What Real Estate Developers Need to Know About Texas Crowdfunding

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Part 2 of the CapitalReady guide for issuers.

Real Estate Operating Companies Are Issuers Too.

In the last article we discussed "issuers" under the Texas crowdfunding rules. To recap, an issuer is a company. It is the company that issues equity to investors, thus the term. The sale of equity in the company is an "offering", most often in the form of shares of company stock.

What many people may not realize is that a company which conducts transactions in real estate or operates a real estate project can also be eligible for crowd funding like any other company.

The law does place some restrictions on companies in that they cannot be reinvestment companies like a mutual fund that only exist to purchase and aggregate shares of other companies (and "investment company"). Likewise, a company must have a plan of business and cannot be a "shelf company" which is idle waiting for some future line of business. However, the vast majority of real estate investments can be structured to work with crowdfunding.

For example, a company that is formed to purchase and run an apartment property can likely be an issuer, even if that company hires an outside property manager to take care of leasing and maintenance.

Issuer Structure

The most basic requirement is that all issuers must be organized under the laws of Texas, be authorized to do business in Texas, and have made the appropriate formation filing with the Secretary of State. Noticeably absent is the requirement that the company be structured as a particular type of entity, which allows issuers some flexibility in determining what kind of corporate structure is appropriate.

For example, the issuer could adopt a traditional real-estate focused Texas limited partnership structure, with crowdfund investors as limited partners.

Or, the issuer could elect to form as a Texas corporation, which more closely matches the company/shareholder relationship typically used for corporate funding transactions.

Savvy issuers will note that the Delaware corporation, so common in M&A and venture capital deals, would be ineligible for Texas intrastate crowdfunding.

In addition to the structural requirements, an issuer also must meet some basic "doing business in Texas" rules:

  • At least 80% of the issuer's gross revenues for the prior year must be derived from the operation of a business in Texas
  • At least 80% of the issuer's assets must be located in Texas
  • The issuer must use at least 80% of the net proceeds of the crowdfunding raise in connection with the operation of its business within Texas; and
  • the principal office of the issuer must be located in Texas.

For some startups and manufacturing companies, these rules may impact eligibility, but in a real estate context they should pose little problem where the issuer's key asset is property located in and deriving revenue within the state.

There are some additional restrictions on issuers that I'll cover in a later post, but as you can see the Texas intrastate crowdfunding rules look to be a very suitable financing vehicle for real estate projects that can be funded with a cash component within the investment caps of the Texas rules.

This concludes Part 2, and just scratches the surface of issuance planning for companies thinking of raising funds under Texas intrastate rules. Always consult with your attorney and accountant before undertaking an offering of securities. Subscribe to the CapitalReady newsletter to be notified when the next part in this series is posted! This post is informational in nature only and is not intended as legal or tax advice.