Since the passing of the JOBS Act in 2012, everyone keeping up with the changes taking place in the securities investing and crowdfunding niches has been keeping an eye on whether or not non-accredited investors will be let in on the ground floor opportunities that present themselves through seed funding. On October 30, 2015, that development took place with the publication of Title III of the Act by the Securities and Exchange Commission (SEC).
Will Title III Significantly Impact Real Estate Crowdfunding Startups?
Real estate investing has always been risky. Crowdfunding takes that risk and decentralizes it as real estate startups receive an expanded base of potential funding partners. However, there are restrictions on the new rules that keep the playing field somewhat irregular.
One of those rules is the funding cap. Startups can’t receive more than $1 million in total investments from all non-accredited funding sources within a 12-month period of time. On top of that, individual investors are limited to giving no more than $2,000 or five percent of their annual income or net worth if their annual income or net worth is less than $100,000. That limit is 10 percent if the annual income or net worth exceeds $100,000. At that rate, startups will have to receive funds from many non-accredited investors in order to make their crowdfunding efforts worth the energy to manage them.
For that reason, many crowdfunding platforms are sticking with accredited investors. That includes some real estate crowdfunding platforms.
On the other hand, if a real estate startup doesn’t need to raise that much money to begin with, soliciting from non-accredited investors may be desirable. Many accredited investors are looking for larger deals with larger returns whereas non-accredited investors may simply be looking for growth returns and/or portfolio diversification. In that case, both real estate startups and investors can get what they want.
While Title III of the JOBS Act offers expanded opportunities for non-accredited investors, it doesn’t diminish the risks involved with investing. By the same token, getting most of its seed money from inexperienced investors can be more risky to the startup than sticking to those investors who know and understand the risks based on their experience with previous investments. In other words, there’s a trade off.
Is Title III a Boon or a Bane to Real Estate Crowdfunding?
Crowdfunding is opening the door to new investment opportunities. However, with potential gains there are also potential losses. Investors should exercise caution and do their due diligence before putting money into any campaign.
Likewise, startups seeking capital through crowdfunding have their own due diligence to perform. Even still, reporting requirements under Title III aren’t as strict as those under Title IV, though bad actor rules still apply.
Crowdfunding is an opportunity. Nothing more. Investors and startups have a mutual obligation to each other to be honest about expectations. Real estate startups still have Title II and Title IV provisions of the JOBS Act, so the main thing Title III accomplishes is expand the base of funding sources. You could argue that is both a boon and a bane. The new rules go into effect in May 2016.
The question is this, what implications does this change in securities law have for real estate investing.