The U.S. Securities and Exchange Commission (“SEC”) released “Topic No. 6: Staff Observations Regarding Disclosures of Non-Traded Real Estate Investment Trusts” on July 16, 2013 (the “Disclosure Guidance”) for real estate investment trusts which do not have securities listed for trading on national securities exchange markets (“Non-Traded REITs”).  While the Disclosure Guidance is not a rule promulgated by the SEC, the effect will be to increase the amount of information disclosed to potential investors by Non-Traded REITs because the Disclosure Guidance represents the views of the SEC’s Division of Corporate Finance.  Notably, these guidelines may not encompass all of the facts and circumstances of every Non-Traded REIT. Therefore, a registrant should consult with legal counsel in order to consider the particularities of each Non-Traded REIT’s position when preparing filings to ensure that the information presented is not misleading and in contravention of the new guidelines.

In 1991, the SEC extended the “Securities Act Industry Guide 5” (“Guide 5”) to offerings conducted by Non-Traded REITs.  Guide 5 requires Non-Traded REITs to provide certain types of information to investors, namely annual transaction statements, financial statements, information regarding potential acquisitions, compensation to sponsors and affiliates, and information relating to prior performance. The Disclosure Guidance expands on the policies of Guide 5 and consolidates subsequent comments made by the SEC.

The main takeaway from the Disclosure Guidance is that Non-Traded REITs should disclose information that would enable potential investors to accurately evaluate the business characteristics and economic position of the Non-Traded REIT.  Pursuant to the Disclosure Guidance, a Non-Traded REIT should disclose its ability to maintain or increase its historical distribution yield, as well as disclose the source of funds used to cover a potential shortfall in the event that cash flow is insufficient to cover distributions.  Newly formed Non-Traded REITs that have not paid distributions to investors should disclose the rationale on which they are basing any estimates of distributions, share values, and/or asset values in filings with the SEC. Additionally, Non-Traded REITs should disclose any dilution that might have occurred which could affect the value of shares, as well as explain the impact of aggregate distributions paid in excess of earnings.

In addition to suggesting disclosure of information about distribution and estimates, the Disclosure Guidance also suggests that Non-Traded REITs should provide information to potential investors about their equity redemption programs.  Investments in Non-Traded REITs are generally illiquid, and many Non-Traded REITs have redemption programs to allow shareholders to liquidate their interests.  However, such programs typically have significant restrictions; therefore, the Disclosure Guidance suggests that Non-Traded REITs provide potential investors with a summary of their redemption program history, including the number of redemption requests received, the number of requests honored, the number of requests deferred, and the source of funds used to honor these requests.

Generally, the Disclosure Guidance is fairly comprehensive and touches many aspects of the disclosures routinely made by Non-Traded REITs.  Non-Traded REITs should consult with legal counsel in order to understand the effect and scope of the Disclosure Guidance in order to ensure that they are satisfying the expectations of the SEC’s Division of Corporate Finance.

Hallie B. Fisher, summer associate, also contributed to this article.