Get ready! Crowdfunding for real estate may become the latest “thing” in financing real estate deals.
Most of us who have heard of crowdfunding think of it in terms of well-known actors raising money for their independent movie projects, or underfunded entrepreneurs raising money to get their new inventions to the marketplace. Crowdfunding has never been tried in the commercial real estate world, however, because of concerns over violating the laws and rules set forth by the Securities and Exchange Commission (“SEC”) on raising money.
For the last 80 years, raising funds for equity real estate investments required registration except under Rules 504, 505 and 506 of Reg. D of the 1933 Act. The rules have strict guidelines on the marketing efforts behind the raising of equity, and limit the players to “accredited” investors: those who have a net worth over $1 million or whose income exceeds $200,000 individually or $300,000 for a married couple (there are a few exceptions to this as well). So raising money on the Internet presented a challenge in the face of these hurdles.
The JOBS act that was signed into law in 2012 and the issuing of a new rule by the SEC has potentially opened up the world of equity raising for real estate to crowdfunding, though. The new SEC rule, if finalized, will allow in limited fashion the raising of funds using the Internet in the “crowdfunding” manner.
Although the rules have not yet been finalized, the comment period elapsed in July. If instituted, the new rule would open up the Internet world and allow, in limited fashion, the crowdfunding concept to move forward for real estate. The proposed new rules would limit the amount raised to $1 million from investments of $2,000 or up to 5 percent of their net worth from persons making under $100,000. For people earning more that $100,000, the cap would be $10,000 of their net worth, not to exceed $100,000. So, the limited amounts would limit the size of deals potentially, or not, if used in combination with other traditional equity raising methods.
It is understood that there are a lot of concerns about the potential for abuse and fraud (there seems to be a new Ponzi scheme reported every day) with this unlocking of the regulatory doors towards equity raising online, and that is the reason the SEC is taking its time in finalizing the new regulations. It is clear with the proposed new rules, however, that the SEC is not going to allow a “free-for-all” in solicitation of people on the Internet, which is a good thing!
So, there is no such thing as crowdfunding for real estate... yet. However, stay tuned, as it appears that the regulatory hurdles are being addressed to deal with the ever changing market demands the Internet is providing for access to potential investors.