Commercial real estate crowdfunding laws can be dense, yet more than ever, commercial investors are harnessing the power of the internet to raise funds on the fly.
Crowd-sourcing websites like realtyshares.com, realtymogul.com and realcrowd.com draw in droves of investors on the daily, and the demand doesn’t appear to be slowing down anytime soon. In 2015, real estate investors dropped an estimated $484 million in crowdfunding sites alone.
Dubbed “the best way to invest in real estate,” these websites have leveled the playing field for investors of all financial capacities, but it hasn’t always been that easy. In fact, small investors have only been able to invest in these ventures for just over a year.
Before real estate crowdfunding hit its stride, investors made use of a method called syndication. In effect, an investor would often hire a sponsor to essentially track down a property and manage its sale. Project investors funded a large sum of the investment and eventually split the profit evenly based on share. Syndication was challenging to market, especially considering the types of technology on the market today.
The JOBS Act:
Jump ahead to 2012 and the commercial real estate crowdfunding laws change quickly — the Jumpstart Our Business Startups (JOBS) Act, Title III, was signed into law and effectively made real estate investment crowdfunding possible. The law required heavy involvement from the US Securities and Exchange Commission, which was tasked with rolling out a series of new rules before the JOBS Act went into full effect in 2015.
The SEC started with advertising by deconstructing a part of the JOBS Act called Regulation D. In 2013, the agency lifted prior restrictions that prohibited the solicitation of private offerings for accredited investors while establishing protections against fraud under rule 506(c).
In 2015, the SEC altered Regulation A+, to open crowd-sourced investment opportunities to non-accredited investors, meaning an investor who has a net worth that’s less than $1 million and a gross income of $200,000 per year.
The regulation broke asset classes into two tiers — the first at $20 million or less, and the other falling between $20 million and $50 million raised per year. With this rule, anyone has the option to invest; for non-accredited investors, the cap is 5 percent of their annual income.
Finally, in January 2016, real estate crowdfunding websites could begin registering with the SEC.
For a full guide on SEC crowdfunding rules and regulations, visit the government’s website.