Crowdfunding Comes to Real Estate Investing

Today, individual real estate investors have more opportunity than ever to invest in income-producing property, thanks to a new rule  – The Jumpstart Our Business Startups Act of 2012 (The JOBS Act) – which ends an 80-year ban on “general solicitation”, allowing private firms and investment funds to broadly advertise securities offerings.
Expect to see real estate sponsors giving it their all via the Internet, television, newspapers, and billboards…and, more importantly, keep your eyes and ears open to avoid getting swindled.

What Spurred The JOBS Act?

The JOBS Act came about as Congress pushed to promote crowdfunding as a means of raising capital. Crowdfunding is defined as the practice of funding a project or venture by raising many small amounts of money from a large number of people, typically via the Internet. Currently, The JOBS Act allows only for private placement issuers to sell to accredited investors. Accredited investors would include individuals with single or joint incomes of $200,000-$300,000 yearly, respectively, over the two prior years, or net worth exceeding $1 million (excluding a primary residence). It is the issuer’s responsibility to verify buyer accreditation.

The rule, from the Securities and Exchange Commission, marks a momentous departure from the days when private placement issuers were permitted only to offer their securities quietly to potential investors who had been prospects or clients of the firm, or hire investment banks to source buyers.

Private real estate securities are not SEC-registered, unlike shares of Boston Properties (BXP), Simon Property Group (SPG) and other well-known REITs. Therefore, private sponsors are not subject to reporting regulations aimed at promoting transparency and safeguarding investors.

We can expect the future to bring SEC adoption of broader crowdfunding rules which would allow anyone to invest in private offerings, due to an SEC crowdfunding proposal awaiting final approval early 2014. This change has already motivated demand on several online platforms, such as Realty Mogul and RealCrowd, designed to connect investors with private issuers. Typically, the platform reviews offerings and sponsors, verifies legitimacy, then opens offerings to investors for a minimum stake of $5000. If the issuer should fail to raise its goal, money is returned to the investors.

Still, the new rule remains controversial. Crowdfunding supporters claim the ad ban kept participation in private offerings low. However, the SEC estimates 8.7 million U.S. households qualify as accredited investors.  State securities regulators and investor protection watchdogs fear giving crooks too much room to swindle unsophisticated investors.  All investors are encouraged to perform due diligence and understand the risks before participating.