Monday, November 14, 2022

Real estate firm failed to verify that investors were accredited

By Anne Sherry, J.D.

The SEC filed settled charges against a California-based real estate company for conducting an unregistered offering for a fund it manages. According to the SEC’s order, PIC Renegade Properties, LLC, raised over $54 million from about 140 investors in the offering. Although it invoked a registration exemption, it did not qualify because it failed to take reasonable steps to verify all the investors were accredited (In the Matter of PIC Renegade Properties, LLC, Release No. 33-11132, November 9, 2022).

The respondent established the real estate investment fund in June 2015. That month, it filed a Form D Notice of Exempt Offering of Securities stating that the fund was relying on the registration exemption of Regulation D Rule 506(c). That rule permits an issuer to conduct a general solicitation if all purchasers are accredited investors and reasonable steps are taken to verify as much.

The fund raised over $54 million between July 2015 and 2019 from about 140 investors, but in at least 25 cases the respondent failed to obtain financial information or documents to verify individual investors’ income or net worth or entity investors’ assets. In some other cases, the respondent accepted funds from investors even though documents indicated the investors did not meet accreditation thresholds.

The firm also failed to adopt written policies and procedures, controls, or other compliance measures relating to accreditation verification and failed to comply with the fund’s own requirements for verification.

As a result of these deficiencies, the respondent sold securities to at least four unaccredited investors. An individual whose household net worth was $800,000 invested $115,000 of her retirement funds, while a nonprofit organization with only $200,000 in assets was able to put $109,000 in the fund. In another case, the firm received an accountant’s letter purportedly verifying that an irrevocable trust established for the care of an elderly grantor was accredited as a natural person with over $1 million in net worth. This letter was irrelevant because the trust (which in fact had only $600,000 in assets) was an entity, not a natural person.

For violating Securities Act Section 5(a), the respondent agreed to cease and desist from future violations and to pay a penalty of $400,000.

This is Release No. 33-11132.