Friday, July 29, 2016

NASAA proposes concentration limits for non-traded REIT investments

By John M. Jascob, J.D., LL.M.

NASAA has proposed amending its Statement of Policy Regarding Real Estate Investment Trusts to place concentration limits on investments in non-traded REITs. The proposal would also require a REIT’s sponsor and any person selling shares on behalf of the REIT to maintain records of the information obtained from shareholders to ensure compliance with the concentration limit for at least six years.

Concentration limits. Under the proposed amendments, a sponsor must establish a minimum concentration limit for persons who purchase shares in a REIT for which there is not likely to be a substantial and active secondary market. Individual investors would generally be limited to investing ten percent of their liquid net worth in a REIT, its affiliates, and other non-traded REITs, unless the state’s securities administrator determines that the risks associated with the REIT require lower or higher standards.

Liquid net worth consists of cash, cash equivalents, and readily marketable securities. The proposal also includes a carve-out for accredited investors under the income and net worth standards set forth in Rule 501 of Regulation D.

In evaluating the standards and any exclusion proposed by the sponsor, the state securities administrator may consider several enumerated factors, including:
  • complexity of the offering;
  • the REIT'S use of leverage;
  • balloon payment financing; 
  • tax implications;
  • potential variances in cash distributions;
  • relationship among potential shareholders, the sponsor and the advisor;
  • prior performance of the REIT, the sponsor and the advisor; and
  • past disciplinary or legal actions by regulators or investors.
Prospectus disclosure and recordkeeping requirements. The sponsor must disclose in the prospectus the responsibility of the sponsor and any person selling shares on behalf of the sponsor or REIT to make every reasonable effort to ensure compliance with the concentration limit based on the information provided by the shareholder. The prospectus must also disclose that adhering to the concentration limit does not satisfy independent suitability requirements under the guidelines, existing administrative rules, or the rules of a self-regulatory organization. The sponsor and any persons selling shares must maintain records of the information obtained from shareholders to ensure compliance for at least six years.

Request for comments. The deadline for comments is September 12, 2016. After the comment period has closed, NASAA will post the comments received to its website.

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