JOBS Act Crowdfunding and its Potential in Real Estate

By Anthony Lineberry
Chestnut Street Partners

On April 5th 2012, the Jumpstart Our Business Startups Act, or JOBS Act, was signed into law, officially allowing businesses to raise money via the offerings of unaccredited investors. This form of investing is called “crowdfunding” because it allows everyday individuals to accrue funds to put towards projects of personal interest. The JOBS act was drafted to “help alleviate the funding gap and accompanying regulatory concerns”[1] faced by startups and small businesses by allowing them to raise capital through crowdfunding by every day people. This form of crowdfunding has been particularly effective in generating financial support for “artistic endeavors like films and music recordings”[2] because it has allowed a large number of people to pool significant financial support for projects with small individual contributions, but this type of investing platform could be successful for all kinds of business endeavors, including real estate.

The Securities and Exchange Commission of Congress, on October 23rd 2013, released a list of proposed rules that unaccredited investors should follow in order to participate in crowdfunding. The proposed rules would, among other things, subject individuals to monetary contribution thresholds, limit the amount of capital a company can raise via crowdfunding, require companies to disclose information about the investments they receive, and create a regulatory framework to serve as an “intermediary that would facilitate crowdfunding transactions.”[3] For example, under the proposed rules a company must cap the amount of crowdfunding offerings at one million dollars in a twelve month period. Additionally, the rules would only allow unaccredited investors to invest up to “$2,000 or five percent of their annual income or net worth, whichever is greater, if both their annual income and net worth are less than $100,000” over a twelve month period.[4] However, investors with an income or net worth totaling $100,000 or more may contribute up to ten percent of said income over a twelve month period. The proposed rules outline that many companies would not be eligible to receive investments as a result of crowdfunding at all, including companies outside of the United States, companies already “reporting”[5] to the SEC, and those companies that fail to comply with SEC regulations.

Perhaps the most important rule proposed by the SEC is the establishment of what is being called a “crowdfunding platform.”[6] This platform serves as the funding portal by which investors will offer money to companies, which will be regulated by the SEC and will be conducted exclusively online. The SEC also requires this platform to protect unaccredited investors with rules to: “provide investors with educational materials, take measures to reduce the risk of fraud, make available information about the issuer and the offering, provide communication channels to permit discussions about offerings on the platform, and facilitate the offer and sale of crowdfunded securities.”[7]

As mentioned previously, the SEC has not finalized these rules. They have agreed to wait 90 days in order seek public comment, meaning that by the end of January 2014 the SEC should be ready to review the publics reaction to the rules and determine whether to adopt them or not. From a real estate prospective, the JOBS Act could open new doors to many individuals who have previously never been able to invest in real estate. Traditionally, investing in real estate requires great skill, knowledge, and even more time and money. However, the JOBS act will allow the average person to invest smaller dollar amounts in properties of interest across the United States. Ultimately, the JOBS Act has the potential to bring about great change in the world of real estate investment, change that could be just around the bend for the crowdfunding community.

Footnotes:
[1] U.S. Securities and Exchange Commission
http://www.sec.gov/News/PressRelease/Detail/PressRelease/1370540017677#.UsdsCLSZ_IU
[2] Ibid.
[3] Ibid.
[4] Ibid.
[5] Ibid.
[6] Ibid.
[7] Ibid.

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