As with any investment phenomenon that begins to attract noticeable attention from investors, real estate crowdfunding has encountered some barriers to entry through the years. Each of these has had to be overcome in one way or the other. In essence, these barriers have done little to stunt the record growth that crowdfunding has been experiencing. In fact, the case could be made that the attention the barriers have given to the concept of real estate crowdfunding has only served to strengthen the resolve of the industry as a whole. The growth experienced both domestically and internationally is truly groundbreaking, and this looks poised to continue for the foreseeable future. That being said, there are still some barriers to entry into real estate crowdfunding that continue to persist as new regulations get passed. Some of these are detailed below, along with a discussion about why such barriers are not slowing down the growth in the industry any longer.
Accredited Investors Have Evolved
The notion of an accredited investor is certainly nothing new. In fact, it was quite some time ago that the governments of the world began to regulate the business of investing in order to protect individuals, institutions, and the entire financial system. The idea of an accredited investor can trace its roots all the way back to 1993, when Regulation D of the Securities Act was established. This stipulated that an accredited investor was any individual who has demonstrated that they can maintain a sufficient level of income, or can demonstrate a substantial net worth, can become willing candidates to take part in funding privately funded securities. If you could not do this, then theoretically you could not even be solicited for funds. This regulation also made it possible for investors to actually participate in a given security without having to actually be counted toward the maximum number of individuals that were really permitted to do so. Such a scheme was made exempt under Regulation D, which strangely enough has paved the way for the rapid expansion of real estate crowdfunding in the modern era.
The New General Solicitation Rules Passed by the SEC
Another barrier to entry to crowdfunding type of investments has been removed since the Securities and Exchange Commission has recently enacted new general solicitation rules. They reversed a long-standing rule that basically prohibited private securities offerings from soliciting or even advertising to potential investors. Before this rule change, investors that desired to participate in a given securities offering had to demonstrate that they had a pre-existing relationship with the firm that was actually tasked with the responsibility of selling the securities. This was the case even if the investor just wanted to inquire about the security and get more information. A relationship had to first be established.
This barrier began to be removed a while back with an exemption being granted under Rule 506. This exemption actually allowed individuals to participate in a given securities investment if they could show that they were a person of considerable means or sophistication. This was permitted even given the reality such private securities were still not allowed to advertise via open media, such as through newspapers, television, radio, public seminars, or even on websites that were open to the general public. So, even under this rule, the average investor not only could not learn about opportunities for investments that they might be interested in, but such securities or projects could not get the word out to them in the first place. As of September of 2013, partly due to the global recession that had just been endured, this rule was loosened to the point that open advertising could take place. This enables real estate crowdfunding platforms to now openly promote available projects, as long as accredited investors are participating.
The Effect of the JOBS Acts on Real Estate Crowdfunding
April of 2012 saw the passing of the JOBS Act, which changed numerous aspects of the aforementioned legislation. First of all, the Act required the Securities and Exchange Commission to draft final rules that would allow non-accredited investors to be permitted to take part openly in private investment transactions. This is the first time that such an action was legally permitted, and it has already served to revolutionize the way new investors can enter the market, particularly in light of the legislation passed in 2013 that permitted more open advertising. Prior to the passing of this legislation, new investors were largely limited in terms of their private investment endeavors to those individuals or projects that took place within their own network of friends. In essence, government regulations precluded private investments from being advertised publicly. As such, what happened was that the best investments available on the market, most of which were privately completed transactions, were reserved for ultra wealthy accredited investors.
As many transactions within the real estate sector are completed privately, the JOBS Act has had an almost immediate impact on the investment market, and the real estate sector in general. Private investors can now use an exemption located in Regulation D 506 to openly raise money with accredited investors. This can be done without having to find a private network to market to. It can actually take place online, out in the open. Enter the proliferation of real estate crowdfunding platforms. While such investment mechanisms were already gaining in popularity prior to the passing of the JOBS Act, this rule change and new legislation has literally opened the floodgates. The number of legitimate real estate crowdfunding platforms in operation today is over 100, and this number continues to grow every year.
The Internet age has ushered in the potential to promote private projects for the entire global investment community to get involved in. This has provided the springboard that many smaller investors needed to enter a market that they felt was traditionally reserved for the wealthy or institutional investor. The future of the industry appears to be bright, as evidenced by record growth, both domestically and abroad, being experienced on a now annual basis.
Matthew Sullivan is the founder and CEO of Crowdventure, LLC
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