What is crowdfunding? It’s raising both debt and equity for commercial real estate investments from a group or a “crowd”. Crowdfunding is a funding model that uses technology to connect opportunities with investors. To date, this has been limited to what is called accredited investors. That is about to change and the little guy is about to have an opportunity to join the big boys.
Let’s start by understanding how “crowdfunding” has worked until now. An investor had to be an “accredited investor”. That means the investor had to have a net worth of at least one million US dollars, excluding the value of one’s primary residence, or have income of at least $200,000 each year for the last two years (or $300,000 combined income if married) and have the expectation to make the same amount this year.
The federal securities laws define the term accredited investor in Rule 501 of Regulation D and, as amended by the Dodd-Frank Wall Street Reform and Consumer Protection Act, as:
- a bank, insurance company, registered investment company, business development company, or small business investment company;
- an employee benefit plan, within the meaning of the Employee Retirement Income Security Act, if a bank, insurance company, or registered investment adviser makes the investment decisions, or if the plan has total assets in excess of $5 million;
- a charitable organization, corporation, or partnership with assets exceeding $5 million;
- a director, executive officer, or general partner of the company selling the securities;
- a business in which all the equity owners are accredited investors;
- a natural person who has individual net worth, or joint net worth with the person’s spouse, that exceeds $1 million at the time of the purchase, or has assets under management of $1 million or above, excluding the value of their primary residence;
- a natural person with income exceeding $200,000 in each of the two most recent years or joint income with a spouse exceeding $300,000 for those years and a reasonable expectation of the same income level in the current year; or
- a trust with assets in excess of $5 million, not formed to acquire the securities offered, whose purchases a sophisticated person makes from Wikipedia
The JOBS Act Title III made some big changes to the “accredited investor” criteria which were approved by the SEC on Oct 30th, 2015. This gives the little guy a chance for optimism, caution and unprecedented access to attractive yields.
Crowdfunding firms will face a cap of $1 million per year raised from non-accredited investors. “The biggest cons are going to be the regulatory, reporting and ongoing logistical burden of raising capital in this fashion….”
Crowdfunding uses a platform for investors to view, perform due diligence and invest in opportunities. There are now over 100 online platforms offering direct real estate investments. A few things you should look for in a platform:
- An experienced team
- Transparency of Deal vetting
- Communication is important
- Operational track record
- Platform should make money when investors make money
Diana D. Hill – firstname.lastname@example.org