Heather and Company sell Sorority Dorm Stock?
While visiting Heather’s apartment after a tennis match, Sue, Brenda, and Heather struck a conversation about their college experiences. Sue and Brenda were pleasantly surprised to find out that they were in the same sorority, though they attended different colleges. This particular sorority was a nationwide sisterhood known for its tight-knit community and secretive codes.
Due to certain internal rules passed down from the powers that be, the sorority was not allowed to own any real property, but could enter into lease agreements. Most of the buildings occupied by the sisterhood around the country are fancy, Victorian-styled buildings that were custom built to lease.
Heather, who quit her job and turned into a serial syndicator, suggested an idea to syndicate the buildings occupied by the sisterhood. Heather, after getting her taste of profits in the syndication business, now wants to syndicate everything in sight.
Brenda, excited about this new fact stated that setting up a fund to then own these buildings, would ensure that the sisterhood in some sense would maintain control over these buildings and it almost guarantees generations of revenue for anyone that owns them.
Sue, who owns Judgement Proof, LLC (“JPL”), a private equity firm that primarily focuses on real estate acquisition, chimes in enthusiastically, “I don’t know why I have never thought of that! I think we should leverage the extensive sisterhood network and launch a Regulation A Fund, which would allow both accredited and non-accredited investors to invest thus allowing for broad participation from the sisters nationwide.”
Heather reminds her fellow Sorority Dorm founders that testing the waters makes viability assessment and decision-making processes for the issuer a “no-harm/no-foul” proposition in case insufficient demand for the stock or any other reason arises, prior to funding.
Sue responds: “That’s a brilliant idea. Let’s assess genuine interest in the fund by testing the waters (1) first, to make sure that the women want Sorority Fund equity for real, not just because it sounds good to say you’d buy it. Testing the waters would give us a good feel for how many buildings we can buy. Hopefully, we raise enough to buy all of them.”
Built-In Liquidity (For Some)
Reg A+ deals theoretically come with secondary market liquidity, and word-of-mouth stock promotion by supporters of the company. Its product and stock fuels a larger footprint in both practical and stakeholder terms.
An established network of successful women creates a cohesive shareholder base and source for liquidity, when different sisters need to sell their shares in the dorm fund. Although the appeal of eventually owning a public stock is touted as a possibility for Reg A+ deals, the reality is that the bulk of these privately owned shares are tightly held and hard to remarket.
Sorority Dorm Fund (“SDF”) seems to get around that roadblock with the strength of several thousand loyal sorority sisters, showing their support for each other and their group’s future going forward, while making some money. An underwriting broker-dealer arranges for issuers like Sorority Dorm to post their size and price indications of interest on Reg A+ exchange platforms. The more robust the shareholder base, the greater liquidity the stock buyers and sellers will encounter on trade date.
Brenda assures Sue that she has the network of young women, who would be all over this idea. Selling mini-IPO stock in their old dormitory appears fun and creative. This Reg A+ deal would carry dual appeal for alumna, as a personal nostalgia-driven investment. For absolute strangers, Sorority Dorm might simply be an extraordinarily unique, smart investment.
Although not a member herself, Heather admits that their Sorority Dorm stock sounds compelling to her, having seen one campus masterpiece over Brenda’s daughter’s graduation weekend.
Identify the Opportunity
Gothic stone, Bauhaus concrete, Classical Georgian brick, and Midcentury Modern dormitories pepper campuses nationwide. Most are owned by builders pursuant to a build-to-lease arrangement and are managed by third-party property management companies that handle maintenance of the properties. The expected cash flow from all properties in aggregate must justify the prices paid for the buildings, in order to provide consistent net profit to equity holders.
For the right price or communal cause, SDF hopes to find that all buildings are readily available as the builders may be willing to monetize gains whenever a ready buyer comes along. Additionally, there is a high possibility of investor interest that could brew within the network of successful graduates.
These buildings have generated property appreciation and steady after-tax cash flow to the owners for a very long time. To a new, wide range of mutual stakeholders, SDF’s stock exposes both accredited and unaccredited retail investors exposure to diversified risk, through a multi-region collection of high-occupancy real property assets. This vast portfolio of properties provides steady operating and free cash flow because all capex expenses are capitalized. This scattered portfolio of properties is conveniently assured high-quality maintenance by meticulous physical plant staffers, professional landscapers, plumbers, and masons, who are responsible for the colonial buildings.
Tier 1 or Tier 2?
If the entire portfolio of sorority houses amounts to fewer than $20 million, then an easier Tier 1 offering could make sense. However, that would only allow the fund to buy 10 properties, with an average cost below $2 million. The upside is that Tier 1 offerings do not place limitations on the amount an unaccredited investor may invest, unlike Tier 2 offerings.
The Tier 2 option allows greater flexibility as to the number and the cost of houses, covering deals between $20 million and $75 million. With 30 chapters and an average cost of $2 million for each property, the budget fits squarely in the Tier 2 category, with at least $60 million needed.
Neither securities sold pursuant to Tier 1 nor Tier 2 are restricted securities but there are certain limitations to how resales take place, each potentially enjoying a secondary market, if feasible – such as listing on an Over The Counter Market.
Tier 2 offerings enjoy certain benefits that Tier 1 does not:
- State pre-emption allows issuers to forego state review of the offering.
- Tier 2 offerings allow for the raising of $75 million for every 12 months as opposed to $20 million.
Other features of Tier 2 create certain hurdles:
- Rather than merely reviewed financial reports, issuers must pay accounting firms. for more extensive “audit” level scrutiny and legal attestation as to their accuracy.
- Unaccredited investors may only invest up to 10% of their gross income or net worth.
|Tier 1||Tier 2|
|Maximum Deal Size (for every 12 month period)||$20 million||$75 million|
|Number of Investors||Unlimited||Unlimited|
|Unaccredited Limit||None||10% of Income or Net Worth|
|General Solicitation (Advertisements)?||Yes||Yes|
|Testing the Waters?||Yes||Yes|
|State Pre-emption?||No, subject to state review with different requirements dependent on whether the state is a merit or disclosure jurisdiction.||Yes, only notice filing needed.|
|Ongoing Financial Reporting post launch?||No, file exit report after completion of offering.||Annual, semi-annual, and current reports unless exit report is filed pursuant to Rule 257(d)(2).|
|Audited Financials?||Audited financials might be required – depends on state regulator.||Audited|
- See Rule 255 of the Securities Act of 1933.