FAQ Real Estate Investment Trust Morrison Foerster | 12 information. Because of the significant additional disclosure burdens, most sponsors seek to enable any potential roll-up transaction to qualify for an exemption from registration under the Securities Act. State Roll-Up Rules (Non-Traded REITs) The NASAA REIT SOP imposes significant requirements with respect to the entry into a roll-up transaction by a non-traded REIT. The NASAA REIT SOP defines a roll-up transaction as a transaction involving the acquisition, merger, conversion or consolidation, directly or indirectly, of the REIT and the issuance of securities of an entity that would be created or would survive after the successful completion of the transaction (referred to as the “roll-up entity”), but excluding: ▪ A transaction involving securities of the REIT that have been listed on a national securities exchange for at least 12 months; or ▪ A transaction involving the conversion to corporate, trust or association form of only the REIT if, as a consequence of the transaction, there will be no significant adverse change in: ▪ Stockholder voting rights; ▪ The term of the REIT’s existence; ▪ Compensation to the REIT’s external advisor; or ▪ The REIT’s investment objectives. Among other protections, an appraisal of the REIT’s assets as of a date immediately prior to the announcement of the proposed roll-up transaction must be obtained from an independent expert in connection with any roll-up transaction. In addition, stockholders who vote against any proposed roll-up transaction must be given the choice of (i) accepting the securities of the roll-up entity or (ii) either (a) remaining as stockholders of the REIT and preserving their interests therein on the same terms and conditions as existed previously or (b) receiving cash in an amount equal to their pro rata share of the appraised value of the net assets of the REIT. Further, non-traded REITs are prohibited from participating in any roll-up transaction: (i) that would result in the REIT’s stockholders having voting rights in a roll-up entity that are less than those provided in the REIT’s charter, (ii) that includes provisions that would operate to materially impede or frustrate the accumulation of shares by any purchaser of the securities of the roll-up entity, except to the minimum extent necessary to preserve the tax status of the roll-up entity, or which would limit the ability of an investor to exercise the voting rights of its securities of the roll-up entity on the basis of the number of shares held by that investor, (iii) in which an investor’s rights to access of records of the roll-up entity will be less than those provided in the REIT’s charter or (iv) in which any of the costs of the roll-up transaction would be borne by the REIT if the roll-up transaction is not approved by at least a majority of the REIT’s outstanding shares. Are there any specific FINRA rules that affect REITs? FINRA rules regulate the activities of registered broker-dealers. As with any offering of securities of a non-REIT, a public offering by a REIT involving FINRA members requires the FINRA member to comply with FINRA Rule 5110, known as the “Corporate Financing Rule.” In addition to Rule 5110, a public offering by a non-traded REIT must comply with FINRA Rule 23104. Rule 2310 prohibits members and persons associated with members from participating in a public offering of a non-traded REIT unless the specific disclosure requirements and organization and offering expense limitations of Rule 2310 are satisfied. Rule 2310 requires firms, prior to participating in a public offering of a non-traded REIT, to have reasonable grounds to believe that all material facts are adequately and accurately disclosed and provide a basis for evaluating the offering. The rule enumerates specific areas to be reviewed by the member, in particular compensation, descriptions of the physical properties, appraisal reports, tax consequences, financial stability and experience of the sponsor and management, conflicts of interest and risk factors. A member may not submit a subscription 4 FINRA Rule 2310 applies to direct participation programs and non-traded REITs. Under Rule 2310(a)(4), a “direct participation program” is a program that provides for flow-through tax consequences regardless of the structure of the legal entity or vehicle for distribution or industry. REITs are excluded from the definition of a “direct participation program.”
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