The regulations that apply to alternatives vary by investment category. Some alternative investments are regulated in exactly the same way that traditional investments are.
At the federal level, this means the issuer or sponsor must register with the Securities and Exchange Commission (SEC), abide by its rules, and provide a detailed prospectus and regular financial reports.
Some investments are also subject to state regulation in the states where they’re available for sale.
Other investments, including most private placements, are generally exempt from SEC registration. Some are regulated by the states where the investments are sold, though others, including those available exclusively to qualified investors, are not. While each state has its own regulator, and its own rules, many collaborate on a number of important issues as members of the North American Securities Administrators Association (NASAA).
Broker-dealers who sell alternative investments are regulated as well at both the federal and state levels. They must register with the Financial Industry Regulatory Authority (FINRA), which is under the jurisdiction of the SEC, and with each State where they operate.
Non-traded REITs and BDCs
Non-traded REITs and BDCs appear similar in some ways, but the regulations that apply to them do differ base on the way the businesses are organized. Both must register with the SEC, REITs under the Securities Act Of 1933 and BDCs under both the 1933 Act and the Investment Company Act of 1940.
Non-traded REITs aren’t listed on a national exchange, so they must register in states where they’re sold. All offerings must be made by prospectus, following specific SEC guidelines for the information that must be provided and the format that must be used. There’s a specific focus on distributions, regular valuations, and the history of the redemption program if the program includes one. NASAA policy governs the make-up of the board of trustees, and sets standards for sales materials, fees and other compensation, investment restrictions, and suitability.
A BDC must provide a prospectus that describes its objectives and business plan, the amount of leverage it plans to use, and its fees and other expenses. The majority of its board of trustees must be independent, which means they have no connection to the sponsor or management team, and the board must provide a fair market value for each of its holdings every quarter. BDCs are also subject to state regulation, though the NASAA guidelines that apply are less specific than those that apply to non-traded REITs state rules also vary. However, broker-dealers must meet the same FINRA suitability and other due diligence requirements that apply to REITs.
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To raise money from investors without using a public offering, as non-traded REITs and BDCs do, sponsors may offer an investment privately. This is legal provided the investment qualifies for an exemption from registration with the SEC. Most exemptions are made under Regulation D Rule 506 of the 1933 Act. Then the only document that must be filed at the federal includes the names and addresses of the individuals behind the offering.
And if these individuals sell the offering themselves, don’t have to register or be regulated broker-dealers. If the issue is offered exclusively to qualified investors, the issuers can decide how much information to provide. The only rule that applies is that there must be no fraud involved. These offerings aren’t subject to state regulation, except in the case of fraud. If non-qualified investors are included in the offering, more oversight documentation is required.
Exemptions from registration are available under a number of other SEC regulations as well. For example, small businesses may raise limited amounts of capital by filing an offering statement and a prospectus-like document called an offering circular. These investments must be registered with the states where they are offered. Certain types of offerings, specifically those with drilling and mining operations, are excluded from exemption under NASAA’s statement of policy.
Limited partnerships are created under state law and must register with the SEC if they sell shares to investors and don’t qualify for an exemption from registration. Specific disclosure rules apply for gas and oil companies in filing registration statements and annual reports.
States may require registration of limited partnerships that are defined as securities even if the partnerships are exempt from registering with the SEC unless they are sold exclusively to accredited investors. NASAA requires gas and oil partnerships to meet specific disclosure standards, including, among other things, requiring a prospectus, detailed background information about the sponsor, signed subscription agreements from each investor, and details of the fees and expenses.
THE CARDINAL RULE
Investor protection is the primary of securities regulation in the United States, at both the federal and state levels. The key to protection is ensuring investors have access to accurate and timely information that enables them to make informed decisions.
Broker-dealers who have operations in more than one state can file a single registration rather than a separate one for each state. And, in most states, the firm’s representatives can meet the licensing qualifications by passing a Series 63 or Series 66 examination, which FINRA administers for NASAA. Most states also rely on the Central Registration Depository (CRD), electronic registration, and record-keeping system for broker-dealers, which FINRA and NASAA developed collaboratively and which FINRA administers.
There’s also a consolidated review process for issuers wishing to offer a program in several states. The issuers file a single application and are promised a response within 60 days. Two participating states lead the review, and when these reviewers approve the offering, all the participating states approve it at the same time.
Alternative Investments Regulation. Check Out Before Investing by Inna Rosputnia
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