Real Estate Crowdfunding Rules
Real Estate Crowdfunding, Syndication & Group Sponsorships
Now that general solicitation is legal*, private companies and and real estate funds can promote their fundraising efforts to the public. But, there’s a catch. In order to invest, investors must be verified as accredited investors.
What is crowd-funding and what is the effect of the 2012 JOBS Act on Raising Funds Online For Real Estate?
Most issuers rely on Regulation D when conducting their private offerings of securities.
Until the Jobs Act all Regulation D offerings in the real estate space where private placement offerings, meaning that the issuer could not sell securities by any general solicitation or advertisement. An offering under Regulation D might also require the delivery of a disclosure document (also called a private placement memorandum, or an offering circular) to unaccredited investors. Remember, all securities issued through Regulation D are “restricted” securities, meaning that the investor is restricted in its resale of the securities.
Regulation D consists of Rules 501 through 508. Rules 501 and 502 give definitions and general terms and conditions, including some of the definitions, e.g. accredited investors, disclosure requirements, limitations on advertising and solicitation, and integration. Rule 503 requires the filing of a notice on Form D. Rules 504, 505 and 506 contain the specific exemptions that issuers actually use under Regulation D. Rule 507 enforces the Form D filing requirement. Rule 508 relates to defective offerings.
Rule 506 permits an unlimited dollar amount of sales to an unlimited number of accredited investors and up to 35 unaccredited investors. It requires that the issuer deliver statutory disclosure documents to unaccredited investors, but not accredited investors.
Rules 505 and 506 (not 504) require the issuer to make statutory disclosures to unaccredited investors. The law contains detailed requirements for the content and format of the disclosures. The disclosures include financial and non-financial information. The scope of disclosure is dependent on the nature of the issuer and the amount of the offering. The disclosure requirement can be very costly to issuers, both in terms of the issuers’ time and resources, and the costs of lawyers and accountants in preparing the disclosures.
For this reason alone, issuers should consider selling only to accredited investors to avoid the statutory disclosure requirement. Other reasons are that non-accredited investors are more risk-averse and disliked as a group by second round angel investors who want to deal only with sophisticated investors.
All of Rules 504, 505 and 506 prohibited the issuer from selling securities through any general solicitation or advertising. The SEC required that the issuer have a substantive relationship with each investor before offering securities to the investor. The issuer had to know each investor well enough to ensure that the investment was suitable to the investor. The issuer could not use any advertisement, article, notice or other communication in any newspaper, TV or similar media, or any seminar where attendees have been invited by any general solicitation or advertising.
Isn’t it illegal to sell securities through advertising ( general solicitation ) ?
That has now changed for Rule 506 and Accredited Investors. Title II of the JOBS Act required the SEC to amend its rules within 90 days to allow the use of general advertisements (so called “general solicitations”) to solicit investors for nonpublicly traded securities without having to register with the SEC or state regulators as long as all purchasers of the securities are “accredited investors” or “qualified institutional buyers.” This finally happened July 10, 2013.
This opens up the internet and general advertising for soliciting accredited investors.
While there is no specific definition of what activities of an issuer would constitute acts of general solicitation and general advertising, Rule 502(c) provides a few examples, such as “any advertising, article, notice, or other communication in any media, newspaper, magazine or similar media, or broadcasts over television or radio”.
You can advertise providing you follow the rules.
Intermediaries that facilitate these general solicitations will not be subject to regulation as a broker or dealer solely by providing ancillary services if the intermediary does not receive a commission for securities transactions, does not possess funds or securities in connection with securities transactions and is not disqualified due to prior disciplinary history. “Ancillary services” include the provision of due diligence services, so long as those services do not include, for separate compensation, investment advice or recommendations, and the provision of standardized documents, so long as the intermediary does not negotiate the terms of securities transactions and does require the use the standardized documents as a condition of using the intermediary.
To properly inform potential investors of the risks associated with your deal you should conform to the disclosures normally used in a Private Placement Memorandum.
Who is crowdfunding real estate deals today?
From your local small developers, to real estate investment banks to tech start ups to national investment groups crowdfunding real estate is one of the most popular crowdfunding categories. The sector is only going to continue to grow as Title III gets defined by the SEC & FINRA. in 2012 before the Jobs Act it has been estimated that $15,000,000,000 Annually gets funded via real estate private placements. This number is going to continue to grow as more and more developers and sponsors go the crowd to fund their real estate offerings.