The following is a guest post from Gene Trowbridge, a noted author and expert on Commercial Real Estate Syndication. I love the quote at the end of the post, so read through. By the way, Gene will be writing regular updates on the Crowdfunding topics.
Crowdfunding is a hot, new term that is being used to describe a method where a real estate syndicator could use social media on the Internet to raise small amounts of money from large numbers of investors.
The House of Representatives passed legislation which was then included in the JOBS Act called the Entrepreneur Access to Capital Act. This legislation created something commonly referred to as crowdfunding which provides that an issuer of securities could market their offering on the internet ,as long as:
- The total amount of securities sold in a 12 month period does not exceed $1MM, or $2MM if the issuer provides audited financial statements to the potential investors; and
- The aggregate value of securities sold by an issuer to any individual investor does not exceed the lessor of $10,000 or 10 % of the investor’s annual income.
This House’s version of the Act did not place a limit on the number of investors, did not prohibit advertising and general solicitation and did not require extensive disclosure be made to investors.
The JOBS Act was sent to the Senate and was passed on March 22, but an amendment, related to crowdfunding, was attached that will cause the bill to go back to the House. The amended Senate version limits the amount an individual could invest to $2,000 or 5% of their annual income or net worth, depending on which is less than $100,000. In addition, the Senate version would require that investors receive tax returns of financial statement of the companies attempting to raise funds prior to raising any money from an investor.
While this legislation proceeds through the reconciliation process we still see problems for its use by real estate syndicators. The major ones would be:
- The limitation of the $1MM funding limit in a 12 month period;
- The management of large number of small investors, each with a maximum of $2,000 invested; and
- The requirement that the SEC issue rules and regulations that will inevitable be structured under their primary purpose of protecting unsophisticated and non-accredited investors.
The SEC and the states should act swiftly to put protections in place for unsophisticated investors, as it is likely the start-up companies that take advantage of crowdfunding will be unsophisticated and the degree of risk to investors is potentially high.
As one state security regulator has said “Any fraudster who does not use the internet for marketing should be charged with malpractice!”
I will keep you informed as this legislation moves to passage.
Don’t forget to go to www.groupsponsor.com to see about our gift MP3, our workshops and self-study course, and my book about real estate syndication “It’s a Whole New Business.”
Gene Trowbridge, Esq., CCIM
It will be interesting to see as the SEC defines the law and gets inacted in 2012 how/if crowd funding investment property will develop.
Crowdfunding is really geared toward startups but offering multiples but I'm sure will see real estate applications as well.
micro syndications ?
micro reits ?
Posted by: Bob | May 31, 2012 at 10:18 AM