With Title III of the JOBS Act set to take effect on May 16, 2016, real estate companies will gain more financing opportunities and investors more investment options than ever before. Title III extends the democratized and innovative power of equity crowdfunding to everyone who invests under its umbrella. Prior to Title III, the exact number of individual investors who qualified as “accredited” in the U.S. varied. Most estimates indicated there were over ten million accredited households.
In 2014, these investors—who had at least a $200,000 individual annual income, a $300,000 household annual income, or a net worth of at least $1 million, excluding a primary residence—imparted $1 billion into real estate crowdfunding platforms. Even before the passage of Title III, that was projected to reach $2.57 billion for 2015, and $3.5 billion by the end of 2016. With the much larger crowd base Title III is expected create, these numbers will most likely grow in unprecedented ways.
Benefits of Title III for Investors
While the SEC has set strict guidelines for how much you may invest with Title III, the ruling gives everyone the opportunity to make money via crowdfunding. Real estate investing is known as a reliable method to enhance retirement savings for older adults. But for younger adults—the tech-savvy millennials inundating today’s workplace—crowdfunding represents the next generation of investing. Millennials exhibit a much greater interest in online investing and alternative finance than previous generations. If most real estate crowdfunding platforms keep minimum investment requirements low, the industry will continue to grow in appeal.
Additionally, unlike the years prior to Title III, individuals can no longer be prohibited from investing if their income falls. Title III is attuned to individual financial circumstances as well as larger market concerns: it’s legislation designed to fuel the crowd’s appetite for investing.
Title III offers everyone a more personal benefit: the satisfaction of helping to revitalize communities. Whether it’s a small apartment, a single-family home, or a new shopping center—located around the block or on the other side of the country—investing in real estate is investing in the community. An investment allows a real estate company to execute projects with greater ease. In turn, their work provides an immediate and serviceable need to a family, a neighborhood, or the local economy. Beautification boosts the value of neighboring residences, which in time generates revenue for schools, parks, and related services.
As an investor, consider the effects of your investment: the pride you’ll experience when Forbes rates the town you invested in as one of the “Best Cities to Raise a Family,” or, if you live nearby, seeing a faltering neighborhood refurbished with a modern sensibility. Even a small investment can help improve lives—in your locale and beyond.
More Efficient Funding
Even before Title III, real estate crowdfunding all but guaranteed easier funding for projects than banks could provide. It is inherently less bureaucratic, allowing investors to flock to you, instead of having to painstakingly acquaint yourself with individual investors. With Title III, funding has become even easier and even faster, so you can advance your company to the renovating or developing phase of a project and spend less time laboring over ink and paper.
The formula is simple: More Investors + Higher Demand for Projects + Quality Platforms = More Efficient Funding. An unlimited number of investors had been locked out of investing for years, and are conceivably enthusiastic now that the door is unlocked. These investors are browsing platforms and listed real estate projects, looking for the right combination of reliable service and high prospective returns.
Title III limits companies to raising no more than $1M from the crowd per year. If no significant issues arise in alternative finance as it continues to grow in prestige, and if the national real estate market does not deteriorate, the SEC could expand that $1M limit to $2M or higher in the next few years.
Rules on Disclosures Work in Your Favor
Title III requires companies to provide crowdfunding platforms and investors with significant disclosures to help create and maintain transparency. Disclosures include the use of proceeds from the offering and financial statements accompanied by information from tax returns.
Disclosures ensure that the process of raising and dispersing funds is lawful and precise. They are not meant to create further roadblocks for companies, but are designed to enhance trust between all beneficiaries and parties. Disclosures keep platforms working with you, and investors interested in your projects.
Moreover, going through vetting, financing, and feedback will yield critical self-knowledge. You will better understand where your real estate company fits in the world of alternative finance, what it offers to a broader community, what is needed for success in a competitive industry, what compromises may have to be made, and what you can gain through this method of funding. Crowdfunding is an indispensable way for real estate companies to engage a nation of ambitious investors with viable economic incentives.
Potential Issues for Investors
Ceiling for Wealthier Investors
The new crowdfunding rules set strict limits on how much wealthier individuals may invest. If an investor’s annual income and net worth are both at least $100,000, he or she can invest the lesser of: $10,000; or 10% of the lesser of her annual income or net worth. Before Title III, if an investor with an annual income of $200,000 wanted to invest 25% of that income, or $50,000, he or she could. With Title III, the same investor can only invest up to 10% of $200,000, or $20,000.
Real estate companies and crowdfunding platforms want to fund projects as efficiently as possible, regardless of the income level of investors. If a single investor has the financial means to invest as much as ten investors, but is denied this ability, no one benefits to the extent they could.
This investment ceiling points to a trade-off in the new crowdfunding rules: although anyone can now invest, no one can invest more than the SEC allows them to.
Solitary Project Investments
Investment experts often recommend “diversifying” portfolios, or spreading investments out among multiple projects. Crowdfunding platforms can help facilitate this practice by grouping projects together, dispersing and mitigating risk via conglomerates, and offering these groupings to a greater number of investors. However, Title III does not require platforms to group projects together in this way. Some new platforms focus on single projects instead of groupings, which can threaten the long-term viability of real estate crowdfunding. Not only will investors face increased risk, but if these projects fail, the industry may face negative publicity.
Potential Issues for Real Estate Companies
Time and Resources
Unfortunately, proper vetting and subsequent disclosures require time and resources, with the possible inclusion of lawyers and accountants. Some real estate crowdfunding platforms are more rigorous in their demands than others. In general, however, companies should recognize that transparency and integrity are worthwhile results of time and energy.
The JOBS Act of 2012 was the first major regulatory measure to address crowdfunding in the U.S., yet it took an additional three years for the crowdfunding portion to be enacted. We believe the wait was worth it. In the past few years, the Internet has begun supplanting old methods of finance and investment and given birth to “alternative finance.” Though we cannot predict exactly how Title III will affect the real estate crowdfunding industry in the next few years, we expect platforms to leverage the ruling with resolve; to bring people, ideas, and capital together at low costs and lightning speed. Title III may be imperfect, but if investors, companies, and platforms benefit from its rules, “alternative finance” may become “mainstream finance” before our eyes. The future belongs to the crowd.
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