Crowdfunding in Real Estate: Is This the Future of Real Estate Investment?
Realty Mogul website) raised more than $1.5 million from 85 investors. What makes this deal special is that it is believed to be the first online offering of its kind for a hotel.
Jumpstart Our Business Startups (JOBS) Act
On April 5, 2012 President Obama signed into law the Jumpstart Our Business Startups (JOBS) Act. This law was intended to encourage funding of small businesses by easing securities regulations. This article will focus on Title II of the JOBS Act.
Prior to the JOBS Act, Rule 502 of Regulation D prohibited the general solicitation (advertisement) of securities in Rule 506 offerings (those are offerings exempt from registration requirements of the Securities Act of 1933) and applies to real estate transactions. This put a limitation on the ability of the issuer (such as a real estate developer or debt issuer) to raise capital. Title II of the JOBS Act reversed this limitation to allow for the advertisement of Rule 506 offerings. Thus, the issuer is now able to broadcast the deal and raise capital from accredited investors (those having a net worth of at least one million USD, not including the value of their primary residence or have income of at least $200,000 or $300,000 if married, each year for the last two years). By removing the ban on general solicitation, issuers do not have to rely solely on existing relationships for funding. This means that issuers can now use the internet to solicit funds from accredited investors.
Prior to the JOBS act, if issuers wanted to raise money for a real estate project, they would have to solicit family, friends, hedge funds/institutional partners or a broker to help raise money for the project. Since issuers can now use the internet to raise funds, access to equity is much more readily available and is much less expensive. There are many crowdfunding real estate websites, such as fundrise.com, realtymogul.com, f-squaredinvestments.com and prodigynetwork.com that have started up in the past two years.
With new technology and new ways to invest money, there are always risks, including fraud. It appears that these sites are doing everything possible to prevent and deter fraud. For example, one site provides a criteria checklist for the sponsor/developer (such as experience, money under management) and asks questions such as how the developer fared during the recent financial crisis. Other sites have very conservative underwriting.
The JOBS Act has opened the door for real estate solicitation via the internet. For developers, this will make access to capital more available and less expensive. This will also benefit investors as it allows for diversifying portfolios with real estate that may not have been as accessible in the past. Crowdfunding for real estate transactions may be the future of real estate investment.
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