What Is A Regulation A+ Offering?

August 3, 2022




CWS 211 | Regulation A+ Offering   Lauren Wells joins the show once again to discuss Regulation A+ Offering with Chris Seveney. They talk about how this offering is structured, the minimum investment required for it, as well as the qualifications of an accredited investor. Chris also shares some exciting news about his own Reg A+ offering, which he has worked on since 2021 and is now finally open for business. The two discuss their primary investment, first-position performing and non-performing mortgage notes. They detail how you can make money from them, how a new investor should approach this process, and why it is the ideal investment for the seven billion people across the entire planet.

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What Is A Regulation A+ Offering?

In this episode, we want to talk about what a Regulation A offering is and share some exciting news. A little background before we get too into what a Regulation A offering is. Chris, since I’m going to be asking you a ton of questions this episode or maybe that’s how it always is anyways. As someone who is new to the investing world, when you talk about real estate investment funds, what are they? How are they structured? What does that look like? First, welcome back. Lauren took a little break before some exciting news will announce. A lot of people hear the term fund syndication. Two terms people use are hand-in-hands. Funder syndication is the pooling of money to invest in a type of asset or asset class. Many people have heard of multifamily syndication where a sponsor, who’s the person who’s putting the deal together, goes out and gets a multifamily deal under agreement and then raises money from hundreds of thousands however many number investors to invest in that offering. That’s a fund or syndication at a high level. We can talk about the different types of syndications or funds that most people are familiar with as well. That’s a great description of what funds and syndications are. Most funds, though, are what type of funds? Most are what’s called a Regulation D 506(c). One thing I want to add. A fund is a very passive investment. You put your money in and essentially wait. Regulation D 506(c) is a type of fund that allows the sponsor to be exempt from the SEC, the Securities and Exchange Commission. The exemption does have some rules that apply to it. One of the main rules is an order to invest, and the investor has to be an accredited investor, which I will let you give the definition of an accredited investor. Chris, tell us what qualifies someone as an accredited investor. The two main categories are annual income gross and annual income over $200,000 if you are single. $300,000 if you are married or have a net worth outside of your primary residence of a million dollars. Now there are some other caveats to it that if you hold certain licenses like a series 65 as somebody who can sell securities. That puts you in that category but for most people, it’s the single $200,000 to $300,000 if you are married or have a net worth over a million outside of your primary residence. With Regulation D offerings, that’s a big barrier to entry for a lot of people but I would say something else that I’ve noticed with a lot of those offerings is another barrier being the minimum investment. Would you agree that most of the time, there is a higher minimum investment than is available to people who are looking to start out with their first investment? No. I was reading an article where people are asking, “Can I go get my series 65 license so I’m “accredited?” Someone put a good comment is, “Great. Go do that but you still need $50,000 liquid to invest in these types of offerings.” I would say $50,000 is the average. I’ve seen them go as low as $25,000. They typically don’t go lower than that, and the high is up around $250,000. This does rule out. 1) The fact that you have to be accredited. 2) The minimum investment amount is usually, let’s say, at the low end, $25,000 to get started. A majority of the offerings that we’ve seen that our funds are Regulation D offerings. Now, that brings us to what we want to talk about, which is Regulation A+ offering. How is the Regulation A+ offering different from a Regulation D offering? It’s not enough time to talk about every difference but the big differences are first, it does have to go through the SEC. It’s not exempt. You get what is called qualified. That’s the first major difference that you must submit to the SEC, and all the information is public record. Everything that gets submitted to the SEC is public. You have to submit biannual reports and audit financials. Everything along those lines is public knowledge, so people can look at that information. By making that information public, they do allow for non-accredited investors to invest as well. There are other types of Regulation D offerings that allow for non-accredited but it has to be somebody you have an existing relationship with, and there’s only a minimum amount. With Regulation A, you can have unlimited amounts of non-accredited investors. That is one of the major differences from an operating standpoint.
CWS 211 | Regulation A+ Offering

Regulation A+ Offering: If you stop paying on the note, the mortgage allows the bank to use the house’s collateral.

  The others are typically you engage a licensed broker-dealer. You have to use special FinTech companies to invest the money and have it go through an escrow portal and also need a transfer agent who’s the person who basically keeps track of all the shares of stock. A lot of people also call the Regulation A+ offering a mini IPO because you are essentially buying shares in a company. The sponsor does have the ability to go list it on an exchange if they want. Here we are going to drop some exciting news. What have you done? What have you been working on? Back in September 2021, I had the squirrel idea. Let’s not take away some credit from you. You say last September but what you mean is probably a few years ago, you thought about this. Probably but what two major events supercharged this? One was when the Build Back Better Bill talked about the whole Peter Thiel, where you may have heard that person. He took his IRA and basically used it for PayPal and may have $5 billion or some insane amount of money off of his IRA tax-free. In that bill, they were trying to restrict a lot of private investments with IRAs. One of the ways around that was through a Regulation A+ offering. That had me starting to look with my attorney to put that process together. Another event happened in January or February timeframe with some staffing, and we basically put that on an overdrive. In April 2022, we submitted documents to the SEC. This July 2022, we got our qualification from the SEC, where we can now go raise up to $75 million a year within our Regulation A+ offering. In short, prior to this, you’ve offered a ton of Regulation D offerings. In 2021, you were working on building out your team, the broker-dealer, the escrow agent, our marketing team, and internal staff to support this reggae offering, which, as you said, we submit it to the SEC, went through the qualification process and now are open for business you could say. You alluded to it a little bit but there is more to why you decided to start this route. You talked about the Build Back Better Bill. Another thing that we had talked about when deciding to go this route was the ability to open. You’ve done like I said, Regulation D offerings. You’ve offered partials. You’ve done joint ventures over the last years. This is a combination allowing those investors who have partaken in any of those investment journeys with you to all come under this one umbrella of a Regulation A+ offering. Am I correct? You hit the nail on the head. I was tired of my wife screaming at me about all the tax returns we have for all the different funds and entities, and I still hear it by taking everything and rolling it into one entity, that saves a little less gray hair on my head but no. As you said, we’ve done a handful of the 506(c) offerings with the credit investors. We did a 506(b) offering as well, which allowed for non-accredited and accredited. We were also doing the partials. For people who have rentals and be like, “I have an LLC for every rental.” The more LLCs and companies you have, the more headaches you have. I viewed this as also a way to simplify things but also get everybody involved because there are a lot of investors out there who have requested, looked to or wanted to invest in the past but had certain hurdles that they couldn’t overcome. By now, doing this Regulation A+ offering, we can open that up to everybody. Some other points on that are being open to everyone different from a Regulation D offering, so you don’t have to be an accredited investor. You don’t have a barrier to entry. The investment minimum, which we will talk about a bit, is a lot lower. It’s something that any investor who’s looking, I say every season of investor, whether they’ve invested in a ton of different funds or syndications, or looking to invest in a fund for the first time and start generating some passive income, whether it’s with cash or their retirement account. This allows for all of that. What would you say were some surprises when we went through the qualification process? Why do you think the qualification process is the way it is? Employment and property values are the two biggest factors that have a major impact on mortgage notes. Click To Tweet It’s a lengthy process. There are a lot of people. It’s under a lot of scrutiny as well, which it should be because you are allowed to go out and solicit the public funds from them to invest in. There are a lot of requirements. There’s a lot of information you have to provide to people. It’s the form called a 1-A which outlines all the terms but also all the risks along with investing. In a 506(c) offering, again, we will go back to the comparison. Most people put together what’s called the Private Placement Memorandum or PPM but technically, you don’t even need to provide that because you are dealing with credit investors. When you start dealing with non-accredited investors, the types of information that are required are significant and substantial. That’s one key area. The other is the number of team players. Some people on 506(c) will get broker-dealers and some other companies involved but let’s say 99% of them don’t. In Regulation A offering, you need to put together an all-star team to handle every single aspect of it because everything has to follow certain processes and procedures to make sure the trail from the beginning of the investor journey to the end falls that specific path. I get that question a lot like, “How is it different?” when speaking with potential investors. You hit the nail on the head when you were talking about how it is very scrutinized because you are allowed to go out, market to the general public, and raise capital. In a sense, I view it as a safeguard for investors who are looking to invest for the first time. It’s a safeguard but it’s a safeguard based on what they are offering. It’s still up to that investor to understand who they are offering with. Now, they’ve had to do checks on URI to make sure that we haven’t been involved in all these Ponzi schemes or whatever it may be. They don’t check to say, “Chris Seveney, you have been in real estate 25 years, check.” That’s not the level of detail. That’s the level of detail you, as the investor, should have to be going through. I sense an episode coming up about that. Let’s talk about the details of our Regulation A offering. Let’s start with what we are investing in. Our primary investment is in first position performing and non-performing mortgage notes. For those who invested with us in the past, have seen us or read to our prior episode, the Good Deeds Note Investing show. That was our primary focus. It was on mortgage notes. That is what the majority of the offering will entail, those first position performing and non-performing loans. At a high level, for people who are new to the show or aren’t as seasoned with what mortgage notes are, can you give a description of what they are? Can you explain a little bit about them? The high level is, if you’ve ever bought a property and gotten a loan from a bank, you get two documents in a note, which is an IOU, and then a mortgage, which attaches that note to the property. If you stop paying on the note, then the mortgage allows the bank to use the house as collateral. The banks usually take those, securitize them into portfolios, and when they get distressed or borrower stops paying, they will get sold off. They work their way down from institutions to Wall Street, other funds, and the individual main street investor. That, at a high level, is what a mortgage note is. A non-performing one is one where the borrower is typically more than 90 days past due. How does the fund make money, then? As an investor, if I give you my money, how am I going to get paid? What does that process look like? Something we talk about a lot at Seveney Investments is our process is a little bit different. We have that three-dimensional picture of the notes. Do you want to talk a little bit about that so that people understand where their money is going and what that process looks like? First, I have to use the typical caveat that every investment has a risk, and no return is guaranteed. That’s a question. First question people always ask me is, “If somebody is not paying their mortgage, how do you make money on that?” The answer to that is you get to buy it at a discount. Think of if you are buying a car that has been in a car accident or damaged, you buy that at a discount. Try and repair it and either keep or resell it. On a mortgage, on a note, it’s very similar. You are buying the loan with the borrower not paying but you are buying it at a discount. By buying it at a discount, it gives you more flexibility to work with the borrower on new payment terms. What is the philosophy at Seveney when working out those notes and with borrowers?
CWS 211 | Regulation A+ Offering

Regulation A+ Offering: When somebody’s not paying their mortgage, you can make money out of it by buying it at a discount. This gives you more flexibility to work with the borrower on new payment terms.

  We always want to keep the borrow in their homes. That’s what we attempt to do. Does it happen on every occasion? Unfortunately, it doesn’t. Our primary focus is to work with the borrowers to get them on a payment plan that is reasonable and affordable and continue to keep them in their house to give them what’s called a trial payment plan to try and make payments for six months. If they do that, modify the loan to some new terms. A lot of times, like everybody else, people have something that happens that goes on in their life. They get caught behind, and a lot of the institutions will only allow a borrower to make all the payments at catch-up. If you are six months behind, they will be like, “You got to pay all six months.” Basically, that snowball starts spinning downhill because they can’t, and every month, they are missing another payment because the bank won’t accept their payments in many instances. With us, we look to take a down payment that might not be that full amount to try and work with them. This is a question I get a lot. When people are looking to invest in something, it’s easy to understand, “I’m going to invest in a rental property with a fund that does multifamily or a fund that does single-family rentals.” That’s why it’s so important to talk about what notes are, what our process looks like, and how it’s a little bit different from other funds which invest in this space, perhaps. One thing I want to jump in and say is people hear about multifamily. The biggest difference between notes and multifamily. Multifamily is typically one asset. You are banking on that one asset in that fund that will either make it or break it. In nowadays’ environment, with interest rate increases and cap rates increasing, what their exit strategy was years ago might not be accurate. There’s not much they can do because it’s that one asset. In a note fund, you are constantly buying and selling notes. You have a very large portfolio. As that portfolio continues to grow, it’s very dynamic where it’s easy to shift the portfolio balance, similar to people with a large stock portfolio with twenty different stocks. You can shift levels of risk in a much-simplified manner than you could if it’s one multifamily that you are investing in. I have so many questions about that. Let’s start with you talking about how it’s different from multifamily. Maybe this isn’t a question. It’s a comment. A lot of people will come and ask me the same thing like, “I was also looking at XYZ company where you can invest in one note or I was looking at partials.” What you said is the same. It’s spreading the risk among multiple assets versus putting all your eggs in one basket with a single asset. The question I had was, how do interest rates and rising in the state of the market affects the notes industry or our business specifically? There’s not as much correlation as people think. People look at the news and see all these mortgage lenders who are laying people off. The biggest correlating factor in mortgage notes is employment. For most people, like you or I, we both own homes. We have fixed mortgages on our homes. Interest rates go up. We are probably not going to be selling our house anytime soon because of the high-interest rates. It’s not the interest rates. It’s some of the ancillary things that happen with interest rates that could have an effect, such as if home prices start to come down because that has an impact potentially on note buying. You want to have equity in your note or if you don’t have equity, you base it on the property value. If that value is going down, it could devalue your note. Employment and property values are the two biggest factors that I view as having the biggest impact on the notes. I would agree on that, specifically employment with people being laid off. If you have a fixed mortgage and you lose your job, that’s not a super great position to be in. The cost of goods going up also has an impact. All the things that will raise someone’s spending. You can google it but there are stats that say 60% to 65% of people live paycheck to paycheck. Any type of blip on the map for them can be very detrimental, whether it’s a loss of job, loss of loved one, reduction in hours, reduction in pay, and inflation. Not as much interest rates but inflation costing everything else to go up may have an impact on them being able to afford their home. I know we talked about how this fund is open to everyone accredited and non-accredited but describe who you feel would this investment, this fund would be an ideal investment for. Around 60% of people live paycheck to paycheck. Any type of blip of the map can be detrimental to them. Not so much as interest rates, but inflation may impact their ability to afford their home. Click To Tweet All seven billion people on the planet. I can whittle that down if you want. That would be great. There are several different categories of people. One area that this is perfect for is the individuals who have an IRA, an individual retirement account that allows you to put $6,000 per year in, and they may have built it to buy some real estate or even own real estate. They may have $5,000, $10,000, $20,000 sitting around in their IRA. They don’t want to put it in the markets because the markets are very volatile now. They are looking for the potential for some passive monthly distributions of income. That would be a perfect example or a perfect opportunity for somebody to invest. Again, get the potential for those types of returns. That’s one area. Other types of real estate investors invest in these types of funds to diversify. Honestly, that’s why I joked about the seven billion people because anybody who has a $500 minimum to invest and diversify across a portfolio. If you look at the correlation of real estate to all other asset classes, there’s nothing that has a strong correlation or negative correlation to real estate. When you look at mortgage notes, it’s even less correlated because of the nuances of it. I’m pulling some questions that I know we have been asked. How is this different from a REIT? Can you go a little bit into that? This is probably one of the top questions that comes up with the people that I speak with. Originally, the first intent was we were going to do a Regulation A+ offering as a REIT, which is a Real Estate Investment Trust where investors invest into that trust but it’s a very passive investment what a REIT. Even the sponsor has to be very passive in all their other entities. They may have a management company and all these other things. They are done out of separate entities. Now the taxation is very different in a REIT how that works. I’m not going to get into how REITs are taxed because you get essentially a 20% deduction off of what you get for interest. The rest of it is taxed as ordinary income but if the REIT gives out 90% of its profits that year and again, sorry, I’m going down that rabbit hole. Didn’t you say you weren’t going to go down this rabbit hole? I did, then I did. As I mentioned, with a REIT has to be passive. Non-performing notes are not considered passive on a sponsorship level. That’s why the REIT was not the right type of fit for this type of structure. How did we decide to structure our offering? After how many excel data tables of analyzing an LLC, a C corporation, and a REIT, we made a determination to structure the entity as a C corporation versus any in LLC or S corp, which to us, we felt provided the best strategy, not only for the fund but for the investors. Without getting into or giving tax advice, as anyone reading, you should definitely consult your own CPA. At a high level, how is that advantageous from a tax perspective for investors?
CWS 211 | Regulation A+ Offering

Regulation A+ Offering: A REIT has to be passive, and non-performing is not considered passive on a sponsorship level. That’s why REIT is not the right type or fit for this investment.

  When people hear C corp, they think, “Double taxation.” A lot of times, people get scared or run away but there are also many benefits to an investor in a C corporation. The two that I will discuss are one for IRA investors. Again, check with your plan sponsor and make sure you understand. The research we’ve done shows that an IRA investor does not have to worry about the UDFI/UBIT taxes because of the structure of a C corp. If you don’t know what that is, ask your custodian. One of the biggest complaints we hear from people is, “I invested in this fund. They went and borrowed $100 million out of a $200 million fund. Now a percentage of my distributions are being taxed.” I would say it’s probably with people investing with their self-directed 401(k) or IRA. The top question I get is, “Am I going to be subject to UBIT/UDFI?” Say I have cash funds I would like to invest. How does that help me that it’s a C corp or does it help me? Again, talk to your tax advisor. With C corporations, you are buying shares of a company. Think of Apple or Microsoft, and they are C corporations that you buy shares of. It’s the same with this entity. You would be buying shares, and if they are held for a specific period, they should be considered a qualified dividend. The next question is, “What is a qualified dividend?” Qualified dividends, one is you don’t have to worry about the dreaded K-1. If you don’t know what a K-1 is or you’ve never gotten one. God bless you. They are a tax form that you get. There’s nothing complex with the form but it takes a while for the CPAs to create and get those out the door, even though it was supposed to be out in February. I’m still waiting on one for one of the investments I did in syndication. That’s the first. The second is qualified dividends or taxed at a much lower rate than ordinary income or if you are investing in syndication that’s an LLC. That gives you a K-1. I believe that starts at 0% if your salary or income is less than $40,000. It’s got a 0% or 15% and a 20% bracket but in most instances, it’s a good 10% delta. Meaning that if you are in the 20% dividend bracket, your tax rate is usually 32% to 37%. The qualified dividend tax rates are 0%, 15%, and 20%. Whereas the income tax rates can go all the way up to 37%. Instead of receiving a K-1, you receive a 1099-DIV form, and the tax ramifications are different. When we were going through this and setting it up, it was about making it as simple for investors as possible. When they see, “This isn’t the return or the preferred return. This is what I can expect versus they are promising this return but then I also have to take into account the taxes I’m going to pay on the backend.” There will be taxes. There are always taxes but we try to make it as straightforward and simple as possible for investors and tax-friendly. I put together a cool spreadsheet that I get excited talking to people about. Feel free to reach out. I like to geek out about that stuff. You can reach out to Chris at 7EInvestments.com. We’ve covered a lot. We’ve covered what a regulation offering is, how it differentiates our specific offering, what we invest in, and some of the tax benefits. However, we haven’t talked about what our offering is. Do you want to talk about the details of the offering as far as investment amount, lock-up period, bonus shares, all those things? No, I want you to. I will go ahead and do that. I’m going to make you talk a little bit instead of asking the questions. I will let you answer some of the questions. Anybody who has a minimum of $500,000 to invest can diversify across a portfolio. There's really nothing that has the same strong correlation to real estate. Click To Tweet We have a Regulation A offering. It is open to, as we mentioned earlier, accredited and non-accredited investors investing with retirement funds or cash. I could say the details behind it is we are looking to give 8% preferred return annual, which is paid monthly. If an investor were to invest now, their interest in that investment would start accruing on August 1st, and their first dividend check would be sent on September 1st. This caveat is we are recording this in mid-July 2022. If this launches in August, it’s the first day of the month as it starts accruing, and it gets paid for the first business day of that next month. I will give another example. If you invest on September 3rd, interest will start occurring on October 1st. You will get paid your first dividend check on November 1st. I always feel like it’s good to give examples like that. Dividends are paid monthly, and there is a lockup period of four years. Meaning that should you choose to pull your investment, there are penalties to doing so. A lot of people like to think of it as a set it and forget it. The minimum investment that we talked about earlier for most other offerings that only accept money from qualified investors is $25,000, $50,000, and a hundred plus thousand dollars. For our offering, the minimum investment is $500. I am not making an error. The minimum investment is $500. Again, we do want to make this open and accessible to people who want to dip their toe in and start investing in an investment that pays monthly dividends. We have bonus shares. Our goal is 8% paid monthly and 8% annual paid monthly. However, there is the option to get bonus shares. We have a limited number of bonus shares that we are offering. That depends on the investment amounts. The more you invest, the higher your annual percentage goes up. I’m more than happy to walk through that. I don’t want to put the numbers out there. It’s hard to visualize without seeing the table. What we can do is I will include our offering page that talks a little bit more about what our offering is, who we are, and how we get investors their money, and that site is Invest.7EInvestments.com. What else, Chris? Is there anything else I missed? Can you explain to people what bonus shares are? Not the amount but is it something that they get to buy at a discount or is it a reduced price? What are bonus shares? Bonus shares essentially, the minimum investment for us to get bonus shares is $25,000. What does that mean? At $25,000, your annual return is going to go to 9%. I’m putting on my sales and marketing. It’s $10 per share with the minimum as we mentioned 500 but if you bought 2,500 shares and spent $25,000, we will give you for free 100 shares. You don’t get 2,500. You get 2,600. In turn, those shares are also earning that dividend. When you liquidate or want to redeem your shares after four years or at whatever point in time. You will also get those shares redeemed as well. If it’s $10 per share, you get the extra 100 shares and a thousand dollars back as well. There you go. That’s the explanation. Free shares. That’s the bonus. This increased your annual return.
CWS 211 | Regulation A+ Offering

Regulation A+ Offering: Qualified dividends are taxed at a much lower rate than ordinary income. If you’re investing syndication, that’s an LCC that gives you a K1 that starts at 0% if you’re salary is less than $40,000.

  I believe it’s a little over nine. It’s 908 or 916. Projected. I’m a numbers guy. If anyone is reading, they will be like, “She’s grinding her teeth now.” She could jump through the screen and strangle me. She would. No, we explained things very differently. It’s good. Is there anything else I’ve missed? What about if somebody also wanted to reach out via email? What is the best email address to reach out to? I’ve given out my email address on probably the last three episodes. You can email me directly. However, we do have a specific inbox for this. That’s [email protected] if you are interested and you have questions. On our offering page, there is also a link to a webinar we did which walks through more details of what we talked about on this episode. The only other thing I will add is on that page, next to the invest button, right below it is a link to the SEC’s website for the circular, which provides all the information that we had to provide to them, including all the terms, conditions, key contracts, key personnel, and all that fun stuff. It reminds me of things we didn’t talk about. We are very transparent. That’s one of the pillars we stand on. Another question that I don’t know how I didn’t bring this up earlier, what are the risks? This came up because if you are someone who wants to read every single risk that could possibly take place. You should read the offering circular. It covers everything. Chris, what are some of the risks? As a newer investor, what should I be worried about? What are some things I should be thinking about or asking when I’m looking at to invest in any fund? What are some things I should be asking? I will give a little prelude because this would be a great topic for another episode but with any investment, there’s a significant risk. Several that roll off the tongue is who’s the team? Who’s the sponsor? What’s the experience they have? There’s the corporate side of things of looking at the company and who those people are and understanding key man policies if something happens to somebody. Do they have systems in place? A lot of the Regulation D 506(c) is run by one person. That one person is running it. If, unfortunately, something happens to them where they couldn’t continue to manage or operate, what happens? That’s always an important thing on the corporate side. On the actual investment where they are investing side, again, you want to understand what that investment is. A tip, get some type of knowledge on what it is you are investing, whether it’s multifamily building notes like this. A lot of people invest in crypto but don’t even know what crypto is or have a lot of understanding of it. You want to make sure you understand what you are investing in and ask those questions as you asked. There are a lot of headwinds in the markets now. If the stock market goes down, could that affect my investment? If the real estate goes up or down, how does that affect my investment? Are government regulation states now or are certain states borrow-friendly and certain ones are lender friendly? If more rules come into place and the government, how does that affect my investment? Again, this is five. We could name 500. I need to do an episode on this, questions to ask interviewing your sponsor. Thank you so much for joining us on this episode of the CWS show. If you enjoyed the show, share it with a friend, subscribe or leave us a review. Until next time. Thank you.  

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1 Comment

  1. Charley Gates

    Excellent information about Regulation A offerings. Thank you!


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