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REISA Reg. D Best Practices

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  • 1. REISA ALERT: A GUIDE TO CERTAIN BEST PRACTICES FOR CERTAIN REGULATION D PRIVATE PLACEMENT OFFERINGS INCLUDING REAL ESTATE FUNDS, DEBT FUNDS AND DEBT OFFERINGS 2012ALERT NUMBER: 12-01 This REISA Alert is a new guide to certain best practices with respect to certainRegulation D Private Placement Offerings, including Real Estate Funds, Debt Funds and DebtOfferings.LIKELY INTERESTED GROUPS  Sponsors  Broker-Dealers  Registered Representatives  Attorneys  Due Diligence Firms  OthersAUTHOR(S) OF THIS ALERT A cooperative effort between industry participants, including Broker Dealers, Sponsors,Attorneys and REISA Committees and Board Members.ATTACHMENTS Exhibit A – FINRA Regulatory Notice 11-02 (“FINRA Notice 11-02”) Exhibit B – FINRA Regulatory Notice 10-22 (“FINRA Notice 10-22”)WEST229500769.2 i
  • 2. Exhibit C – FINRA Regulatory Notice 09-27 (“FINRA Notice 09-27”) Exhibit D – NASD Notice to Members 05-18 (“NASD NTM 05-18”) Exhibit E – Example of Risk Factors in a PPM Exhibit F – Sample Estimated Use of Proceeds Table Exhibit G – Prior Performance Reporting Templates Exhibit H – TICA Alert 05-02 THIS REISA ALERT IS PROVIDED BY REISA FOR EDUCATIONAL ANDINFORMATIONAL PURPOSES ONLY AND IS NOT INTENDED, AND SHOULD NOT BECONSTRUED, AS LEGAL ADVICE. THIS REISA ALERT IS NOT A STATEMENT OFSUBSTANTIVE LAW. PERSONS OR ENTITIES ARE URGED TO CONSULT THEIR OWNLEGAL COUNSEL FOR ADVICE REGARDING THE MATTERS DISCUSSED HEREIN.WEST229500769.2 ii
  • 3. INTRODUCTION AND HISTORY The Real Estate Investment Securities Association (“REISA”) believes that a bestpractices guide is necessary to cover real estate funds, debt funds and certain debt offerings aswell as to address FINRA’s heightened focus on due diligence. In addition, this Guide should beconsidered a business practice standard that is applicable to retail distribution sales practices forprivate offerings under Rule 506 of Regulation D which is considered a “safe harbor” for theprivate offering exemption of Section 4(2) of the Securities Act. This Guide should beconsidered applicable to offerings made through FINRA member broker/dealers and is notintended as a guide for other types of offerings. In addition, FINRA is currently updating itsposition regarding many of the items discussed in this Guide and all the statements in this Guideare subject to any such updates. This Best Practices Guide (the “Guide”) should not be construed as legal advice, legalinterpretation, or written policies for broker-dealers, registered representatives or sponsors.Firms are urged to consult their own legal counsel for advice regarding the matters discussedherein.WEST229500769.2 iii
  • 4. TABLE OF CONTENTS (continued) PageALERT NUMBER: 11-01 ............................................................................................................. iLIKELY INTERESTED GROUPS ................................................................................................ iAUTHOR(S) OF THIS ALERT ..................................................................................................... iDATE APPROVED BY REISA BOARD ...................................................................................... iATTACHMENTS ........................................................................................................................... iINTRODUCTION AND HISTORY ............................................................................................ iii1. Regulatory Notices............................................................................................................. 12. Suitability ........................................................................................................................... 1 (A) “Reasonable Basis” Suitability Analysis ............................................................... 2 (B) “Customer Specific” Suitability Analysis .............................................................. 3 (C) “Quantitative” Suitability Analysis........................................................................ 43. Broker-Dealer Supervision of Registered Representatives and Other Associated Persons ............................................................................................................................... 44. Securities Licensing ........................................................................................................... 85. PRIVATE PLACEMENT MEMORANDUM (PPM) DISCLOSURES ........................... 9 (A) Cover Page and Commissions Table ................................................................... 10 (B) Who May Invest or Investor Suitability Requirements ....................................... 12 (C) Summary of the Offering ..................................................................................... 12 (D) Risk Factors ......................................................................................................... 12 (E) Cautionary Note Regarding Forward Looking Statements .................................. 13 (F) Estimated Use of Proceeds................................................................................... 13 (G) Business Plan and Investment Objectives............................................................ 15 (H) Description of the Investment(s) .......................................................................... 16 (I) Acquisitions and Financing (if applicable) .......................................................... 19 (J) Compensation to the Sponsor and its Affiliates ................................................... 19 (K) Sponsor and Management .................................................................................... 20 (L) Prior Performance ................................................................................................ 20 (M) Conflicts of Interest.............................................................................................. 22 (N) Summary of Operative Documents ...................................................................... 23 (O) Plan of Distribution .............................................................................................. 23 (P) Description of Securities Offered ........................................................................ 23 (Q) Restrictions on Transferability............................................................................. 24 (R) Federal Income Tax Section ................................................................................ 24 (S) State Tax Section ................................................................................................. 24 (T) ERISA .................................................................................................................. 24 (U) Supplements ......................................................................................................... 246. Legal Opinions ................................................................................................................. 25 (A) Partnerships (including Limited Liability Companies) ....................................... 25WEST229500769.2 i
  • 5. TABLE OF CONTENTS (continued) Page (B) Debt Offerings ..................................................................................................... 257. Marketing Materials ......................................................................................................... 26 (A) Consistency with the PPM ................................................................................... 26 (B) General Solicitation Considerations .................................................................... 278. General Solicitations made by Broker-Dealers and their Registered Representatives ................................................................................................................ 279. General Solicitations made by Sponsors.......................................................................... 2910. Due Diligence .................................................................................................................. 30 (A) General Obligations ............................................................................................. 30 (B) Due Diligence of Sponsor .................................................................................... 32 (C) Due Diligence for Real Estate Funds ................................................................... 33 (D) Due Diligence for Debt Funds ............................................................................. 34 (E) Due Diligence for Debt Offerings........................................................................ 3511. Offering Time Frames...................................................................................................... 35 (A) Sponsor Evaluation Period ................................................................................... 36 (B) Contemplation Period .......................................................................................... 36 (C) Broker-Dealer Due Diligence Cooling Off Period .............................................. 36 (D) Selling Agreements .............................................................................................. 37 (E) Subscription Acceptance ...................................................................................... 3712. Rules for Gifts, Travel, Entertainment, and Personal Purchases of Securities by Registered Representatives .............................................................................................. 37 (A) Influencing or Rewarding Employees of Others ................................................. 37 (B) Travel Expenses ................................................................................................... 38 (C) Reimbursement of Expenses ................................................................................ 39 (D) Entertainment ....................................................................................................... 39 (E) Gift & Entertainment Logs .................................................................................. 40 (F) Purchasing of Interests by Registered Representative for Own Account ............ 4013. Subscription Paperwork and Recordkeeping ................................................................... 4114. Investor Communication .................................................................................................. 43 (A) Acceptance to Closing Communication............................................................... 43 (B) Post Closing/Perpetual Communication .............................................................. 44 (C) Other Communications: ....................................................................................... 44CONCLUSION ............................................................................................................................ 45WEST229500769.2 ii
  • 6. EXHIBITS:Exhibit A – FINRA Regulatory Notice 11-02Exhibit B – FINRA Regulatory Notice 10-22Exhibit C – FINRA Regulatory Notice 09-27Exhibit D – NASD Notice to Members 05-18Exhibit E – Example of Risk Factors in a PPMExhibit F – Sample of Estimated Use of ProceedsExhibit G – Prior Performance Reporting Templates – Summary ReportsExhibit H – TICA Alert 05-02 Thank you for your interest in this REISA Alert. To download the full document, please visit http://www.reisa.org/sections/legislative.best- practices.php, fill out a short form, and then download the full PDF. The password for the PDF document is reisaregdWEST229500769.2 H-1

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