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Regulatory Compliance

Regulatory compliance refers to the obligation of DST sponsors, managers, and stakeholders to adhere to the legal, regulatory, and procedural standards set forth by the state of Delaware and any other applicable federal regulations concerning DSTs. This encompasses a broad range of duties, from the creation of the trust and its operations to its dissolution.

Specifically, a Delaware Statutory Trust is a legal entity used primarily for real estate investment purposes, and it allows individual investors to own a beneficial interest in the DST, which in turn owns real estate assets. The DST industry is governed by Chapter 38 of Title 12 of the Delaware Code, and certain federal regulations, particularly when the trusts are used in conjunction with Section 1031 tax-deferred exchanges under the Internal Revenue Code.

Some key compliance areas in the DST industry include:

  1. Formation: Ensuring that the DST is properly structured and documented according to Delaware law.
  2. Operations: Adhering to the specified roles and duties of the trustee, which are generally limited due to the “bankruptcy remote” nature of DSTs. This means that DSTs are structured in such a way to minimize the risk of bankruptcy by restricting certain activities.
  3. Offering and Disclosure: If the beneficial interests in a DST are offered as securities to investors, there are specific Securities and Exchange Commission (SEC) regulations and other federal laws to be followed. This includes providing appropriate disclosure to potential investors and ensuring that any fundraising activities comply with federal securities laws.
  4. Tax Compliance: Ensuring that the DST operates in a manner consistent with Section 1031 of the Internal Revenue Code if it’s being used for a tax-deferred exchange, as well as other applicable tax regulations.
  5. Reporting and Record Keeping: Maintaining appropriate records, making necessary filings, and providing required notifications.
  6. End of Life/Dissolution: Ensuring that the dissolution or termination of the DST is done in accordance with Delaware laws and any other applicable regulations.

Failure to adhere to these and other regulatory requirements can result in penalties, loss of tax benefits, or other negative consequences for DST sponsors and investors. As such, it’s crucial for those involved in the DST industry to be well-acquainted with both state and federal regulations to ensure full compliance.