The internet and social media have changed the way people communicate in a vast number of ways. They also offer numerous opportunities—and hazards—for investors. Securities laws and regulations have struggled to keep up with new technologies. A process known as “crowdfunding,” by which individuals and businesses solicit small donations from the general public for specific projects or causes, has become increasingly popular in the past few years. A bill enacted by the U.S. Congress in 2012 allows crowdfunding for investment purposes, subject to various rules. Real estate investors may also now invest in ventures, including real estate syndicates, through crowdfunding platforms.
What Is Crowdfunding?
A typical “crowdfunding” campaign seeks to raise money for a specific project through small contributions. Platforms offered by companies like Kickstarter and GoFundMe allow individuals to contribute via a website or a mobile app. Kickstarter is generally known for creative projects like films, while GoFundMe is known for more charitable causes, like raising money to help pay medical bills.
Contributions to crowdfunding campaigns on this type of platform are not “investments,” since the contributor does not receive equity in the project. Contributors to a Kickstarter project may receive a reward defined in the campaign. For example, people who contribute $20 might get a t-shirt, and people who contribute $50 might get a t-shirt and a poster. Investing through a crowdfunding platform requires compliance with securities laws.
One prominent example of a real estate crowdfunding company is RealtyShares.
Securities Laws and Crowdfunding
Investing in a real estate syndicate typically gives an investor an ownership interest in the venture, which might be organized as a limited partnership, a limited liability company, or some other type of business entity. The investment therefore might constitute a “security” under state and federal laws. This means that either the security must be registered with a regulatory agency like the Securities and Exchange Commission (SEC), or it must be eligible for an exemption from the registration requirement.
The SEC’s rule regarding exemption is known as Regulation D, or “Reg D.” It sets limits on the total amount of money that can be raised in a exempt venture, as well as the types of investors that may be solicited. Investors should be familiar with Reg D’s basic requirements in order to evaluate a possible investment.
Reg D does not place restrictions directly on investors, but it does make a distinction between “accredited” and “non-accredited” investors. In order to comply with Reg D, offerors of securities must limit or restrict investments by non-accredited investors. The offeror has the burden of determining who is an accredited investor.
The Jumpstart Our Business Startups (JOBS) Act of 2012 directed the SEC to create rules allowing business ventures to acquire investors and raise capital through crowdfunding, known as “regulation crowdfunding.” The SEC amended Reg D to include crowdfunding. Under the amended Rule 506(c) of Reg D, for example, offerors can make general solicitations. The number of investors, particularly unaccredited investors, is still subject to strict controls.
Crowdfunding Real Estate Syndicates
Investing in a crowdfunded real estate syndicate is not as simple as donating to a GoFundMe campaign. A prospective investor must establish whether or not they meet the SEC’s definition of an “accredited investor.” This will determine the maximum amount they are allowed to invest. The maximum total investment anyone can make to crowdfunded projects in a given year is $100,000.
More Blog Posts:
Securities Laws and Regulations Affecting California Real Estate Syndicates, Titles and Deeds, June 19, 2017
When Is an Interest in a California Real Estate Syndicate a “Security” Under State and Federal Laws? Titles and Deeds, June 5, 2017
Organizing a Real Estate Syndicate and Securities in California, Titles and Deeds, April 25, 2017