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Investing in real estate used to mean buying an investment property outright or opting for real estate investment trusts (REITs). However, thanks to the development of the Jumpstart Our Business Startups (JOBS) Act, investors nowadays have more options — one of them is crowdfunding.
Crowdfunding draws relatively small amounts of funds from many investors to create a large pool of capital that can be used to finance a number of projects. In exchange, investors can receive stock, equity or debt stakes. Crowdfunding is an efficient way for companies to raise capital and offers unique opportunities for investor returns.
Crowdfunding has many different types of regulations. Regulation CF is just one, and while limiting, it can be helpful to those working in real estate.
What is the JOBS Act?
The JOBS Act was signed into law by President Barack Obama on April 5, 2012. This legislation expanded the ways companies can raise capital and eased many of the regulatory burdens smaller businesses faced.
The JOBS Act allowed companies to raise capital via crowdfunding and outlined Regulation A, which enables companies to offer stock without having to go through federal securities law and through the Securities and Exchanges Commission (SEC).
Previously, only accredited investors were able to invest in projects and companies not listed with the SEC through Regulation D Rule 506(c). By definition, accredited individuals have a net worth of more than $1 million or an annual income of at least $200,000 over the past 2 years. The JOBS Act, changed this and allows nonaccredited investors to become involved in projects they were once excluded from.
What is Regulation CF Crowdfunding?
Regulation CF is also known as Title III of Regulation A+. These regulations were added to the JOBS Act in 2016 and allow companies to essentially raise money by selling stocks to an unlimited number of investors up to a certain amount and over a set timeframe. Previously, this figure was at $1 million, but from March 2021, businesses will be able to raise up to $5 million from anyone and maintain an unlimited number of investors.
This development is significant, especially for real estate companies that need to access large pools of capital to purchase properties. It’s also a lot easier for businesses to get approved for Reg CF crowdfunding versus other types of campaigns — such as venture capital or initial public offerings (IPOs).
It also allows nonaccredited investors to get involved with crowdfunding deals. And while the rules and requirements for hosting crowdfunding campaigns are significantly less stringent than other forms of fundraising, certain regulations still apply.
As with any type of investing, there is always an element of risk. The SEC sees nonaccredited investors as more prone to risk than accredited investors, who typically have the funds, knowledge and experience. As a result, the SEC limits nonaccredited investors in how much they can invest into a crowdfunding campaign during any 12-month period. This limitation depends on the investor’s net worth and income.
Investors are limited to $2,000 or 5% of their net worth if their net worth is less than $100,000. If their net worth is greater than $100,000, no more than 10% of their net worth can be invested for up to a max of $100,000. Investors also are restricted from reselling shares for the first 12 months.
Why Should you Invest in Real Estate?
Real estate can be a great investment because of the potential for passive income, stable cash flow, appreciation and portfolio diversification. The real estate market typically doesn’t correlate with stock market performance, making it a solid choice for hedging against volatility.
Real estate crowdfunding allows investors to gain some of the benefits of real estate investing without having to actually finance, rent out and manage the property outright. This process is not only time-consuming, it also can be incredibly risky for inexperienced investors. Instead, with crowdfunding, the real estate company handles all the details and pays out the profits to investors based on their equity, stock-holding or debt agreement.
Why Should Businesses Use Regulation CF Crowdfunding?
Regulation CF crowdfunding gives businesses the opportunity to raise large sums of capital in a more simplified and easier way than other forms of fundraising. Through Regulation CF, businesses can access enough funds to take on larger projects, such as completing residential homes, tiny apartment complexes or duplexes. They also can crowdfund per project, which allows for greater flexibility.
Most importantly, Regulation CF helps businesses avoid strict SEC regulations that typically make other types of fundraising more complicated. The Regulation CF process is fairly simplified and works relatively quickly, allowing businesses to access the capital they need.
Regulation CF crowdfunding also has the added bonus of helping businesses connect with new investors, business partners and the community at large. You can ask your local community, professional network and other business associates to get involved in your project and show support. In fact, some companies have been able to find their best business partners by going this route.
Benzinga’s Favorite Equity Crowdfunding Platforms
Looking to get involved in real estate equity crowdfunding but don’t know where to start? Take a look at Benzinga’s top picks for equity crowdfunding platforms.
securely through CrowdStreet’s
CrowdStreet is a commercial real estate investing platform where people can invest directly in commercial projects. Unlike a brokerage firm, CrowdStreet isn’t a middleman. Instead, the platform acts as a marketplace where investors can pick and choose the best deals for their time horizon and strategy.
Available investments range from family living spaces to office buildings to storage facilities and investors can sign up for a free membership. Your investment options are limited to what’s live on the Marketplace and you’ll need capital to build a diverse real estate portfolio. Only accredited investors can access deals through CrowdStreet.
- Investors looking for diversification away from stocks
- Real estate investors interested in new opportunities
- Accredited investors with lots of capital at their disposal
- Unique opportunities available
- Makes real estate accessible and understandable
- Investors can devote capital to both debt and equity offerings
- Offers quality education materials and answers to FAQs
Read More:Guide to Regulation CF Real Estate Crowdfunding • Benzinga