FAQ Real Estate Investment Trust Morrison Foerster | 10 these FAQs. REITs conducting a blind pool offering, including non-traded REITs, are also subject to the SEC’s Industry Guide 5, as discussed below. What is a blind pool REIT Offering? A blind pool REIT offering is a public offering by a REIT that does not identify specific real properties or real-estate related debt instruments to be acquired with the net proceeds from its public capital raise; rather, after capital has been raised, the REIT’s sponsor or external manager or advisor will recommend investments in assets for the REIT based on a predetermined investment strategy disclosed in the prospectus. Therefore, the reputation and past experience of the sponsor is critical when establishing a blind pool REIT because an investor may make investment decisions based on the sponsor’s reputation and its track record. Accordingly, the prospectus for a blind pool REIT offering may be required to include information regarding the prior performance of similar investments by the sponsor in order for the investor to make an informed investment decision. Most non-traded REIT public offerings and offerings by private REITs are blind pool offerings. In addition, a public REIT offering may still be deemed a blind pool offering if more than 25% of the proceeds of the offering (as disclosed in the “Use of Proceeds” section of the prospectus) are not allocated to specified uses, such as acquisitions or debt repayment. What is Industry Guide 5? In addition to the enhanced disclosure obligations applicable to real estate companies, including REITs, under Form S-11, REITs conducting blind pool offerings are subject to the SEC’s Industry Guide 5, which sets forth the following additional disclosure requirements, among others: ▪ Risks relating to: (i) management’s lack of experience or lack of success in real estate investments; (ii) uncertainty if a material portion of the offering proceeds is not committed to specified properties; and (iii) REIT offerings in general; ▪ General partner’s or sponsor’s prior experience in real estate; and ▪ Risks associated with specified properties, such as competitive factors, environmental regulation, rent control regulation, and fuel or energy requirements and regulations. In addition, REITs conducting a blind pool offering also must make certain undertakings in their registration statements pursuant to the SEC’s Industry Guide 5, including, but not limited to, an undertaking to file a sticker supplement for reasonably probable acquisitions of properties, and consolidate such stickers into a post-effective amendment (a “20D Amendment”) at least once every three months that must include audited financial statements meeting the requirements of Rule 3-14 of Regulation S-X. Non-traded REITs are permitted to continue offering shares after a 20D Amendment is filed with the SEC and before it is declared effective. Depending on the nature of the specific REIT—UPREIT, DownREIT, listed, non-traded, equity, mortgage, externally managed, internally managed, etc.—there are additional necessary disclosures under the SEC’s Industry Guide 5. In July 2013, the SEC issued guidance regarding disclosure by non-traded REITs, particularly the applicability of certain provisions of Industry Guide 53. The SEC’s Industry Guide 5 also includes requirements regarding sales literature. In particular, Item 19.D of Industry Guide 5 provides that “any sales material that is intended to be furnished to investors orally or in writing . . . should be submitted to the staff supplementally, prior to its use.” Pursuant to SEC Staff guidance, if the Staff does not comment on submitted sales literature within 10 calendar days, it may be used by the non-traded REIT. Further, many states have codified the requirement for non-traded REITs to submit sales literature to the states prior to use. Finally, it is best practice for broker-dealers selling non-listed REIT securities to submit sales literature to FINRA and receive a “no objections” notice for use of such sales literature. 3 CF Disclosure Guidance: Topic no. 6, “Staff Observations Regarding Disclosures of Non-Traded Real estate Investment Trusts” (July 16, 2013), available at http:// www.sec.gov/divisions/corpfin/guidance/cfguidance-topic6.htm.
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