Each rental home and vacation rental property funded on Arrived is qualified with the U.S. Securities and Exchange Commission. But why do we go through the process to ensure that every offering on Arrived is qualified?
What is the SEC?
As the Great Depression wreaked havoc on Americans’ confidence in the U.S. markets, Congress passed the Securities Act of 1933, also known as the “Truth in Securities” law, which had two primary objectives:
- Require that investors receive financial and other significant information concerning securities being offered for public sale
- Prohibit deceit, misrepresentations, and other fraud in the sale of securities
- Protect investors
- Maintain fair, orderly, and efficient markets
- Facilitate capital formation
Why Does Arrived Qualify its Offerings with the SEC?
There were two primary reasons behind Arrived’s decision to go through the process of qualifying its offerings with the SEC:
- Anyone can invest: By qualifying its offerings with the SEC, Arrived can allow anyone over the age of 18, accredited or non-accredited, to participate in its offerings.
- Investor protection: Qualifying offerings with the SEC means filling out long-form document disclosures for each property, filing financial statements on a semi-annual basis and auditing those statements on an annual basis. All of this provides adequate disclosure to investors so that they understand what they’re investing in and the performance of each asset.
Why Should You Care?
As the real estate investing space has grown, numerous startups have come to market with different approaches toward their offerings. One such approach is by utilizing the blockchain to tokenize properties. So, what’s the difference between securities and tokens?
What is a security? Investopedia explains it perfectly with the following definition:
The term “security” refers to a fungible, negotiable financial instrument that holds some type of monetary value. A security can represent ownership in a corporation in the form of stock, a creditor relationship with a governmental body or a corporation represented by owning that entity’s bond; or rights to ownership as represented by an option.Investopedia: What are Financial Securities? Examples, Types, Regulation, and Importance
Simply put, a security is a secure, tradable financial asset. And, this may go without saying, but, securities are regulated by the SEC.
All Arrived Offerings are securities.
What is tokenized real estate? Here’s how CoinTelegraph explains it:
The tokenization of real estate refers to the process of fragmenting an asset into digital tokens that represent the underlying property with all its rights and obligations. Smart contracts are used to define contractual specifics. The algorithm encoded in the digital contract activates the events stated in the code if a predefined contract condition is satisfied.CoinTelegraph: What is tokenized real estate? A beginner’s guide to digital real estate ownership
The Big Difference
Tokens may sound very similar to securities. Still, the big difference is that they are not registered or qualified with any regulatory body like the SEC.
How Arrived’s Process Works
So, how does our process of buying homes and qualifying them with the SEC work? Here’s a general overview:
Downsides to SEC-Qualification
While the positives far outweigh the negatives, there are, in fact, some challenges when it comes to registering and qualifying properties with the SEC.
- Time: The most notable downside of working with the SEC is the time required to complete the necessary filings for a property to be fully registered and fully qualified. And due to the nature of qualification, we often can’t pinpoint the exact date and time an offering will be available to investors to fund.
- Resources: To complete the aforementioned filings and respond to any SEC inquiries, Arrived has to maintain a finance and legal team dedicated to supporting the process.
Access Arrived’s SEC Filings Here
Arrived property financials are prepared in compliance with generally accepted accounting principles (GAAP) for regulatory purposes. Arrived holds its team accountable for the accuracy and integrity of information. If you would like to access our SEC filings, you can click here.
What is Regulation A?
When you pull up an SEC filing from Arrived, you will see a couple mentions of Regulation A, such as, “Each Offering is being conducted (i) under Tier II of Regulation A of the Securities Act of 1933…”
So, what is it? Here’s a full breakdown of Regulation A from the SEC:
Regulation A is an exemption from registration for public offerings. Regulation A has two offering tiers: Tier 1, for offerings of up to $20 million in a 12-month period; and Tier 2, for offerings of up to $75 million in a 12-month period. For offerings of up to $20 million, companies can elect to proceed under the requirements for either Tier 1 or Tier 2.
There are certain basic requirements applicable to both Tier 1 and Tier 2 offerings, including company eligibility requirements, bad actor disqualification provisions, disclosure, and other matters. Additional requirements apply to Tier 2 offerings, including limitations on the amount of money a non-accredited investor may invest in a Tier 2 offering, requirements for audited financial statements and the filing of ongoing reports. Issuers in Tier 2 offerings are not required to register or qualify their offerings with state securities regulators.U.S. Securities and Exchange Commission: Regulation A
Arrived Offerings fall under Tier 2, and our operations fully support the requirements laid out by the SEC. It’s also worth noting that the limitation on the amount of money a non-accredited investor may invest in a Tier 2 offering is 10% of the total offering, so Arrived sets a maximum investment amount at 10% for all investors on our platform, regardless of accreditation status.
While working with the SEC can add complexity and make our process longer, we at Arrived think it’s necessary. The only way to democratize access to the real estate market is to allow anyone to invest, and the best way to do it is to do it in a way that provides maximum protection for those investors.