Is a DST a security, and who is allowed to sell me one?

Real estate to the IRS, a security to the SEC, and both statements are true

Rev. Rul. 2004-86 holds that exchanging real property for an interest in a properly drafted Delaware statutory trust "is the exchange of real property for an interest in Blackacre", because each beneficial owner is treated under §§671 and 677 as owning an undivided fractional interest in the trust's assets. That is a federal income tax classification and nothing more.

Whether the same instrument is a security is decided under the securities laws, and it is: you hand money to a sponsor, a trustee and a master tenant run the asset, and your return depends entirely on their work. Sponsors therefore sell DST interests through registered firms under an exemption from registration rather than by public offering (does a DST interest qualify as like-kind property).

Nothing about the securities label weakens the tax result. The two regimes ask different questions, and a DST is designed to answer both at once (the Delaware Statutory Trust guide).

Rule 502(c) is the reason you cannot find live offerings on anyone's website

Rule 502(c) bars the issuer and anyone acting for it from offering or selling "by any form of general solicitation or general advertising", and spells out what that covers: "any advertisement, article, notice or other communication published in any newspaper, magazine, or similar media or broadcast over television or radio", plus "any seminar or meeting whose attendees have been invited by any general solicitation or general advertising".

That is why a sponsor's public pages carry education and closed deals rather than the trust raising equity this month, and why a firm will want a conversation and a suitability file before showing you anything specific. Filing the Form D itself does not count as general solicitation, so you can read a live filing on the SEC's EDGAR system even when you cannot see the offering documents.

The securities you eventually buy stay restricted. Rule 502(d) gives them the status of securities acquired under section 4(a)(2), so they "cannot be resold without registration under the Act or an exemption therefrom" — one of the reasons a DST has no secondary market (DST illiquidity and exits).

Who may put a DST in front of you, and who may not

Exchange Act §15(a)(1) makes it unlawful for a broker or dealer to use the mails or interstate commerce "to effect any transactions in, or to induce or attempt to induce the purchase or sale of, any security" unless registered. The SEC's own guide to broker-dealer registration treats soliciting or negotiating a transaction, receiving compensation that depends on its size or outcome, and marketing real estate investments that are securities as the activities that require registration.

• May sell: a FINRA member broker-dealer and its registered representatives, supervised under the firm's written procedures.
• May advise on and place: an SEC- or state-registered investment adviser, acting under its own fiduciary duty.
• May not sell: a real estate broker, a qualified intermediary, a CPA or an attorney, unless separately registered in that capacity.
• May not be paid: anyone taking a share of the commission for the introduction, which is the transaction-based compensation that defines broker activity.
• Your QI's role stops at the exchange documents and the funds (what the qualified intermediary needs, do I need a QI to exchange into a DST).

Accredited investor: the two numbers, the housing carve-out and the licence route

Rule 501(a)(5) counts a natural person whose net worth, alone or with a spouse or spousal equivalent, exceeds $1,000,000. The primary residence is excluded as an asset, and the mortgage on it is excluded as a liability up to the home's estimated value, except that any increase in that debt in the 60 days before the sale counts against you. Debt above the home's value is always a liability.

Rule 501(a)(6) counts income over $200,000 individually, or $300,000 with a spouse or spousal equivalent, "in each of the two most recent years" with a reasonable expectation of the same this year. Rule 501(a)(10) adds holders of professional certifications the Commission designates, and entities qualify through the $5,000,000 tests in Rule 501(a)(7) and (9).

Rule 506(b) does technically permit up to 35 non-accredited purchasers in any 90-calendar-day period, each of whom must be "capable of evaluating the merits and risks of the prospective investment". Most DST sponsors decline to use that allowance because it triggers a heavy information-delivery obligation (accredited investor requirements for DSTs).

What Regulation Best Interest actually obliges the firm recommending a DST to do

Reg BI requires a broker-dealer recommending a security to a retail customer to "act in the best interest of the retail customer at the time the recommendation is made, without placing the financial or other interest of the broker, dealer, or natural person... ahead of the interest of the retail customer", through four obligations: disclosure, care, conflict of interest and compliance.

The care obligation has real teeth for an illiquid product. The firm must have a reasonable basis to believe the recommendation suits you specifically, judged against a defined investment profile that expressly includes your "other investments, financial situation and needs, tax status... investment time horizon, liquidity needs, risk tolerance". A separate limb covers a series of recommendations taken together.

On the product side, FINRA Regulatory Notice 23-08 of May 9, 2023 says a member must conduct a reasonable investigation of any Regulation D offering it recommends, extending the areas listed in Notice 10-22 to the issuer's regulatory and litigation history, transactions between the issuer and its affiliates, and cherry-picked past performance. "The presence of red flags should alert the broker to the need for further inquiry", and the firm may not rely solely on the sponsor's own representations.

Five checks you can run on the firm before you sign a subscription agreement

All five are free, and four of them take minutes. Do them before the 45-day clock makes you hurry.

• Ask for Form CRS, the plain-language relationship summary the firm must give retail investors.
• Look the firm and the individual up on FINRA BrokerCheck, and any adviser on the SEC's adviser search.
• Ask in writing how the firm is paid on this specific trust, and what the sponsor pays it.
• Ask whether the firm ran its own due diligence or bought a third-party report, and ask to see the summary.
• Find the sponsor's Form D on EDGAR and check the offering size against what you were told (how to read a DST PPM and Form D).

Where we sit in this, and where your own advisers do

Breakwater Exchange is a 1031 exchange broker licensed in all 50 states within a regulated broker-dealer framework, working with vetted national DST sponsors. That framework is the reason we can show you offerings at all, and the reason the conversation starts with a suitability discussion rather than a list.

Nothing here is tax advice for your situation, and the securities rules do not displace the tax ones: confirm the 1031 and reporting consequences with your own CPA or attorney (how to choose a 1031 exchange advisor).