By Gail Kalinoski, Contributing Editor
For more than three years since the passage of the JOBS Act, the commercial real estate industry has been waiting for the U.S. Securities and Exchange Commission to approve final rules that would make it easier for more investors to participate in crowdfunding. They shouldn’t have to wait much longer.
Crowdfunding of real estate deals has been increasing in recent years, but SEC laws currently allow only accredited investors with incomes over $200,000 and high net worth to participate. While other aspects of the Jumpstart Our Business Startups Act have already been implemented, Title III of the act has remained under review.
Legal and CRE experts expect the SEC will approve the final Title III rules when it meets Friday at 10 a.m. in its Washington, D.C., headquarters. Once adoption occurs, the rulings must be published in the federal register and will take effect 60 days later.
“It will be a fantastic way to kick off 2016,” said Robert Hoskins, who runs crowdfunding public relations campaigns as director of media relations at Front Page Public Relations Inc. in Austin, Texas. “People have been waiting on this for three years and they are ready.”
Noting that one of the hottest segments of crowdfunding is commercial real estate, Hoskins said opening up the fundraising platforms to non-accredited investors “really makes sense” and likened it to the sale of shares in REITs.
“It will be really good for small businesses and small real estate firms,” he told CPE. “They’re suddenly going to have a lot more money to work with.”
The JOBS Act, signed into law in April 2012, is designed to streamline the way startups and small businesses could raise funds by selling equity capital and soliciting small investments over the Internet. Laws dating back to the 1933 Securities Act previously limited how funds could be raised through investors. Title III is considered the part of the law that will help startups and small businesses the most because it will open the equity fundraising to non-accredited investors, those who have annual incomes lower than $200,000 for singles, $300,000 if married and a net worth above $1 million.
Some like corporate and securities attorney Doug Ellenoff, who has been specializing in crowdfunding issues in recent years, say the final implementation of Title III may not be as attractive to larger commercial real estate companies or sponsors looking to raise a lot of capital because there are limits. Unless the SEC changes it, and it is not expected to at this point, organizations may only solicit up to $1 million annually.
“The million-dollar limitation makes Title III much less attractive to commercial real estate,” said Ellenoff, a partner with Ellenoff, Grossman & Schole, L.L.P. in New York City and co-founder of iDisclose, a web-based application that enables entrepreneurs to prepare customized private placement documents. “That’s very limiting unless they change that language.”
But Ellenoff does expect the SEC to make some changes to the Title III rules based on feedback from interested parties. He said the SEC was going to require real estate companies or sponsors raising more than $500,000 to get an audit but he expects them to back off and be more flexible in its final ruling.
He told CPE the SEC was also going to hold the crowdfunding platforms liable for any misstatements or errors by sponsors.
“After a lot of push back, I think that is not going to be the case,” he noted.
While there might be changes to the Title III rules, Ellenoff does expect the SEC to approve them Friday.
“A vote at this time is perfunctory,” he said.
The SEC vote will only affect crowdfunding offerings in the United States, but Scott Picken of South Africa and author of Property Going Global said its action will reverberate.
“It sets a precedent for the rest of the world,” said Picken, also founder and CEO of Wealth Migrate, the 10th largest global real estate crowdfunding platform which allows investment minimums as low as $10,000.
“It’s big for America but it’s massive for the rest of the world,” said Picken, “The rest of the world is trying to catch up with regulations. But it will be good for the investors.”