April 13, 2017

Crowdfunding—a Viable Source of Capital?

April 14, 2017 | by Beth Glavosek | Blue Vault

In October 2015, the U.S. Securities and Exchange Commission (SEC) adopted final rules to permit companies to offer and sell securities through “crowdfunding.” Mary Jo White, SEC Chair at the time, stated, “There is a great deal of enthusiasm in the marketplace for crowdfunding, and I believe these rules and proposed amendments provide smaller companies with innovative ways to raise capital and give investors the protections they need.”

What is crowdfunding, and how does it apply to capital raising?

Crowdfunding is a product of the Jumpstart Our Business Startups (JOBS) Act signed into law on April 5, 2012, by President Barack Obama. The Act required the SEC to write rules and issue studies on capital formation, disclosure, and registration requirements. The JOBS Act was intended to help small businesses by easing regulations.

Title II of the JOBS Act lifted a decades-old ban on the mass marketing of securities offerings. Title III (which became effective May 16, 2016) allows anyone, regardless of whether or not they are accredited investors, to participate in equity crowdfunding. In other words, the concept of crowdfunding opened up new avenues for product sponsors to reach individual investors.

Who can participate?

The SEC states that anyone can invest in a crowdfunding securities offering. However, because of the risks involved, investors are limited in how much they can invest during any 12-month period in these transactions. Limitations are based on net worth and annual income. For example, if your annual income is $150,000 and your net worth is $80,000, JOBS Act crowdfunding rules allow you to invest the greater of $2,000 or 5% of $80,000 ($4,000) during a 12-month period. So in this example, you can invest $4,000 over a 12-month period.

How are REITs using crowdfunding?

According to an article in National Real Estate Investor, crowdfunding firms have stepped into the REIT space to attract commercial real estate investor capital. Regulation A+ and Title III of the JOBS Act allow REITs to market to large groups of non-accredited investors. Reg A+ offerings allow sponsors to raise up to $50 million over a 12-month period from both accredited and non-accredited investors.

Industry sources say that there is a huge demand from non-accredited investors to get exposure in commercial real estate and access opportunities historically only available to institutional investors. In addition, some traditional nontraded REITs may find new avenues for capital raising by opening up their offerings to crowdfunding.

Crowdfunded REITs are similar to nontraded REITs in that they don’t experience the same market volatility or daily liquidity as publicly-traded REITs. Some do calculate net asset values (NAV) at regular intervals.

For more complete information on the final rulings related to the JOBS Act, visit the SEC’s guidance page. For information on what investors should know about crowdfunding, visit FINRA’s guidance page.