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Welcome to the Self-Storage University Podcast, where you will learn the correct way to identify, evaluate, negotiate, perform due diligence on, renegotiate, finance, turn-around and operate self-storage facilities. And your host is a partner in one of the largest real estate portfolios in the U.S. with nearly $1 billion of holdings, Frank Rolfe.
If you're a self-storage facility owner, at some point in your career, whether it's after buying one property or three or five, but everyone at some point reaches a moment where they don't have the capital to buy any more facilities. And when that happens, you have to venture into the realm of getting a capital partner. Some people get the capital partner as an individual, some through partnerships, but some use something called the Reg D 506. This is Frank Roth for the Self Storage University podcast. We're going to talk about a proposed change to the Reg D-506 structure of raising money that could have huge implications for self-storage property owners trying to grow their portfolio. Now, the Reg D came under the JOBS Act during the Obama administration. Its original goal was to try and help businesses form and raise money in areas that were blighted and that no one would invest in. The example given at the time was someone who wanted to open a restaurant in inner city Detroit, and no one is going to go ahead and invest in that. There's no bank that's going to underlie the loan there. So what the JOBS Act was to do was to allow people to raise money in the form of selling shares.
As I recall at the time, a dollar a share with up to a million shares that could be sold. And the problem with this concept was it was a complete contradiction to the Securities and Exchange Act of 1933. In fact, the head of the SEC hated this idea so much that they resigned rather than enact it, saying it would be basically the end of civilization. They were so upset, which was, of course, ridiculous. But, you know, people get sometimes. So the Reg D became law under Obama, and what it does is it allows you to raise money from people, but the structures changed dramatically over time because it's no longer people trying to raise money to open a restaurant in inner city Detroit. Today, it's probably its biggest user is, in fact, the real estate industry. So by combining the investments of a large number of people, a Reg D 506 can grow to be a fairly large investment tool. And they come in a couple of different classifications. You have what's called a B fund and a C fund. And again, I'm not an attorney, so I'm just telling you what I remember. So don't use this as your legal guidance.
Go ahead and get a real lawyer to tell you how this works. But a B fund allowed for friends and family. I've forgotten the number, maybe 30 or 35 friends and family. And the rest of the investors had to be what they called accredited. Now, again, not being a lawyer or an accountant, I'm not going to even tell you what accredited means because I don't want anyone to say, oh, I gave you the wrong information. But an accredited investor has a very large amount of annual income and or very large amount of net worth, not including their house. And it becomes fairly rarefied error because not that many people in America have as much money as is required, either in income or in net worth. But that's just the way the government set it up. And they set it up that way because they thought that accredited investors could not be taken advantage of. And they worried that neophyte investors who didn't really know how business works would be very gullible and could be sold on investing in a Reg D's that really at the end of the day had no potential to ever make money or pay distributions.
So at least accredited investors could maybe spot those issues. And additionally, the accredited investor, if they lost some money, well, they had lots of money to lose. But what happens then is it limits the ability to raise money under the Reg D format. Because, again, it's very rarefied error. And the only way you can attract advertisers for a Reg D, traditionally, again, I'm not an attorney, check this out yourself. If you wanted to advertise for investors, then you can run ads only on the Reg D 506 C, which is where everyone is accredited. But if you go with the B fund, the friends and family fund, they have to be just that friends and family are not allowed to advertise for them at all. Now, that's the way it's been for the longest time. I think they brought out the Reg D 506 back in about 2009, 2010, and it hasn't had a whole lot of changes since then. But recently, they're talking about a big change. This is something that has not officially happened yet, but looks like it might be on the pathway to passage. And what it would do is it would it would create a new category of accredited investor.
So instead of earning a certain amount or having a net worth of a certain amount under the new concept, you could take a test and the test could declare that you are an accredited investor by nature of your knowledge. It would be kind of like passing the bar exam. Kind of like beginning your M.D. Doctorate degree. Didn't matter how much money you have or how much net worth you have. When you become a lawyer, you're deemed through passing the state bar and going to law school. You're deemed to be knowledgeable enough to practice law no different than the highest earning, highest net worth lawyers on earth. Kind of a one size fits all. So the argument is, why can't we do that with this concept of being accredited? Now, if this should pass, there will be some changes that you should be aware of. So the first one will be, there'll probably be a giant boom regarding the Reg D format, because you'll have lots of people who are excluded from it in the past who will now have the capability of investing as an accredited investor. That is going to be a huge shift.
There are lots of people out there who are very disgruntled with how things have gone for them with the stock market, CDs, bonds. Here's a terrible statistic for you. You've seen all those financial ads that talk about you need a million dollars for retirement. I see ads that say, can you really retire on two million dollars? Only two and a half percent of all American seniors have a million dollars to invest. Two and a half. It's on TV every night, ad after ad after ad. But it would appear they've been selling all Americans a bill of goods. They talk about, hey, invest with us. We got your back. We know what to do. We'll help you grow that nest egg to a million, but they don't deliver. Or if they do deliver, it's a very small fraction of our society at only two and a half percent. So a lot of people are going to be looking to alternative investing to try and get a higher yield and get the job done since it's not happening in the conventional investing arena. And that should probably send a lot of more people towards the concept of becoming an accredited investor if it's no longer based on finances, but just your ability to take a test.
Now, there's a lot of storage people out there, a lot of storage investors who are already using the Reg D format. So I'm of the opinion that if they change this rule and make it where accredited is simply based on passing a test, that there'll be a lot more potential money pouring into those funds. I also think, as there'll be more money pouring in and more awareness for people of the concept of Reg Ds and accredited and the accredited test, that more people will open those funds. And if you are a storage investor, and again, you've worked out your capital and you've basically spent the money you have to buy what you have in your portfolio, but you have that portfolio piece in the form of a property or properties that are doing well, then you might investigate the realm of the Reg D. It's called a Reg D 506. You can read about it on Wikipedia. If you look up what's called the JOBS Act, J-O-B-S, and learn more about it. Because if they do change how people are accredited, the first time it will have ever been changed in American history, to nothing more than passing an exam.
It will definitely be like a dam breaking. There'll be a massive outflow of capital from traditional investments, which don't really get anyone anywhere. Think about it, a CD paying at 4% means you're simply tracking inflation, nothing more, you're not actually making any money. To actually make money in America, you have to be in investments that make at least 10 or 20% annualized return. Not going to find it in most things out there. Stock market has been very sketchy on pulling that off over its life cycle. Very big on some years, but there's entire decades in which the market moved, not at all. But I really think you should at least keep your eyes open and read up on it, because this will have a fundamental shift on how money is raised. This is Frank Rolfe of the Self Storage University podcast. Hope you enjoyed this. Talk to you again soon.