Our firm is often engaged by real estate investors and entrepreneurs seeking to raise capital for their projects or companies. A company may raise capital as either debt or equity. To raise capital as equity, a Company must undertake an offering of Securities. The definition of Securities in the Securities Act of 1933 (the “Securities Act”) and associated case law is broad and includes both the laundry list in 2(a)(1) of the Securities Act as well as “the many types of instruments that, in our commercial world, fall within the ordinary concept of a security” (H.R.Rep. No. 85, 73d Cong., 1st Sess., 11 (1933)).
For our clients, most Securities offerings are of an equity interest in Company that is acquiring or developing real property. Offerings can pay a return to investors by way of a variety of methods; however, some of the most popular methods of determining a return to investors are as follows:
- Preferred Return: For the duration of the investment, the Company will pay the investors a quarterly, semi-annual, or annual preferred return that is negotiated by the various parties. The return is typically a percentage of the investors’ investment amount. A preferred return can accrue (unpaid preferred returns compound) or not accrue (a missed preferred return is lost). An accruing preferred return will typically contain a catch-up prior to each preferred return, and a catch-up prior to the equity split upon liquidation of the investment.
- Equity Split: Net profits remaining after payment of the preferred return (including any catch-ups) is divided between the sponsor team and the investor group. Equity splits can occur both from operating cash flow and from the proceeds of a liquidation.
- IRR Based Return: IRR based returns are similar to preferred returns, however, the investor receives payments based on a target internal rate of return (IRR) to the investor. At liquidation, a catch-up restores the investor to its target IRR, after which the investor does not typically participate in an equity split or participates in a significantly lower split.
Securities and real estate are complicated areas of the law that require expertise from experienced attorneys. For assistance please contact Shameer Soni of Patel Law Group at (972) 650-6848 or by email at ssoni@patellegal.com.