For the foreseeable future, the COVID-19 pandemic will continue, creating continued uncertainty in certain real estate markets. In addition, it is likely we will see a change in the nation’s political landscape. This raises questions and uncertainty as it pertains to capital markets and tax policies. However, 2020 did bear some fruit for the private lending industry, namely via the Securities and Exchange Commission (SEC). The SEC’s sweeping efforts to reform its private placement exemptions and modernize finders’ fees regulations. These rule changes have given me significant hope that it will allow private lenders greater access to broader capital sources and streamline capital formation.
While uncertainty still abounds for many lenders, some positive changes came out of 2020 via the SEC. In 2020, the SEC:
- Proposed rule changes around the definition of accredited investors
- Updated Regulation A
- Modernized the integration doctrine
- Modernized finders’ fee rules, loosening the once antiquated ones to give a clearer capital raising path
Accredited Investor Definition Change
As a result of the SEC’s changes to the accredited investor definition in 2020, certain professionals may now be certified as accredited investors regardless of net worth. This is significant because it expands the pool to high value target investors like financial services professionals, investment professionals, and even doctors, lawyers, and engineers.
Harmonizing the Exemptions
The proposed rulemaking surrounding “harmonizing” the various private placement exemptions, such as the integration doctrine and Regulation A, will prove to be significant. The integration doctrine was very antiquated, and the proposed rules now allow private lenders a clear path to have a series of Regulation D Rule 506(b) offerings without an overly burdensome 6-month safe harbor. In the same proposed rulemaking session, the SEC proposed increasing the maximum capital for Regulation A Offerings, and loosening “testing the waters” restrictions. All these changes will create a clearer and simpler path to raise capital for private lenders.
Modernized Finders’ Fees Rules
Another significant rule change that came about in 2020 was modernizing the finders’ fee rules, which were very restrictive and vague. This modernization set a clear framework for finders to refer investors to Regulation D private placements (and others) and receive compensation without registering as broker-dealers. This will be significantly beneficial to the private lending industry because it finally allows lenders to leverage their personal network to raise capital in a meaningful way without risking regulatory penalties by navigating a series of SEC no-action letters and guidance statements.
With a national election just behind us, many in the private lending industry have expressed concern or uncertainty as it pertains to tax policies and laws and capital markets. It is very unclear whether a new administration will dismantle the existing tax deductions or increase regulatory oversight on Wall Street and financial institutions. Many have expressed concerns that a new administration would repeal the Tax Cuts & Jobs Act and reinstate the Volker Rule. This is a possibility, but will take time, energy, and political capital as these are highly impactful pieces of legislation and have a sunset date in the code for 2025.
There are higher priority legislative agenda items in today’s fractured political climate than repealing the entirety of the Tax Cuts & Jobs Act or reinstating the Volker Rule. This means that the 20% QBI deduction and the Qualified Opportunity Zone Program are likely to remain until 2025.
All things being equal, I’m very excited for 2021. I think the 20% QBI program or Qualified Opportunity Zone programs will remain untouched, and I am confident the SEC will continue down the path of modernizing and harmonizing the path to capital formation at the private level, meaning that mortgage funds, REITs, and their investors can sleep easy despite the uncertain times ahead.