SEC Compliance for Real Estate Funds

Raising capital for real estate investments triggers securities law requirements. Understanding and complying with SEC regulations is essential for protecting both sponsors and investors while avoiding serious legal consequences.

Why Securities Laws Apply

What is a Security?

Real estate fund interests are typically securities because they involve:

• Investment of money
• In a common enterprise
• With expectation of profits
• Derived from efforts of others

The Registration Requirement

Securities must be registered with the SEC unless an exemption applies. Registration is complex and expensive, so most real estate offerings rely on exemptions.

Common Exemptions

Regulation D

The most common exemption for private offerings:

Rule 506(b)

• Unlimited capital raise
• Up to 35 non-accredited investors
• No general solicitation
• Requires pre-existing relationships
• Disclosure requirements for non-accredited investors

Rule 506(c)

• Unlimited capital raise
• Accredited investors only
• General solicitation permitted
• Must verify accreditation status
• More documentation required

Regulation A

A "mini-IPO" option:

• Tier 1: Up to $20 million
• Tier 2: Up to $75 million
• Non-accredited investors allowed
• Significant disclosure requirements
• SEC qualification required

Regulation Crowdfunding

For smaller raises:

• Up to $5 million
• Must use registered platform
• All investor types
• Significant disclosure
• Investment limits apply

Accredited Investor Requirements

Who Qualifies

Income Test

• $200,000 individual income in each of last two years
• $300,000 joint income with spouse
• Reasonable expectation of same level in current year

Net Worth Test

• $1 million net worth
• Excluding primary residence

Professional Certifications

• Series 7, 65, or 82 licenses
• Knowledgeable employees of private funds

Verification Requirements

For 506(c) offerings:

• Tax returns
• W-2s or 1099s
• Bank/brokerage statements
• Third-party verification letters
• Self-certification not sufficient

Disclosure Requirements

Private Placement Memorandum (PPM)

Key contents:

• Business description
• Risk factors
• Management information
• Use of proceeds
• Fee structure
• Conflicts of interest
• Legal matters

Ongoing Disclosures

What to communicate:

• Material events
• Financial performance
• Significant changes
• Distribution information

Anti-Fraud Provisions

Always Applicable

Regardless of exemption:

• Rule 10b-5 anti-fraud
• No material misstatements
• No omission of material facts
• Duty to disclose material information

What's Material?

Information is material if:

• A reasonable investor would consider it important
• It could affect investment decision
• It relates to risks, returns, or management

State Securities Laws

Blue Sky Compliance

State requirements in addition to federal:

• Notice filings
• Filing fees
• State-specific requirements
• Timing considerations

Planning Ahead

• Identify states where you'll offer
• Understand requirements
• File timely
• Track renewals

Investment Adviser Considerations

When Registration Required

Managing investor assets may require:

• SEC registration (>$100M AUM)
• State registration (<$100M AUM)
• Exemptions may be available

Common Exemptions

• Private fund adviser exemption
• Venture capital adviser exemption
• Intrastate adviser exemption

Compliance Best Practices

Documentation

Maintain thorough records:

• Offering documents
• Investor communications
• Subscription documents
• Accreditation verification
• Board/manager resolutions

Investor Onboarding

Standard process:

• Suitability assessment
• Accreditation verification
• Subscription execution
• AML/KYC compliance
• Confirmation and welcome

Ongoing Compliance

Regular activities:

• Required filings (Form D, state notices)
• Investor communications
• Record keeping
• Policy updates
• Training

Common Compliance Mistakes

Solicitation Errors

• General solicitation without 506(c)
• Social media violations
• Improper advertising
• Relationship timing issues

Verification Failures

• Inadequate accreditation verification
• Accepting self-certification for 506(c)
• Poor documentation

Disclosure Deficiencies

• Missing risk factors
• Incomplete management disclosure
• Failure to update materials
• Omitting conflicts of interest

Working with Professionals

Securities Attorney

Essential for:

• Structuring the offering
• Preparing documents
• Compliance guidance
• Regulatory filings

Compliance Consultant

Helpful for:

• Ongoing compliance
• Policy development
• Training
• Audit preparation

The Cost of Non-Compliance

Potential Consequences

• SEC enforcement actions
• Investor rescission rights
• Personal liability
• Reputational damage
• Criminal penalties in extreme cases

Securities compliance isn't optional—it's a fundamental requirement for raising capital legally. Invest in proper legal guidance, maintain rigorous compliance practices, and protect both your investors and yourself.