“Crowdfunding” has been a buzzword among investors and entrepreneurs for several years now, often bringing to mind successful startups, movie projects—and even a potato salad—made possible by online donations from people around the world who believe in an idea. In exchange, these investors often receive a token from the project: a tee-shirt, tickets to a premiere—even a bite of the salad.
Equity crowdfunding, however, is a more buttoned-up affair, and refers to the online offering, through a platform or portal, of private debt or equity securities to a group of people for investment. In return, those investors get equity or debt investment in the commercial enterprise. is was made legal by the Jumpstart Our Business Startups (JOBS) Act of 2012, Title III of which allows for equity crowdfunding when conducted by a licensed broker-dealer or via a registered funding platform. rough crowdfunding, a company can raise up to $1 million in a year, from both accredited and non-accredited investors. 1 Because it involves investments into commercial enterprises, crowdfunding is subject to regulation by the Securities and Exchange Commission (SEC). Crucial to attracting investors (especially those who are unaccredited), the JOBS Act also allows for a form of “general solicitation,” allowing companies to give notice directly to the public about the existence of an offering.
Just because the rules are out does not mean that the debate is over. Some legislators think that the SEC’s regulations for crowdfunding—especially the compliance and registration requirements–are too onerous and time-consuming for it to be protable, effectively hobbling the practice before it takes off. On the other side of the spectrum are those who think the SEC has not done enough to protect investors, especially those who are unaccredited (and thus new to investing). Since the JOBS Act was signed into law four years ago, several bills have been introduced to address these conflicting issues, but none have been made law yet.
So, what does equity crowdfunding mean for REALTORS®? Right now, it can be a new source of capital for commercial real estate projects. is is especially important to smaller projects and areas reliant on regional and community banks, which may struggle to find financing. Using a crowdfunding platform to finance a real estate project provides an alternative to working with banks, and allows developers to reach a wider audience of potential investors. However, unless a REALTOR® is registered with the SEC as a licensed broker-dealer, they cannot yet host a crowdfunding platform for their clients, or receive a commission for referrals to/ advising done on behalf of one.
There has been a sharp rise in the number of crowdfunding platforms specializing in real estate investments in the past few years, and growth is only expected to continue as the practice becomes more common. NAR will continue to advocate for crowdfunding legislation and regulations which will enhance the flow of capital to commercial real estate.
1Unaccredited investors are limited to a maximum investment of either $2,000 or the lesser of 5% of their annual income or net worth; accredited investors may invest up to 10% of their annual income or net worth.
This article appears in the Commercial Connections issue Summer 2016: Building Opportunities, Community & Our Future.