You’ve seen the news headlines about real estate crowdfunding and how it is changing the commercial real estate industry. In this post I will cover real estate crowdfunding and give you a solid overview of what is possible with crowdfunding real estate investments. and also where you need to be cautious. Title III regulations, which allow non-accredited investors to fully participate in investment crowdfunding.
The JOBS Act Gives Birth Investment Crowdfunding
It’s hard to be on the internet without coming across an article about some new crowdfunding startup. The power of using a group of strangers to raise money for everything. When the JOBS Act was signed in 2012, it was, in part, targeting a very specific type of crowdfunding.Even more exciting is that investment crowdfunding is not limited to accredited investors. Under Title III or Reg CF, regular consumers can receive the benefits of investment crowdfunding. They can place their money in real estate or business projects all over the world, and grow their nest egg from their home computer.
The Power of the JOBS Act
Real estate crowdfunding uses the same principles of pooling capital as syndication, but leverages the changes in the rules brought by the JOBS Act to make it easier to find investors. Crowdfunding is like syndication, only with more latitude in the solicitation rules and without the need for pre-existing relationships between the sponsor and the investors. In some cases you can also seek out investors who traditionally would not have been eligible to invest in a real estate syndicate because they lacked sufficient income or assets to qualify as an accredited investor. This simple rule change allows people that live in the community to invest in the real estate and business development in their neighborhoods and build wealth and their community at the same time.
Title III Crowdfunding Regulations
After more than three years of waiting, the SEC finally released the proposed regulations for Title III of the JOBS Act. This step will finally allow non-accredited investors to fully participate in investment crowdfunding. The rules will not be in full effect until June 2016, but the process for online crowdfunding portals to register with the SEC will begin the end of January 2016.
The Rules for Investors
While non-accredited investors will be able to participate in crowdfunding, individuals will be limited in the amounts they are able to invest. Investors with a net worth of less than $100,000 can only invest either $2,000 or 5% of their annual income or net worth, whichever is greater, a year. This means that most investors in this category are limited to investing less in equity crowdfunding than they can put into an IRA each year.
Investors with a net worth of $100,000 or more can only invest up to 10% of the lesser of their net worth or annual income a year in equity crowdfunding securities. No investor is allowed to purchase more than $100,000 in crowdfunding securities in any 12-month period.
Investors will not be allowed to sell their crowdfunding securities for at least one year in most circumstances. Investors will not be required to register their crowdfunding securities so long as the issuer is in full compliance with SEC reporting obligations is has less than $25 million in assets.