Coni Rathbone, The Daily Record Newswire
As we look forward to the next 12 months, one area to watch closely is the ever-evolving face of commercial financing. It will be interesting to see whether conventional or alternative financing arises as the predominant financing tool for 2014. The changes in private financing, triggered by the 2012 JOBS Act, will finally create a significant impact in the private market, and likely in the financing market as a whole.
During the last several years, particularly in 2013, the U.S. economy continued a steady crawl out of the deep 2008-09 financial recession. The outlook for 2014 looks positive, with economists predicting continued “measured” growth.
One of the greatest challenges to the economy during the financial crisis was the unavailability of money from traditional sources. Moreover, private money was sitting on the sidelines awaiting some certainty in the recovery. In the current climate, and I expect well into 2014, money will be much more readily available, albeit under much more stringent underwriting requirements and guidelines.
Banks and life companies are making loans again; however, their underwriting criteria are considerably more onerous. This change is positive in that pre-2008, underwriting criteria seemed to be entirely missing in action. Loan-to-value ratios currently fall in the 60 percent to 80 percent range.
Completely absent for several years were “CMBS loans.” They are back in 2014 with a vengeance. Borrowers can often obtain 10 percent more loan proceeds from a CMBS loan, when compared to a Freddie or Fannie loan. CMBS lenders’ rates are competitive, so if the project can tolerate the substantial yield maintenance requirements, this form of lending may be a good option. It’s interesting that the CMBS market has recovered relatively quickly, given that is was one of the primary drivers of the financial crisis.
Recall that in 2012 Congress passed the Jumpstart Our Business Startups Act in an effort to provide better access to equity through securities offerings. Congress intended for the JOBS Act to provide a relatively immediate source of new financing for the country, as evidenced by its fairly aggressive 2012 and 2013 deadlines for proposed implementation rules. Unfortunately, the SEC missed each deadline, causing great delay of the JOBS Act. However, many of the rules are now in effect, or are at least proposed. Therefore, I rate the implementation of the effect elements of the JOBS Act as the top area to watch in 2014.
We should watch three primary aspects of the JOBS Act: 1, advertising and general solicitation of Regulation D offerings; 2, crowdfunding; and 3, rules affecting Regulation A offerings.
Regulation D
The SEC now, for the first time ever, allows advertising and general solicitation in Rule 506 offerings to accredited investors. This means that an issuer in a Rule 506 offering can run an ad in a newspaper for investors for a particular private offering, or — and this is more likely — list their offering in an Internet portal set up for this purpose. These portals are like dating sites, matching investors with investment opportunities.
One complication with an advertised offering is that the issuer must certify that the investors are accredited. This has raised significant concerns for issuers and in the broker-dealer community with respect to determining “what is enough” for purposes of providing a certification of accreditation of the investors.
Moreover, registered securities’ broker-dealers are worried about being cut out of the sales process altogether. Despite this certification issue, the ability to advertise Reg D offerings is a fundamental change in raising private capital through securities’ offerings and will have a dramatic effect on private financing all over the country.
Crowdfunding
In crowdfunding, an issuer is allowed to raise up to $1 million over a 12-month period in small increments from accredited and non-accredited investors. People regularly confuse the Reg D portals for crowdfunding. This product is truly targeted to startups with low capital requirements.
A big concern with crowdfunding is whether one offering will be integrated with other offerings of related issues for purposes of exceeding the $1 million cap. The SEC has not yet issued proposed rules for crowdfunding. Once implemented, crowdfunding will be popular, but likely not huge in commercial financing arenas due to the $1 million cap.
Regulation A
Finally, the JOBS Act made Reg A much more attractive by raising the maximum offering amount from $5 million to $50 million. Reg A can be described as a “mini” registered offering. Previously, the $5 million limit made Reg A unattractive because of the transactional costs.
Securities issued under a Reg A offering can be sold to accredited and non-accredited investors, and can be resold in over-the-counter markets. Rules for Reg A were issued on Dec. 18, 2013.
One important element of the proposed rules is that offerings greater than $5 million would be exempt from state regulations. With the new limits, Reg A offerings are a much more viable source of financing into the future.
It appears that the long drought of financing is over.
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Coni Rathbone is a shareholder with Lake Oswego-based Zupancic | Rathbone Law Group PC. Contact her by calling 503-704-2795, or by visiting www.ZRLawGroup.com.
