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When Does the “Sale” of a Security Occur?

Reg D requires issuers to file a Form D

When you’re conducting an offering under Regulation D, the date you sell the securities is critically important. Reg D requires issuers to file a Form D within 15 days of the date the security was first sold. Failure to do so could result in the issuer losing its right to the exemption which would blow the entire offering.

What is the “date of first sale”?

The SEC defines the “date of first sale” of a security in the instructions of filing the Form D as: “the date on which the first investor is irrevocably contractually committed to invest, which, depending on the terms and conditions of the contract, could be the date on which the issuer receives the investor’s subscription agreement or check.” For most offerings, the date the security is first sold is easy to figure out; it’s simply the date the first investor signed the investment contract/subscription agreement and paid for their investment.

What about in the context of real estate syndications?

In the context of real estate syndications, however, the date a security is sold could get complicated. In many real estate syndications that utilize an exemption under Reg D, issuers often try to give themselves some leeway with dates because of the nature of closing on a piece of real estate. All syndicators and real estate professionals know that until all parties have signed on the dotted line and escrow has officially closed, any deal can fall apart. When you’re syndicating a deal with multiple investors who have already committed their funds, it’s important to give yourself some flexibility to refund your investors before you actually close on the property. If you didn’t, and a deal fell through prior to closing, you’d be stuck with investors’ funds and no deal to use their money on. This could also lead to other issues if you’d already filed your Form D.

This brings us back to the definition of the date of first sale above: in the context of a real estate syndication where an issuer can refund an investor prior to closing, when are the investors’ funds “irrevocably contractually committed”? Well, the answer depends on how your Private Placement Memorandum (PPM) is written. If your offering is for a specified property(ies) then you’d want to make sure the PPM states that investor funds are not irrevocably committed (i.e. can be refunded by the issuer) until at least the date of closing. That way, if a deal falls through before closing, you can return your investors’ funds, and not need to worry about filing a Form D because the offering never commenced. If you didn’t (e.g. you filed a Form D but your deal fell through), you’d still be on the hook to your “investors” and the SEC with no deal!

The date a security is sold may seem like an easy thing to figure out, but as you can see, it can sometimes get complicated. If you’re thinking about doing a real estate syndication and want to make sure you are totally compliant with the SEC, talk to one of our attorneys today.


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