Thursday, January 31, 2013

Crowdfunding and Real Estate Investing

By Tim Husson, PhD

The JOBS Act of 2012 was ostensibly designed to increase investment in small businesses.  One of its provisions was to allow private placement investments (such as hedge funds, oil and gas partnerships, etc) to advertise publicly.  Another provision is to allow for 'crowdfunding' of real estate and other investments, in effect allowing the sale of partial interests in speculative ventures to small retail investors.  Kaitlin Ugolik at Law360 has a great review of the implications of this provision for real estate law, which could represent a further erosion of investor protections.

Crowdfunding refers generally to collecting small investments from a large group of people, usually via websites such as Kickstarter, to fund a project of any kind.  Crowdfunding has become a popular way for artists and inventors to attract the initial funding they need to begin their creative works, and has been greatly facilitated by the rise of social media and the ability to spread the word about a project quickly and cheaply.

But crowdfunding also raises many legal and regulatory questions, such as whether investments in these projects constitute securities under the SEC's purview.  The JOBS Act addressed crowdfunding directly by mandating that the SEC not only allow for crowdfunded investments, but to create the markets ('portals') by which crowdfunding would take place.  The SEC has not yet implemented these provisions, and according to the Law360 article, there is a great deal of uncertainty regarding how it will be done.
Meanwhile, small developers and property owners looking to expand are waiting for the SEC to determine a variety of things, like what types of information they will have to provide potential investors, and how much. Perhaps most importantly, they await guidance on how the securities issued through crowd funding will interact with other securities issued by the same companies, experts say.
The article goes on to compare crowdfunded projects with condominium-hotel projects, which divided properties into many individually-owned rooms.  Such arrangements often lead to conflict amongst owners when developers or managers propose changes to the property or business plan.  Such conflicts are common among tenant-in-common investors, another form of private placement real estate investment, and may be a significant problem in crowdfunded projects as well.

We will eagerly await the SEC's guidance on this issue, as well as the other currently outstanding provisions of the JOBS Act.

10 comments:

  1. Interesting post, thanks. I am the CEO of one company doing crowdfunding for real estate, www.realtymogul.com and we too await the final regulations from the SEC. I think you will see a lot of companies, our included, looking to do business with accredited investors until final regs are out.

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  4. Great article! Like Jilliene I am also CEO of a Real Estate investment company that will utilize the new crowdfunding exemptions: PatchofLand.com

    While there is still a great deal of uncertainty regarding exactly how the SEC will implement the new regulations, congress has mandated a fairly specific set of guidelines to follow. There must be a strict separation between the company managing the securities, and the crowdfunding portal that will be offering them to investors. There is lower requirement for registration and reporting, however there are still many restrictions put in place to protect potential investors, including a cap on the total dollar amount able to raised through general solicitation. The new exemptions are going to allow a freedom of choice for small cap investors that has never really existed before, but like any new industry, there will definitely be room for improvement in both oversight and practice.

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