JOBS Act Exemption Allows Investors To Crowdfund To Raise Equity Capital From General Public
By Rick Tannenbaum
You found the perfect investment property. Solid triple net tenant on a long-term lease, good cash flow, strong NOI (net operating income), the right cap (capitalization) rate and IRR (internal rate of return). Interest rates are still low and you have a motivated seller.
Sounds perfect, right?
Or you’ve found the house on the residential street selling well below the other houses. You could buy it, fix it up and flip it. Make a quick $100,000. Hard money is everywhere. Interest rates are a bit higher, but still fair, and all of the numbers work. Sounds great, right?
Each of these investments will require you to put in equity, substantial equity to get in and close the deal. Commercial down payments can be 25% or more of the selling price. Hard money lenders for house flippers want your skin in the game. And, you don’t have a rich uncle or other relatives lined up and ready to fund your investments.
What can you do? Consider crowdfunding.
Done correctly, crowdfunding – the offering of an investment opportunity to the general public over the internet – enables real estate developers to tap an investor market that was previously off limits to smaller players.
The Jumpstart Our Business Startups (JOBS) Act created an exemption under the federal securities laws so that crowdfunding can be used to raise equity capital from the general public. It also established the regulatory structure that limits the amount of money developers can raise and investors can invest.
Requirements vary based on the type of investor you are seeking and the type of intermediary or crowdfunding portal you use, but here’s a quick primer.
Accredited Investor Crowdfunding – Allows developers to use the internet and other methods of general solicitation and advertising to raise an unlimited amount of capital with two limitations. Investments may only be made to accredited investors (those earning more than $200,000 per year for a period of years or net worth over $1,000,000, not including their primary residence). Second, the issuer must use reasonable methods to verify accredited investor status.
Non-Accredited Investor Crowdfunding – Allows developers to offer and sell securities over the internet to anyone, not just accredited investors, without registering with the SEC, though an issuer may raise no more than $1,070,000 per year using this method. The amount an individual may invest is also limited based on their income and net worth. A developer must use a third-party funding portal.
Mini-Public Offering – The third crowdfunding exemption allows companies to raise up to $50 million from the general public in a mini-public offering over the internet. The federal registration requirements still exist for more traditional public offerings but the new regulations are scaled down and the process has become less expensive and time consuming.
A word of caution. While the framework exists to raise real estate capital over the internet, the advice of a good crowdfunding lawyer is essential. In addition to complying with the new federal rules, there are also New York state notice and filing requirements. Third-party portals already exist to review your offerings and manage your solicitations. Some of the more established for seasoned developers include Fundrise, RealtyMogul, CrowdStreet, Patch of Land and RealCrowd.
For those willing to make the investment of time to investigate and understand crowdfunding, an entirely new source of real estate capital may be as close as your keyboard.
Rick Tannenbaum sells commercial investment property with Houlihan Lawrence. rtannenbaum@hlcommercialgroup.com
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