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Real estate companies looking to raise money are in luck. Crowdfunding is at the forefront of new ways to obtain funds. It works by pooling money from a large number of investors who contribute relatively smaller amounts. It can be conducted via the internet and for a comparatively low cost.
There are several ways real estate companies can engage in crowdfunding. One of them is through a Regulation D or Reg D offering, which comes with a unique set of benefits. Whether you’re a real estate business owner looking for an influx of capital or an investor looking for a new opportunity, here’s what you need to know about Regulation D.
What is Regulation D?
Formerly known as Securities and Exchange Commission (SEC) Regulation D, this amendment lives under the Securities Act of 1933 but was only introduced in 1982 and streamlined under the JOBS Act.
Regulation D allows small and medium-sized companies to raise capital without having to foot the expenses and legal implications of going public. It’s an alternative to raising capital without having to file and report to the SEC.
Instead, Reg D streamlines the process for smaller companies to offer securities. Although issuers still have to file a Form D electronically with the SEC after the first securities are sold, this process is far less laborious and time-consuming than filing for an initial public offering (IPO).
Reg D allows companies to solicit funds from accredited investors and have up to 35 nonaccredited investors. Nevertheless, nonaccredited investors must still qualify as “sophisticated” — having the funds, experience, knowledge and net worth to take on more advanced types of investment opportunities.
Regulation D was formulated by regulators to help small businesses and make it easier for them to raise capital — all the while offering some protection to investors. And even though companies who file Reg D offerings are technically unregistered, they are still subject to federal and state securities laws, civil liability and SEC scrutiny.
What is Rule 506(b)?
Rule 506(b) offerings allow unlimited accredited investors and up to 35 nonaccredited investors. However, even these investors have to be “sophisticated” and have prior knowledge and experience with the type of investment.
An accredited investor is someone with a net worth above $1 million or who has an annual income of at least $200,000 for the last 2 years.
To determine whether investors are “sophisticated,” investors have to complete a questionnaire and self-certify. They will also receive numerous disclosures about the investments.
The 506(b) offerings do not allow general solicitation. This is to protect nonaccredited investors who may not know enough to understand the advertisement or risk because they’ve only self-certified.
Specific details about the investment have to be posted behind a “gate.” Investors will only have access to this information once they’ve self-certified.
What is Rule 506(c)?
Rule 506(c) offerings are only available to accredited investors without exception. A person must have a net worth exceeding $1 million, either individually or jointly with their spouse, or have an annual income of $200,000 for the past 2 years.
To determine whether an investor is accredited or not, they must be formally vetted. There is no self-certification process. Instead, investors must provide adequate documentation showcasing net worth and income levels.
Accredited investors will have to show proof of their assets and value. They may also have to provide evidence of $200,000 in income over the past 2 years and supporting documents to give a reasonable impression of the same income level in the current year.
Unregistered offerings are considered riskier than public offerings, especially because they lack the normal disclosures that come with SEC registration. Accredited investors are assumed to have more knowledge about investments along with greater experience. They are also assumed to be financially well-equipped, and therefore able to bear the risks associated with unregistered offerings.
General solicitation and promotional advertising with accredited investors are also allowed.
Who Benefits from Reg D Crowdfunding?
Early-stage companies, as well as startups at seed or Series A rounds of funding benefit from pursuing a Regulation D exemption. Ideally, they should have already begun generating revenue or witnessing substantial levels of growth.
Small businesses that can’t afford to undergo an initial public offering (IPO) or other crowdfunding offering are also well-suited for pursuing a Reg D exemption.
On the other hand, investors who want to buy in on a company’s early stages of growth and establish a long-term relationship could benefit from investing in crowdfunding opportunities.
With any type of investment — and whether you’re an accredited investor or not — it’s always important to do your research and go through the company’s financials before you commit a significant amount of funds.
Benzinga’s Best Real Estate Crowdfunding Platforms
Want to get started on real estate crowdfunding but don’t know where to begin? Whether your company is looking to raise capital, or you’re an investor, check out these best real estate crowdfunding platforms to help you get started.
DiversyFund isn’t your average crowdfunding platform. You’ll find that the company puts a twist on the traditional everyday crowdfunding platform, beyond anything you can find online with a simple Google search. You only have to look under DiversyFund’s skin one layer to surmise that DiversyFund is a conscientious developer and sponsor and helps hedge risk through improved vetting.
DiversyFund offers a multifamily real estate investment trust, the DiversyFund Growth REIT, and its main goals are to increase cash flow and resale value. It’ll automatically give you access to multi-million dollar real estate assets.
- Those looking for an alternative investment beyond stocks and bonds
- Individuals who aren’t sure they want to be landlords in the traditional sense
- Investors who aren’t accredited
- Only need to pony up $500 to get started
- Open to investors all over the world
- No expensive broker fees
- You’ll only be able to access “blind pool” investments, which means that you can’t opt out of specific properties
- There’s only one real investment option, the DiversyFund Growth REIT
Read More:Benzinga Explains: Regulation D Real Estate Crowdfunding • Benzinga