(Article from Registered Funds Regulatory Update, July 2025)
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The North American Securities Administrators Association recently proposed revisions to its Statement of Policy Regarding Real Estate Investment Trusts, which includes a proposal to limit investments in non-traded REITs and other non-traded direct participation programs (such as BDCs) to 10% of an investor’s liquid net worth.
Under the proposed concentration limit structure, individual investors would be restricted to investing no more than 10% of their liquid net worth in non-traded REITs, BDCs, and other direct participation programs on a combined basis. However, state securities administrators retain discretionary authority to exempt “accredited investors” from these “default” concentration limits. Individual states would also maintain authority to require higher or lower concentration limits based on specific program risks.
NASAA’s rationale for the concentration limits centers on liquidity constraints and investor protection concerns. According to the proposal, most non-traded REITs maintain voluntary repurchase plans that are capped at 5% of net asset value per quarter, but these plans have faced significant stress in recent years. NASAA argues that the concentration limits are necessary given the complexity and risks of these investments. NASAA notes that non-traded REITs have generated disproportionate investor complaints, ranking third among all security types in FINRA arbitration cases over the past three years despite representing a relatively small portion of total market capitalization of offered securities.
Should the concentration limits be implemented, they would represent the most significant change to non-traded REIT regulation since 2007. Industry observers suggest the practical effect may accelerate the existing trend toward private placements, potentially reshaping the entire market structure for alternative investment products while raising questions about the ultimate impact on investor access and market development.
NASAA’s proposed revisions follow a previous request for public comment on proposed revisions to the REIT Guidelines issued by NASAA in 2022. Other proposed revisions include (i) updating the conduct standards for brokers that sell non-traded REITs to incorporate Regulation Best Interest; and (ii) increasing investor qualifying requirements to $100,000 (from $70,000) in annual income and net worth or at least $350,000 (from $250,000) in net worth to account for inflation since they were last updated in 2007.
The proposed revisions were subject to comment until May 28, 2025.
NASAA Request for Public Comment, Proposed Amendments to the NASAA Statement of Policy Regarding Real Estate Investment Trusts (Mar. 25, 2025), available at: https://www.nasaa.org/wp-content/uploads/2025/03/NASAA-Request-for-Public-Comment-REIT-Guidelines-Amendments-3-25-2025.pdf.