in the case of issuers, their predecessors and affiliated issuers) that are (i) in connection with the purchase or sale of a security; (ii) involve the making of any false filing with the SEC; or (iii) arise out of the conduct of the business of an underwriter, broker, dealer, municipal securities dealer, investment adviser or paid solicitor of purchasers of securities; 2) Orders, judgments or decrees of courts entered within five years before the filing of the offering statement that, at the time of the offering statement filing, restrain or enjoin the subject covered person from engaging or continuing to engage in any conduct or practice: (i) in connection with the purchase or sale of a security; (ii) involving the making of any false filing with the SEC; or (iii) arising out of the conduct of the business of an underwriter, broker, dealer, municipal securities dealer, investment adviser or paid solicitor of purchasers of securities; 3) Final orders of certain state regulators (such as state securities, banking and insurance regulators) and certain federal regulators (such as federal banking agencies, the CFTC or NCUA), if the order (A) at the time of filing bars the covered person from: (i) association with an entity regulated by the applicable state or federal regulator; (ii) engaging in the business of securities, insurance or banking; or (iii) engaging in savings association or credit union activities; or (B) is a final order based on violation of law or regulation prohibiting fraudulent, manipulative or deceptive conduct entered within ten years prior to filing; 4) Certain SEC disciplinary orders relating to brokers, dealers, municipal securities dealers, investment advisers and investment companies and their associated persons to the extent such order is in effect at the time of filing; 5) Cease and desist orders of the SEC to which the applicable covered person is subject as of the filing and which were entered within five years before the filing for scienter-based antifraud violations and Section 5 registration violations; 6) Suspension or expulsion from, or suspension or barring from association with a member of, a registered national securities exchange or a registered national or affiliated securities association (such as FINRA), for any act or omission constituting conduct inconsistent with just and equitable principles of trade; 7) Has filed, or was named as and underwriter in, any registration statement or Regulation A+ offering statement filed with the SEC that, within 5 years prior to filing of the offering statement, was subject to a stop order or order suspending the Reg A exemption, or at the time of the filing is subject of an investigation to determine whether to issue such an order; and 8) Is subject to a USPS false representation order entered within 5 years prior to the filing date of the offering statement. An issuer will not be subject to disqualification for an event of disqualification that occurred prior to the effective date of the revised Regulation A rules. However, an issuer will be required to disclose in its offering circular any matter that would have been an event of disqualification but for its occurrence prior to the effective date of the rules. â–˛
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From
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Q &A Part I & Part II: 1031 Q&A
Part I Q:
Back in 2006, the TIC industry was a $3.5 billion equity business (over $7 billion of real estate acquisitions). Then, TICs became virtually extinct. What happened?
A: An unprecedented double dip recession. Starting in 2007 and again in 2009, the US economy experienced a severe, unexpected and long-lasting double dip recession. The recession disproportionately and adversely impacted old TIC real estate investments by reducing rents, shrinking the pool of quality tenants, and generally creating a negative atmosphere (malaise) in which to retain tenants or re-tenant buildings. The TIC structure proved problematic: the requirement for unanimous TIC owner consent made it difficult to accomplish work outs with lenders and tenants. The structural TIC issues were exacerbated by the varying degree of investor sophistication and general investor inability (or unwillingness) to contribute fresh capital to old TIC properties. Many investors did not have funds to support sorely needed capital calls and others simply refused to “put good money after bad.” Many TIC owners ran out of funds to re-tenant, repair and maintain properties to their former high standards. This happened even though most TIC properties were “adequately” funded with reserves to cover foreseeable events, but not the length and depth of the recession. In addition, there was a general malaise in the country that instantaneously had an impact on valuations and made it more difficult to “get a deal done” with tenants and lenders. Many TIC investments had adequate reserves to weather a blip in the economy; few had enough reserves to weather “the perfect storm” that lasted five years.
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With Louis Rogers
CMBS debt, which financed most TIC properties, proved to be problematic in the context of a TIC work out. CMBS servicers transferred loans to special servicers who were generally slow in responding and uncooperative (or worse) in resolving property issues caused by the recession. Some special servicers seemed influenced by an unexpected profit motive at the expense of the TIC owners. In addition, CMBS debt essentially dried up overnight in mid-to-late 2007, making it much more difficult for TIC investors to finance their way out of challenging properties. Finally, during the recession, many properties were sold or simply transferred from a nurturing and caring TIC sponsor to mercenary replacement sponsors, some of whom appeared to be more interested in collecting fees than saving properties and protecting the life savings of TIC investors. When the original sponsors exited and outliers took over TIC properties, many investors lost an ally and were left to fend for themselves in a complex world dominated by lawyers, servicers and investment bankers, well beyond their level of knowledge and expertise.
Q: What happened to the 50 plus sponsors who were “the leaders of the TIC industry”?
A: Most of the newbie TIC sponsors simply went out of business; some were put out of business. A small core of respected TIC sponsors transitioned into DST programs. They presently serve a vital role in providing fractionalized 1031 replacement property for old TIC and new exchange investors using the DST structure.
Q: What is the direction of fees and loads? A: DST sponsor fees have trended down materially over the past
five years. Most DST sponsors are working harder for lower net fees. Broker-dealer commissions and allowances have declined slightly and are poised to decline further over time. It is important to continue the moderation of fees and loads to help put more investor dollars in the ground for the ultimate benefit of investors first, and BDs, reps and sponsors who are seeking a stable business model built to last for the long haul.
Q: What was the biggest surprise? A: Bankruptcy of LandAmerica Financial Group, once a Fortune 500 company listed on the New York Stock Exchange. Who could have imagined that LandAmerica Exchange’s investment in auction rate securities would bankrupt an NYSE-listed public title insurance company? That was an eye-opener and a gamechanger that demonstrated the fragility of even large, respected public institutions. If this could happen to LandAmerica, it could happen to any large company (Lehman Brothers?).
Q: Question 5: Greatest opportunity? A: Old TIC rollovers will create a nice opportunity for sponsors and service providers. The TIC industry peaked in 2006. Most TIC properties were financed with 10 year debt. That means that the bulk of the remaining TIC properties will have to be sold no later than 2016, when their debt matures. Many of those investors will want to structure new exchanges to defer substantial taxable gains. Most will have severe tax issues if they do not exchange because of their low tax basis and high leverage. Without a new exchange to once again defer the gain, many investors will not have sufficient net proceeds to pay federal and state income taxes. In other words, without a qualifying exchange, a large number of old TIC investors will have to pay substantial deferred federal and state income taxes IN EXCESS OF THE NET PROCEEDS OF SALE. This will create a real sense of urgency and an opportunity for sponsors, BDs and reps to help satisfy the demand for investors who want a fractionalized replacement property. ▲
Part II Q:
What is the entity of choice for Section 1031 exchange programs post 2007-2011 recession?
A:
Starting in late 2007, TIC lending essentially ended. Later, as the recession began to wind down, lenders started making loans to Delaware Statutory Trusts, or DSTs, structured to accomplish taxdeferral under Section 1031. DSTs are widely used today for virtually all fractionalized Section 1031 exchange programs; TICs are no longer a viable structure for 1031 programs. DSTs were formerly known as Delaware Business Trusts and have
been in use for many decades. A DST is a flexible, unincorporated entity formed under Delaware law and can be used for many purposes, including real estate ownership. Like Revenue Procedure 2002-22 issued for TICs in 2002, Revenue Ruling 2004-86 issued in 2004 provided much needed guidance on DST qualification for 1031 exchange treatment. To qualify, a DST must satisfy a number of technical requirements and avoid any of the so-called “seven deadly sins”.
Q: What was the leading cause for the stratospheric growth in TIC programs “Back in the Day”?
A: Replacement property debt is critical to an exchange program because Section 1031 requires taxpayers to offset debt on the relinquished property with equal or greater debt on the replacement property. Any debt reduction is treated as taxable “boot”. By the time Revenue Procedure 2002-22 was issued in 2002, Wall Street was actively securitizing real estate mortgages into Collateralized Mortgaged Back Securities, or CMBS. Originally, CMBS underwriters were unwilling to finance TIC-owned real estate. Over time, rating agencies established guidelines that helped smooth over most of the rough edges associated with the TIC structure and made TIC-owned real estate much easier to finance in the growing CMBS debt market. In just a couple of years, CMBS became the dominant source of financing for TIC programs, with most TIC properties financed by CMBS debt. To satisfy rating agency requirements for CMBS loans, TIC properties generally were required to use bankruptcy-remote Delaware special purpose entities, or SPEs (typically limited liability companies), to hold title to the TIC interests, use independent trustees/managers to protect bond holders from borrower defaults, and deliver bankruptcy and other legal opinions to help ensure compliance with applicable guidelines. Sponsor incurred substantial additional costs in satisfying these lender requirements; these costs were passed along to the investors in TIC programs. Many people think Revenue Procedure 2002-22 was the primary cause of the phenomenal growth in the TIC industry. Without a doubt, the Revenue Procedure provided much needed tax guidance on the TIC structure. However, the author believes that CMBS financing was the greatest single factor leading to this runaway growth because the TIC industry could not have taken off without billions of dollars of favorable real estate financing. Q: In hindsight, what structural issues may have played a part in the eventual breakdown of the TIC market? How do DSTs differ? A:
The DST structure, when compared to the TIC structure, is more stable during economic volatility by granting the sponsor sole authority to make key decisions instead of requiring
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unanimous consent of TIC owners. Reserves. TIC programs were structured with substantial reserves intended to be sufficient to carry a property for a reasonable time following one or more potential challenges, for example, loss of a tenant. However, very few TIC programs had sufficient reserves to survive the pernicious, double dip recession of 2007-2011. TIC sponsors agonized over the appropriate amount of reserves to be held in cash in their TIC programs. While prudence dictates holding sufficient reserves to cover foreseeable needs of a property, it may not be prudent to over reserve because cash on hand essentially has no return to investors and cash funded by investors has the potential to be treated as taxable “boot” in a Section 1031 exchange. Problematic TIC unanimous consent requirement. The problem was exacerbated by the requirement that TIC investors unanimously consent to new or modified leases. One famous illustration involved a well-known sponsor of a large single tenant TIC property where the sole tenant failed; the sponsor found a replacement tenant that had the potential to save the investment but the investors refused to approve a new lease with the replacement tenant. This refusal could have been due to the terms of the new lease being unacceptable, investor passivity (a single investor could block the lease!), an emotional response from investors who were upset over the situation, or possibly even investor ignorance or stupidity. No matter what the reason, unanimous consent is problematic and not easily overcome in time to deal with serious property issues. This could not happen in the DST structure because the sponsor has sole discretion to make property decisions.
Q: What is old and what is new? A: Real estate has not changed; the leading aspects of a sound real estate investment have not changed. A key question then and now—are the tenants going to pay the rent? New positive features of DST programs include tighter legal structure, elimination of TIC unanimous consent requirements, and lower sponsor fees. But the essence of real estate investing has not changed: if the tenants do not pay the rent, the investment is likely to fail. That fundamental proposition is not a tax or legal issue that can be solved with a newfangled legal structure, but is the essence of real estate investing. Structure. Some TIC sponsors emphasized a number of structural “bells and whistles”; clearly, structure is very important but misses the point—even the best legal structure will fail if the tenants do not pay the rent. The underlying real estate investment is the key; target fixation on the nuances of legal structure, while a valid part of prudent underwriting, can be a distraction from the basics of real estate investing. Bottom line: structure is very important but do not overlook the basics—strength of tenants, location, and regional/ national economic issues.
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Q: Have there been any significant breakthroughs In underwriting and due diligence? A: While we have better computers and real-time market research in 2015, the basics of real estate investing have not changed.
Q: With DSTs as the entity of choice for 1031 programs, what are the key attributes of current DST programs? A: DST interests solve a number of problems experienced by exchangers, especially small investors who frequently struggle with the requirements of Section 1031. The biggest challenges for most exchangers include: sourcing replacement property, conducting customary due diligence, identifying replacement property within 45 days, placing required debt and closing on the replacement property. DSTs solve many of these problems. Reps to the rescue. Instead of actively searching for replacement property or engaging a realtor, many exchangers enlist the services of a securities representative, or rep, who specializes in the sale of DSTs. Reps are affiliated with FINRA-licensed broker-dealers who have a menu of available DST programs. An investor, working with a rep, can pick and choose from numerous DST programs on the broker-dealer’s platform, making it much easier to locate, identify and close on suitable replacement property in time to satisfy the requirements of Section 1031. Investment Grade Real Estate. DST properties tend to be larger and higher quality than most investors could acquire on their own. Frequently, DST properties are “investment grade,” permitting smaller investors to acquire a higher quality replacement property. Identification. All replacement property must be identified in writing, typically sent to the qualified intermediary or accommodator holding the exchange proceeds. The identification must be sent within 45 days of closing the relinquished property to satisfy Section 1031. Failure to properly identify in time will result in the entire transaction being fully taxable. Due Diligence. Prudence dictates extensive due diligence before committing to a long-term real estate investment. This is problematic in an exchange where the taxpayer only has 45 days to identify all replacement property. • Customary due diligence includes the following: • Property condition report – independent evaluation of the condition of the property; • Phase 1 environmental site assessment – independent review of the environmental condition of the property; • Appraisal – independent determination of the fair market value of the property; and • Zoning report – confirmation that the property is a proper and lawful use under applicable zoning rules.
If the due diligence is expedited, it is possible to obtain the so-called “third party reports” described above in 45 days. Virtually the entire 45-day identification period may be consumed by the due diligence process, which means that taxpayers should have replacement property candidates in sight before closing on their relinquished property. Lender Issues. The due diligence process is further complicated where a lender is involved because the lender will typically order the third party reports and control this aspect of the due diligence process. Lender involvement usually adds time that the taxpayer may not have to spare with only 45 days to identify replacement property. DSTs as turn-key solutions. By comparison, DST programs have already completed the entire due diligence process; all the third party reports are complete and frequently the property has already been acquired by the DST with the necessary loan in place. Sponsors of DST programs source the replacement property in advance: sponsors conduct the due diligence, place the debt, and close on the property. A typical exchanger can easily identify one or more DST replacement properties within the required 45-day period; many exchangers actually close on the DST interests within the 45-day period and never have to identify. The 45-day identification clock starts ticking when the relinquished property is sold for tax purposes (not necessarily the date on the settlement statement), and there are no extensions barring a Presidentially-declared national emergency. What if the timing is bad because the pricing of desirable properties is high, the inventory of available properties is low or the exchanger does not have time to find replacement property? Such an exchanger may fail to qualify because the 45-day identification period may not be extended. Failure to properly identify in time will result in the entire transaction being fully taxable. What if the exchanger has located several prospective replacement properties and has not decided which property or properties to acquire? Taxpayers may identify three and sometimes more properties using the so-called 200 percent rule or the 95 percent exception to identify more than three properties. However, multi-property identification is problematic for taxpayers who do not have tax counsel on retainer; a number of taxpayers will inadvertently over identify, which results in the entire transaction being fully taxable. Reinvestment of precise equity amount and debt offset. Taxpayers must reinvest the exact amount of net proceeds from the sale of their relinquished property. Any proceeds not reinvested will be treated as taxable boot. Also, taxpayers must offset debt on the relinquished property with an equal or greater amount of debt on the replacement property. These simple rules can create a great deal of mischief in the real world. An exchanger may easily invest
the exact amount of net proceeds from the relinquished property in a DST without running the risk of locating a property that is too large or too small. Also, DST interests are encumbered by debt that will offset the debt on the exchanger’s relinquished property. In this way, a DST interest is a simple solution to many of the challenges typically experienced by exchangers. Tax Opinions. In addition, national DST sponsors provide a legal opinion from tax counsel stating that the DST interests should “qualify” for Section 1031 treatment. This is a positive feature of syndicated DST offerings.
Q: What has been the reaction of IRS and Treasury to the rise of 1031 exchanges in general and TIC/DST programs? A: The IRS has consistently supported Section 1031 with guidance, including Revenue Procedure 2002-22, Revenue Ruling 200486, and a large number of private letter rulings, technical advice memoranda and the like. Back in 1991, regulations were issued on deferred or delayed exchanges that included the use of a qualified intermediary or accommodator to hold exchange proceeds. This “safe harbor” eliminated concerns about exchangers being taxable due to actual or constructive receipt of sales proceeds. Over time, the cost of using a qualified intermediary or accommodator has declined to the point where even small transactions can be costeffectively structured 1031 exchanges. As the body of favorable tax guidance grows, a greater number of taxpayers are comforted that a properly structured DST investment qualifies for 1031 treatment and will not subject the taxpayer to an audit. The modern DST is particularly efficient in keeping transaction costs to a minimum, works well for smaller investors, and provides additional comfort of a “should” qualify tax opinion. To twist an infamous quote, “today, even the little people DO NOT have to pay taxes” when they exchange investment property.
Q: What do you see for the future of DST programs? A: The leading 1031 sponsors are very creative in structuring fractionalized real estate offerings to qualify for Section 1031; first TIC offerings and, now, DST offerings. Future structures will evolve and change over time to conform to applicable tax requirements and changing demographics of exchangers (for example, many aging baby boomers seek passive ownership and preservation of principal). From whole properties to TICs, and now from TICs to DSTs, legal structures come and go but sponsors are ever mindful of the importance of qualifying for tax deferral under Section 1031. Large and small real estate investors across the land who may struggle with the technical requirements of Section 1031 are the beneficiaries of these evolving exchange programs. ▲
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From
20 16
Descent Into Madness: The Department of Labor’s Fiduciary Rule and Ensuing Chaos By Deborah Schwager Froling
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The Department of Labor (the “DOL”) has proposed a rule defining who is a “fiduciary” for purposes of providing financing advice to employee benefit plans and individual retirement accounts (“IRAs”) (the “Fiduciary Rule”). Those found to be fiduciaries to employee benefit plans and IRAs would be prohibited from receiving compensation from third parties in connection with transactions involving employee benefit plans and IRAs. There were exceptions, however, for brokerdealers to receive compensation depending on the types of investment product involved and meeting the other onerous requirements of the exemption (the “Best Interest Contract Exemption” or “BICE”).
The DOL has couched its proposal as requiring “retirement advisers to abide by a ‘fiduciary standard’—putting their clients’ best interest before their own profits.” If that were the case, most people would agree that clients’ best interests should be paramount. However, as we all know, the devil is in the details and in this case, the devil really is in the details. The term “financial advisor” is used in public parlance to include both investment adviser representatives (“IARs”), who are licensed with investment advisers, as well as registered representatives (“RRs”), who are licensed with broker dealers. IARs already have a fiduciary duty to their clients to act in their best interests and they do not get paid on a transaction by transaction basis—they are paid based on assets under management (or AUM). RRs have a duty to provide recommendations to their clients that the investment is suitable for them. RRs generally have their clients’ best interests in mind when they recommend an investment, but the self-regulatory body that oversees RRs is the Financial Industry Regulatory Authority, Inc. (“FINRA”) and only requires a suitability analysis 1. While the marketed concept of the proposed rule (i.e., investment advice should be in the best interests of the client) has wide public support, and is promoted by the White House,
While the marketed concept of the proposed rule (i.e., investment advice should be in the best interests of the client) has wide public support, and is promoted by the White House, it seems that the unintended consequences far outweigh the limited utility of the rule.
it seems that the unintended consequences far outweigh the limited utility of the rule. For the alternative investment industry, the rule could prove disastrous. Imagine the following: an investor hires a financial advisor to give investment advice and the investment funds are coming from a retirement account (as many people’s investments do). Now, what happens? If that financial advisor is an RR, he or she will now be unable to recommend alternative investments, such as REITs, BDCs and/or private placements, because those investments pay selling commissions to the financial advisor, rather than charge a fee based on the amount of money the investor has determined to place with his or her financial advisor (i.e., assets under management or AUM).
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The DOL has couched its proposal as requiring “retirement advisers to abide by a ‘fiduciary standard’—putting their clients’ best interest before their own profits.” If that were the case, most people would agree that clients’ best interests should be paramount. However, as we all know, the devil is in the details and, in this case, the devil really is in the details.
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Does the average investor understand whether or not his or her financial advisor is an IAR or an RR? Do investors believe their investment options should be limited solely based upon the type of investment funds that are being used? How many financial advisors are licensed as both RRs and IARs? To add to the confusion, Securities and Exchange Commission (SEC) Chair Mary Jo White continues to state that the SEC is working on its own fiduciary rule to harmonize the standards between RRs and IARs, as required under the Dodd-Frank Act. The SEC’s rule is expected to be more broad than the DOL’s rule, given that the DOL’s rule only applies to investments made within retirement accounts, whereas the SEC’s rule will apply to all products and investments sold by RRs. However, the SEC has not given a timetable for its release of such a proposed rule. Given those differences, it seems likely that a conflict will arise between the SEC’s regulatory scheme and the DOL’s. While the DOL has remained committed to moving forward with its rulemaking, it seems as though a pause and coordination should rule the day, rather than putting into place disparate rules that will cause even further confusion amongst the investing community and the financial advisors who serve it. ADISA continues to believe that alternative investments, such as non-traded REITs, BDCs and other direct participation investments, including private placements, have a role to play in an investor’s investment portfolio, regardless of the types of funds used to make those investments. By eliminating the ability to use retirement accounts to make these long-term, non-correlative investments, it is doing further harm to investors’ overall portfolio diversification tools and their ability to make these types of investments with the very funds that have the best ability to take advantage of the long-term, non-correlative attributes of such investments. While ADISA strongly believes that the DOL should work with the SEC to provide comprehensive regulation and oversight to protect investors in a way that will not create confusion on the part of investors trying to build value for their future, ADISA recognizes that perhaps the Fiduciary Rule has gained too much traction to be completely eliminated. In that event, the alternatives available to ADISA are to (1) nibble around the edges of the BICE and/ or (2) prepare ADISA members to work within the new regulatory scheme. ADISA intends to continue to work hard on behalf of its members to do what it can in conjunction with other organizations like Financial Services Institute (FSI) and Securities Industry and Financial Markets Association (SIFMA) to modify the Fiduciary Rule, adjust the
1—FINRA Rule 2310(b)(2)(B)(i) —“(a) the participant is or will be in a financial position appropriate to enable him to realize to a significant extent the benefits described in the prospectus, including the tax benefits where they are a significant aspect of the program; (b) the participant has a fair market net worth sufficient to sustain the risks inherent in the program, including loss of investment and lack of liquidity; and (c) the program is otherwise suitable for the participant.”
BICE and/or educate its members to life in a brand new world. ▲
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ADISA
Events News
ADISA News & Events
ADISA Legislative & Regulatory Efforts, 2016 Year-End Report Throughout 2016, ADISA’s Legislative & Regulatory Committee worked on behalf of the membership to represent the non-traded alternative investment space in Washington and elsewhere, and to advocate on behalf of the industry in regard to a number of important issues. As 2017 arrives, there is no shortage of important issues for the Association’s membership to focus on, particularly through the efforts of the Committee and its leadership. The Committee was chaired in 2016 by John Grady, a partner with DLA Piper. In 2017, as Grady assumes the role of ADISA President, the Committee will be chaired by Catherine Bowman, founder and principal of The Bowman Law Firm, with Larry Sullivan, president of Passco Companies, as vice chair. “ADISA certainly has plenty to do in 2017 to keep our membership informed and also in influencing legislation and regulation which impact our industry,” said Grady. “Our Legislative & Regulatory Committee, which has been vibrantly active, will continue its outreach to help our cause.” ADISA’s Executive Director John Harrison noted that ADISA had recently added additional government relations resources to help with DOL Fiduciary Rule and 1031 Like-kind Exchange issues in Washington.
takes hold. “Somewhat surprisingly, the DOL Fiduciary Rule is back in play because of the 2016 election outcome,” said Ms. Bowman, incoming Committee Chair. ADISA staff are involved with the SIFMA-led Coalition in visitations with both new and established Members of Congress. The Coalition expects to have direct contact with the Department of Labor once a new Secretary is confirmed. “Since the Fiduciary Rule has been effective for more than 60 days, it is considered final,” said Thomas Rosenfield, ADISA’s government relations consultant. “This means that an Interim Final Rule could be an effective tool to delay the applicability of a rule; however an IFR is subject to multiple legal challenges by the Rule’s stakeholders. For this reason, the industry constituents are likely to support other paths to reconsidering the Rule. Asking for additional time to review the Rule seems reasonable,” said Rosenfield. 1031 Like-Kind Exchanges ADISA believes Section 1031 is a time-tested and important feature of our tax code, helping all of us grow business, and has actively voiced its support for the provision throughout the year. ADISA established a Call to Congress website on the 1031 LKE issue to encourage ADISA members to contact their member of Congress, and published links to two recent academic studies—both co-sponsored by ADISA—on the value of LKEs, which can be found here. ADISA also co-signed 1031 Coalition letters to both the Clinton and Trump campaigns regarding preserving 1031s earlier this fall. ADISA will also continue its involvement in the Real Estate Roundtable coalition and work with sister associations to help preserve the feature as the Congress looks to tackle tax reform. According to ADISA’s Washington sources, tax reform among the top priorities early in the incoming Trump Administration. Most likely, say ADISA’s sources, March is the earliest a new budget will be proposed. This does give some time early in 2017 for ADISA and other associations and stakeholders to present the case for preserving the Like-Kind Exchange.
Issues, Activities and Initiatives
Other Legislative & Regulatory Issues
DOL Fiduciary Rule Since the rule-making process began, ADISA served as a vocal advocate for the industry in regard to proposed versions of the rule. The final version of the rule and the accompanying class exemption, which were released in April 2016, reflected a number of important changes that reflected industry input. Some key initiatives included:
Use of Electronic Offering Documents and Electronic Signatures ADISA submitted several letters to NASAA regarding its Statement of Policy Regarding the Use of Electronic Offering Documents and Electronic Signatures (the “SOP”), one when the Statement was initially proposed (June 2016), and the other when the Statement was revised (October 2016). ADISA also established a “Call-to-Action,” where ADISA members can conveniently contact their state securities administrator regarding NASAA’s proposed REIT concentration limits.
• Meetings with Congressional offices (House and Senate) in March 2016 • Compiled review of research literature for presentation to OMB, March 2016 • Appeared before Office of Management and Budget in March 2016 • Published dedicated DOL Fiduciary Rule issue of Alternative Investment Quarterly (Winter 2016 issue) to familiarize investment professionals with the issue As we look toward 2017, ADISA will continue to follow further developments on the Fiduciary Rule, particularly as the new administration
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Definition of Accredited Investor ADISA and IPA jointly submitted a comment letter regarding SEC’s review of definition of an accredited investor (September 2016). Both organizations agreed that the potential for market disruption and investor harm that might result from changing the definition outweighs any potential investor protection or other public policy benefit, and believe that changes to the definition might in fact negatively impact the ability of companies and businesses across the
country to raise needed capital for their operation and growth. Congressional Outreach As part of its ongoing outreach efforts to educate Congressional members on alternative and direct investments, ADISA sent a mailing to key representatives and senators, with its pamphlet, “The Guide to Alternative Investments.” The mailing stressed the importance of non-traded alternative investments, as more and more Americans rely on them as part of their diversity strategy for general investment and retirement planning. The Creating Financial Prosperity for Businesses and Investors Act (HR 6427) Late last year, HR 6427 was passed by the U.S. House of Representatives by a vote of 391-2. The bill, which aggregates six House Financial Services Committee measures that each previously passed the House with bipartisan support, is seen as a move by Republican leadership, particularly newly re-elected Financial Services Committee Chairman Jeb Hensarling (R-TX), to promote capital formation and remove barriers to growth faced by small businesses and startups. ADISA will continue to follow this bill as it moves to the Senate.
ADISA 2017 Officers Grady
Lampi
Mausz
Buehler
Kosanke
Bendix
Steinhause
ADISA 2017 Board of Directors The ADISA membership has elected new directors to its 2016 board. The newly elected 2016 board members are: Brandon Balkman, Orchard Securities Brian Buehler, Triton Pacific Capital Partners Austin Dutton, Bridge Valley Financial Services Peter Magnuson, Securities America
ADISA 2017 Directors
Vali Nasr, Claraphi Advisory Network At the Board’s first meeting of the year, the new ADISA Board selected its 2017 officers: John H. Grady, DLA Piper – President Keith Lampi, Inland Private Capital Corporation – President-Elect/ADISA 2018 President Greg Mausz, Preferred Apartment Communities – Vice President
Balkman
Bowman
Dutton
Greer
Lyons
Magnuson
Nasr
Sullivan
Updike
Brian Buehler, Triton Pacific Securities – Secretary Mark Kosanke, Concorde Investment Services – Treasurer Mike Bendix of DFPG Investments, ADISA’s 2016 president, will serve the Board as its immediate past president, and Darryl Steinhause of DLA Piper will remain as legal counsel. Additionally, Catherine Bowman of The Bowman Law Firm was also elected by the Board to serve as a director for a oneyear term, and Holly Greer of CNL Financial was appointed by President Grady to serve as Director-at-Large. These officers and the newly elected Board members join the remaining 2017 ADISA Board of Directors: Larry Lyons, Kalos Financial Larry Sullivan, Passco Companies Brad Updike, Mick Law ADISA board elections occur in the fall; each director was elected to a two-year term through 2018.
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10401 North Meridian Street Suite 202 Indianapolis, IN 46290
ADISA 2017 Spring Conference April 3-5 Hyatt Regency New Orleans
Designed for all industry professionals who sponsor, analyze, market, distribute or sell alternative investments, attendees will benefit from high-level networking opportunities and timely education covering the full spectrum of alternative investment products and issues. Most sessions will also qualify for continuing education credits for finance and legal professionals. Going forward, ADISA’s “Spring” event will now be known as “Spring Conference” rather than “Spring Symposium” to reflect the broader curriculum of education sessions offered and growing nationwide attendance, which has increased more than 30 percent over the past three years. ADISA’s Spring Conference has attracted a growing number of company presidents, CEOs and other C-level professionals to the event, who find it a productive and approachable venue for networking and learning from leading professionals in the alternative investment space. Hot topics at ADISA’s 2017 Spring Conference will include: an outlook for alternatives; peering into the regulatory crystal ball; the best interests contract exemption; marketing and technology best practices; energy strategies; due diligence on interval funds; T-shares 101 and interactive sessions on robo-technology and cybersecurity. Products, including private equity, real estate investment trusts, business development companies, direct participation programs, Reg A+ offerings and 1031 like-kind exchanges, and new technology platforms will also be highlighted. ▲ 58
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