Real Estate: the Next Crowdfunding Boom?
BY Liyan Chen
Looks like the JOBS Act will make it much easier for crowdfunding platforms to host real estate projects.
The JOBS Act has led to the boom of crowdfunding platforms across many industries, and it seems like it is also poised to change the face of the real estate financing. As Bloomberg pointed out recently, the implementation of the JOBS Act will open up opportunities for real estate crowdfunding start-ups by saving them time and money on the legal process.
Here's some background: Before the passage of the JOBS Act, real estate financing was mainly available to accredited investors under Regulation D of the Securities Act of 1933. But the JOBS Act, which eases restrictions on investments, will allow more individuals, including non-accredited investors, to invest up to $2,000 a year or 5 percent of their income or net worth in commercial real estate projects.
Currently, these real estate crowdfunding platforms, like Washington, D.C.-based Fundrise for example, have to go through a lengthy approval process by the SEC and local regulators.
Fundrise, which arguably pioneered in using the old rules for crowdfunding in real estate, took seven months to get its first project approved by the SEC and state regulators in Virginia and D.C. in 2012. The company claims the project raised $325,000 from 175 people, including unaccredited investors.
“Working with the regulators to understand the importance of using Regulation A for local real-estate investment was the biggest hurdle,” Molly Fitzgerald, Director of Communications of Fundrise, told Inc. The new crowdfunding exemption under the JOBS Act will accelerate that process.
The JOBS Act will also lift the restriction on investors, who have to be residents of the same states of the registered offering, Fitzgerald said. Once the new rules are in place, start-ups like Fundrise will reportedly be able to sell equity to investors across the U.S.
But at the moment, property developers are still waiting for its full implementation in order to take advantage of the new rules, though the law was signed in April 2012.
“We are anxiously waiting for it to happen,” Fitzgerald said. “Our goal is to offer more.” Among Fundrise’s four fully-funded projects, only one was a public offering.
The SEC is still working on the proposed rules, as it tries to balance the freedom to raise fund from investors and the protection of those investors, Inc. recently reported. Regulators have concerns over crowdfunding platforms that may exploit investors (investigators have probed some 200 shady sites).