Crowdfunding for Real Estate

There has been a serge of interest lately in Crowdfunding. The concept is for an entity or an individual that is looking to raise capital, to reach out to the general public for small individual contributions towards its capital goal. The capital is typically used to launch or grow a product, service, or idea; however there has been a recent rise in its use for real estate investing. Using the Crowdfunding vehicle also gives a certain amount of promotional exposure to the issuer.

The platform lends itself very well to socially conscious endeavors whereby people in a community, or behind a certain cause, can all contribute or chip in towards its achievement. Popular Crowdfunding websites such as Kickstarter are used to raise capital for creative projects such as art, movies, and even food trucks. However the investors in Kickstarter projects do not get to own equity, or become shareholders, in the project or entity. In return for their money the investor will typically get an advance sale, at a discount, of the product being launched, promotional material, or name recognition. For example, a movie needing production funding could offer investors a discounted copy of the finished movie, and depending on the level of your investment, they could even get a Producer credit in the movie.

For Crowdfunding to award investors an equity stake or shareholding in an entity, they would need to comply with strict SEC regulations around the promotion of investments and the solicitation of investors. The whole premise of Crowdfunding is to make it easier, cheaper, and more efficient for entities to raise capital, and to give investors more access to investment opportunities. It is the democratization of investing, allowing small entities and individual investors to easily and efficiently meet, that would otherwise be cost & time prohibitive by going through traditional investment banking channels.

The SEC regulations are designed to protect investors, particularly unsophisticated investors, from losing their money. The Jumpstart Our Business Startups Act of 2012, known as the JOBS Acts, has proposed some amendments to current SEC regulations around capital raising which will directly benefit Crowdfunding. The JOBS Act makes two particular proposals, one a revision to current Regulation A, to be called Regulation A+, and the other called Title III concerning SEC registration exemptions.

Regulation A+ proposes an exemption to a capital issuer having to register in each State that it offers its securities in, once the SEC qualifies the offering. It will raise the offering limit from $5 million to $50 million, and ease the requirement of when audited financial statements are required form the current $500,000, to $5 million.

Title III proposes allowing capital raises of up to $1 million to unaccredited investors, without rigorous SEC filings and State by State approvals. The capital issuer would simply file an offering statement with the SEC, which would not need SEC review or clearance.

These JOBS Act proposals have not yet been approved, and the earliest an approval can be expected would be sometime in early 2016. There is considerable doubt as to whether final approval will be granted due to the significant pushback from the State level regarding the relinquishment of their oversight of capital issuers.

So then, how can a Crowdfunding site legitimately raise capital today? Under current regulations an issuer can raise capital under Regulation D Private Placement, Regulation A Offering, Federal S-1 Offering, or a single State qualification by permit.

Rule 506b of Regulation D is a private placement with accredited investors for an unlimited amount of capital, without the need to register a public sale through the SEC. The issuer cannot solicit the investors with public advertising, but they can contact investors it reasonable believes to be accredited. Regulation A, Federal S-1, and State permits, all require some level of review and approval before soliciting investors.

Therefore capital issuers today raising money via Crowdfunding for new business ideas or real estate projects are still somewhat restricted, and for the most part only have accredited investors as their audience. From my review of some Crowdfunding websites dedicated to real estate, it does not appear as if using this vehicle would be more cost efficient for an accredited investor. Accredited investors typically have access to direct investments in real estate as a Limited Partner, and have an ability to negotiate their own terms.

If you have a development project or an investment property in need of capital, with either debt financing or equity co-investment, or you seek an experienced development/operational partner, please give me a call. Likewise, if you have capital to deploy we can assist with identifying appropriate real estate opportunities.