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Cedar River Properties Newsletter (2/25/23)

This week’s newsletter will briefly describe the evolution of apartment syndications and the how the JOBS act of 2012 changed the industry.

The Jumpstart Our Business Startups (JOBS) Act of 2012 was passed in response to the financial crisis in the late 2000s.

It was created to help small and medium sized businesses grow in order to stimulate the economy.

This was a law that was passed by both parties, which shows the amount of support it had from Congress at the time.

Before this law was passed, strict securities laws limited the amount and type of funding small businesses could raise.

Securities laws have been in place since 1933, which was the period right after the Great Depression. These laws were created to provide more transparency to investors and to help prevent fraudulent activity. If a person was looking to raise money for an investment, they had to register their offering with the Securities & Exchange Commission (SEC).

However, after the JOBS Act was passed, there were exemptions under Regulation D that changed how money was raised for real estate deals and opened up opportunities for active and passive investors without needing to file with the SEC.

Essentially, it allowed apartment syndicators to advertise their deals to the general public in order to find investors. However, they had to make sure they were accredited investors, which is usually verified by a 3rd party company.

This type of offering is called 506(c).

According to the SEC website, an accredited investor has to have the following qualifications:

• Net worth over $1 million, excluding primary residence (individually or with spouse or partner)

• Income over $200,000 (individually) or $300,000 (with spouse or partner) in each of the prior two years, and reasonably expects the same for the current year

(https://www.sec.gov/education/capitalraising/building-blocks/accredited-investor)

Prior to this time period, capital raising had to be done with people you had a pre-existing relationship with.

This left the majority of the population unable to invest in alternative assets such as apartment investing unless they knew somebody that was putting together these deals. It also made it very difficult to raise money to buy deals.

Most people were unfamiliar with alternative investments and were mainly focused heavily in stock investing because that was where they thought all of their hard-earned money went.

Nowadays, many apartment syndicators/private equity companies focus heavily on marketing in order to find potential investors for their deals.

They use social media platforms such as LinkedIn to let their network know what they are working on and what they have to offer. They also use it as an educational tool so people become familiar with their investment offerings.

Since the JOBS act was passed in 2012, more people than ever are now able to invest in these types of deals creating more opportunities, which I think is a win-win for everybody.

Lastly, non-accredited investors are also able to invest in syndications that are 506(b) offerings. These are similar rules prior to 2012, where you need to have a pre-existing relationship with the person putting the deal together.

I hope you found this week’s newsletter educational and I appreciate you taking the time to read it!

-Caleb