Updated · Part of the CRE investment glossary
How a blind pool works
The sponsor sets out what the fund will buy: property types, markets, deal sizes, leverage limits and how much can go into one asset. Investors commit capital against that mandate. During the investment period the sponsor finds deals that fit and calls capital to close them; afterwards the fund operates and sells the assets and distributes through its waterfall.
A closed-end real estate fund is often a blind pool at its first close and becomes less blind as it invests: later investors can see the first acquisitions. Some funds are partly specified, with one or two seed assets and the rest of the capital unallocated.
What SEC Industry Guide 5 asks of registered programs
For registered offerings of real estate programs, the SEC’s Industry Guide 5 sets out the disclosure the staff expects, and Form 1-A requires Regulation A issuers to follow the industry guides too. Several of its items address unspecified properties directly:
- Risk factors: where a material portion of the minimum net proceeds is not committed to specific properties, disclose the added uncertainty because investors cannot evaluate how the proceeds will be invested, and that there may be a substantial delay before the money is invested and earns a return.
- No rate-of-return statements: where proceeds will go into non-specified properties, or properties without significant operating histories, it is generally not appropriate to state a rate of return.
- Properties as they become probable: when a reasonable probability arises that a property will be acquired, describe it, during the offering by a prospectus supplement or post-effective amendment.
- Prior performance: a narrative and tables on the track record of programs the sponsor ran before.
Private blind pool funds
In a Regulation D offering sold only to accredited investors, no SEC form prescribes what the memorandum contains. If a Rule 506(b) offering sells to non-accredited investors, Rule 502(b) requires them to receive information of the kind in Part II of Form 1-A, or in a registration statement, which brings the industry guides in. Either way the antifraud rules apply: Rule 10b-5 forbids untrue statements of material fact, or omissions that make statements misleading, in connection with the sale of any security. The Guide 5 items above make a sensible checklist for any blind pool memorandum. A blind pool fund is also different from a "blank check company" under SEC Rule 419, which covers registered penny-stock offerings by development-stage companies with no specific business plan.
Worked example: fees on commitments
Because a blind pool raises money before it invests, the fee base matters. A $50,000,000 fund charges a 1.5% management fee and has invested $15,000,000 by the end of year one. The rate is an example, not a market figure.
On commitments, investors pay $750,000 for the year; on invested capital, $225,000. Some funds charge on commitments during the investment period and on invested capital afterwards, so investors pay for the search as well as the assets. Read which base applies in each period.
| Fee base | Arithmetic | Year-one fee |
|---|---|---|
| Committed capital | 1.5% × $50,000,000 | $750,000 |
| Invested capital | 1.5% × $15,000,000 | $225,000 |
What investors check before committing
With no assets to underwrite, investors underwrite the rules and the people:
- Investment criteria and limits: property types, markets, leverage caps and concentration limits, and who can approve exceptions.
- Track record: full-cycle results of earlier deals in the same strategy, net of fees.
- Investment period and fee base: how long the sponsor has to invest and what fees are charged on meanwhile.
- Key-person and governance terms: what happens if named principals leave, and an advisory committee for conflicts.
- Reporting: what investors will see as each asset is acquired.
Primary sources
- SEC Securities Act Industry Guides, Guide 5 (real estate programs), items 7, 8, 10, 11 and 20
- 17 CFR §229.801(e), Guide 5 listed (Cornell LII)
- SEC Form 1-A, Part II Item 7(c): industry guides apply to Regulation A
- 17 CFR §230.502(b), information for non-accredited purchasers (Cornell LII)
- 17 CFR §240.10b-5, Rule 10b-5 (Cornell LII)
- 17 CFR §230.419, blank check offerings (Cornell LII)
General information, not legal, tax or investment advice. Your operating agreement, offering documents, counsel and CPA govern your deal.