Browse Tag: crowdfunding

SEC Talks Federal Crowdfunding Regs At Two Events

Stephanie Speer, NAR’s Commercial Regulatory Policy Representative would like to let you know that Uncle Sam is grappling with all the implications of the 2012 passage of the Jumpstart Our Business Startups (JOBS) Act. But this isn’t another case of “the government bureaucracy expanding to meet the needs of the expanding government bureaucracy”.  This is about legally raising capital using crowdfunding techniques on the internet, a topic near to the heart of every dealmaker faced with stiff credit availability in a banking environment dominated by, well, banks.  Enjoy Stephainie’s guest post on a pair of SEC events on crowdfunding.  – WG

The Securities and Exchange Commission (SEC) held a two-day event in Washington D.C. focusing on small business capital creation, with a special emphasis on the implementation of the Jumpstart Our Business Startups (JOBS) Act of 2012. The SEC Government Business Forum on Small Business Capital Formation kicked off the event with a roundtable discussion featuring panelists from the Small Business Administration (SBA) and SEC, followed by a second day of panel discussions and work groups.

For context, regulators view the JOBS Act as partner legislation to the Dodd–Frank Wall Street Reform and Consumer Protection Act. Both were created in response to the Great Recession to focus on bank regulations. The JOBS Act was designed to provide more avenues for small businesses to raise capital, expand their operations, and create more jobs. Most of the JOBS Act provisions are in place but there is one provision not yet finalized that is generating a great deal of buzz among many groups of people: crowdfunding.

Much of the discussion at the event focused on how to make crowdfunding regulation work at the federal level. The SEC has proposed regulation that is not finalized and there isn’t yet an anticipated date of completion. Many states already have state-specific crowdfunding laws, but those are limiting to businesses because they only deal with activities occurring within a state. Businesses, investors, and state regulators are clamoring for the federal regulations to be completed so that crowdfunding can legally expand across state borders.

NAR has been monitoring the proposed crowdfunding regulations and working with experts and regulators in the field, as it views crowdfunding as another potential source of funding for commercial real estate. For additional information, check out our recent article in the fall edition of Commercial Connections on the subject (available here) and please contact me at [email protected] with any questions.

Crowdfunder Vets Partners, Participates In $3.7M Shopping Center Deal

I’ve written here before about the phenomenon of crowdfunding in the commercial real estate market. A fast-growing new source of investment capital enabled by a last year’s relaxation of SEC regulations, crowdfunding in commercial property might conjure up images of a “wild west”-style marketplace, where dubious solicitations sent to any Tom, Dick or Harriet hide giant risks, buried in promises of glittering payoffs announced over a bullhorn to whoever shows up to participate.

As it turns out, that would be the wrong image, at least in one case. Reaching out to the crowd for capital can go hand in hand with prudence, caution and expertise, as exemplified by a recent equity deal financing a 62,000 sq. ft. shopping center outside of Kansas City.

Wait, “crowdfunding”?

First a quick video describing crowdfunding in general terms.

Not Just Banging A Drum, Vetting A Partner

One implication of crowdfunding is a new kind of direct relationship between investor and solicitor. No longer bound by regulation governing the qualifications of investors, crowdfunding solicitors and investors now face, it might seem, a lower bar of caution and diligence than before.

But that isn’t the way the above shopping center deal went.  Instead, the crowdfunding website that raised a portion of the capital for the South Greystone Center equity deal, Realty Mogul, brought not only the crowd and its wallets to the table, it brought its own business acumen and diligence.

In Emily Behlman’s piece at Wichita Business Journal, we find diligence was baked into the shopping center deal through vetting and partnering.

A group of 23 investors came together on the real estate crowdfunding website Realty Mogul, which got started in late 2012, to invest in the property. The shopping center was acquired by Block Real Estate Services of Kansas City for just under $4 million, with Realty Mogul providing a portion of the equity capital.

wrote earlier this month about crowdfunding’s potential as a source of capital for entrepreneurs, but at the time, I didn’t consider the financing mechanism as a way to fund real estate deals.

I talked today with Realty Mogul co-founder and CEO Jilliene Helman about the concept.

Her site and a couple others like it allow accredited investors (people with $1 million in net worth or $200,000 in income generally qualify) to join together and invest in real estate deals through loans or equity. The company says its online platform makes investment opportunities more accessible, and the minimum investment, $5,000 on some deals, is much lower than in many traditional real estate investment scenarios.

The company vets partner businesses and properties before making deals available to investors.

In the case of Greystone Shopping Center, the partner business was Block Real Estate. Helman says Realty Mogul ran background checks on all Block principals and studied the company’s track record, among other things. Then, Realty Mogul staff studied the property itself, looking for things like diversification — the center has 18 tenants so it’s not reliant on one — and neighborhood — Lenexa is relatively affluent and growing.

Realty Mogul has invested in 55 properties so far, and it’s done about $12 million in transactions.

An Evolution In Crowdfunding

When I compare the above details to other high-traffic crowdfunding sites such as Kickstarter, what sticks out in this case is that Realty Mogul’s practice here outstrips other crowdfunding models in terms of diligence.

When, for example, an artist or software developer goes to crowdfunding giant Kickstarter to fund a project, there is no similar vetting of the project nor the solicitor’s ability to deliver a completed project. Kickstarter currently stays mum on that issue, and hands all the risk of donation to the donor.

By stepping forward and addressing, rather than ignoring, the risks of deregulated solicitation, Realty Mogul may be showing the way forward for this new commercial real estate capital source to mature — fast.

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Crowdfunding And The SEC: Deregulation Continues

It’s not especially well known that the retail / e-commerce juggernaut Groupon started life not as a provider of retail savings to consumers but as a nonprofit crowdfunding platform for communities called The Point.  Groupon founder and former CEO Andrew Mason’s original software project let communities pool their money online to, for example, get a park built in their neighborhood or to solve some other community problem together.  It was only later, after a nudge and a million-dollar check from a venture capital latecomer that Mason applied the same crowdfunding idea and software to coupons. The rest, as they say, is retail history.

The crowdfunding mechanism that Mason conceived and built took off in many different directions – his design has been copied by endless Groupon clones, and by enormously successful arts and cultural funding platforms such as Kickstarter. Crowdfunding in retail and the arts are fine, but the commercial property industry has to wonder: what about using crowdsourcing to raise private equity for, say, a commercial real estate investment?

As I’ve written in this blog before, the barrier to using online crowds to raise investment capital has traditionally been SEC regulation.  There is a long-standing regulatory concept that protects investors from handing over money under terms they can’t be expected to understand fully, which has meant that the kind of generalized advertising of certain investment offerings that any crowdfunding site must traffic in are not allowed.

Or, were not allowed.  Was a long-standing regulatory concept. Used to protect unsophisticated investors.

Continuing a long string of deregulation to rule 506 under SEC Reg D, on July 10, 2013, the SEC ended the prohibition of General Solicitation and General Advertising in certain offerings. 

Rule 506

The final rule approved today makes changes to Rule 506 to permit issuers to use general solicitation and general advertising to offer their securities provided that:

  • The issuer takes reasonable steps to verify that the investors are accredited investors.
  • All purchasers of the securities fall within one of the categories of persons who are accredited investors under an existing rule (Rule 501 of Regulation D) or the issuer reasonably believes that the investors fall within one of the categories at the time of the sale of the securities.

To my non-attorney* eye, this seems to clear the major barrier to crowdfunding of real estate investment.  What was once a hard requirement to limit solicitation to  investors meeting certain criteria of “sophistication” and “wealth” and “accreditation” has now been replaced with a far less rigorous standard: issuers of securities now must only take “reasonable steps” to verify that investors aren’t completely misunderstanding the terms of the investment…or aren’t precocious twelve year olds playing with the family Visa card online.

“Big Government”: Hardly Getting Bigger

People who make hay with constant rhetorical complaining about government getting in the way of business get awfully quiet when deregulation like this comes along: by consigning to the scrap heap the heart of the SEC Reg D rules that once absolutely required potential investors in certain issues to have “sophistication” and thereby have eyes wide open in the deal, the connection of crowd-funded capital with commercial real estate portfolios is very likely to charge forward on crowdfunding investment sites such as EarlyShares or Realty Mogul and others.  Was the investor protection unnecessary?  Time will tell.

We’ll be watching the results with hope that the commercial property industry does great things with its new, government-approved crowdfunded capital source.

It’s up to issuers now.

* NEVER EVER take anything you read here at The Source as legal or fiduciary advice.  Always retain qualified counsel.

(Photo credit: Anirudh Koul)