Mortgages & Creative Financing

SEC Approves Changes to Crowdfunding Laws

Expertise: Mortgages & Creative Financing, Real Estate Marketing
12 Articles Written
real estate crowdfunding concept on gearwheels

On November 2, the Securities and Exchange Commission approved increasing the maximum raise under Regulation Crowdfunding from $1.07 million to $5 million—a significant acknowledgment of the success of equity crowdfunding.

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SEC Amends Security Act of 1933

Following are some of the other approved changes.

Removal of Investment Limits for Accredited Investors

Until now, there have been limitations on the amount an accredited investor can invest in a Regulation Crowdfunding (Reg CF) offering. The SEC has eliminated those restrictions. This increases the ability of small real estate entrepreneurs to raise capital by allowing them to raise money using Reg CF without limiting the amounts they can raise from the wealthiest investor pool: accredited investors.

Related: Tech Is ‘Democratizing’ Real Estate—Creating Big Opportunities for Syndicators & Investors

Improvement of Investment Limits for Non-Accredited Investors

The SEC has altered the way in which the limit non-accredited investors can put into any deal is calculated. This also increases the amount of money a sponsor can raise by allowing non-accredited investors to invest more than previously permitted.

Limits are now calculated "using the greater of their annual income or net worth when calculating the investment limits for non-accredited investors," per the SEC’s announcement.

people paper cutouts in front of stacks of coins

Introduction of ‘Test the Waters’ & ‘Demo Day’ Communications

This amendment permits issuers to determine which regulation they will ultimately use for a capital raise before formally filing with the SEC through a process known as “testing the waters.” It allows sponsors to test market their deals to see if there is investor interest before incurring the time and expense of first filing with the SEC only to discover afterward that their deal is a dud.

Similar to testing the waters campaigns, the SEC has further liberalized “demo days.” These events are designed to allow sponsors to discuss deals with prospective investors prior to actively soliciting investment. These events are no longer considered “general solicitation,” which would require filing with the SEC. These opportunities to discuss deals openly with investors are typically used by (non-real estate) startups to discuss their products and services—but equally apply to real estate companies with new deals to finance.

Permission to Use Special Purpose Vehicles

Another new amendment allows the use of special purpose vehicles (SPVs) to invest in Regulation CF deals. This may open the door to feeder funds investing in Reg CF deals.

Related: Crowdfunding: A New Era of Fairness and Efficiency

Increase in Limits for Regulation A+ Offerings

The maximum that can be raised under Regulation A+ has increased 50% from $50 million to $75 million (Tier 2). Regulation A+, open to non-accredited and accredited investors alike, are sometimes called “mini-IPOs.” While they do not incur the same time, cost, and disclosure requirements as a full IPO, they are more restrictive than Reg CF offerings, yet allow for general solicitation of investment from the general public.

When Regulation Crowdfunding was first being debated by Congress prior to the passing of the 2012 JOBS Act, the limit of $5 million was rejected out of concern that there would be fraud. Now, eight years later, with very few instances of fraud having been perpetrated and uncovered, the SEC has acknowledged the benefits crowdfunding can bring to the overall economy and has increased the maximum limit accordingly.

Watch as Adam Gower discusses with attorney Mark Roderick how original regulations, deemed mistakes, are now being corrected to the benefit of the real estate industry.

How Real Estate Investors Will Benefit

During these times of unprecedented economic and political uncertainty—and with the threat of more pandemic waves further hobbling the economy—the SEC has acknowledged through its actions the need for extra liquidity, particularly to small and medium-sized enterprises.

As with all JOBS Act-related changes, these modifications are primarily designed to benefit community businesses. However, as almost every new real estate project starts with the formation of a new company to manage that project, they also benefit from these changes. The SEC’s recent announcements are particularly important for real estate entrepreneurs, as they significantly increase the sources one can use to raise capital.

Related: How to Fund Real Estate Deals Using Private Money (& Why It’s a Good Idea!)

The amount of Reg CF investing has ballooned since the beginning of COVID and shows little sign of abating.  According to Crowdfund Capital Advisors, the amount invested in Reg CF deals has more than doubled since the beginning of the year on a month-to-month basis. CCA also notes that the number of offerings has increased by 50% and that the average amount invested per investor has also increased in the same period.

This all bodes well for the real estate industry—an unintended effect of the original JOBS Act and of subsequent changes to the regulations. As investors remain locked down while they look for opportunities online, and as the regulations restricting what they can invest in continue to relax, the ability of forward-thinking real estate sponsors to finance their deals is becoming easier.

To find out more about the changes to crowdfunding regulations, see the SEC’s press release here.

Have you invested in a crowdfunding deal? Are you interested in doing so? Why or why not?

Join the discussion below.

See Adam’s new book SYNDICATE here and his website GowerCrowd here. Adam Gower, Ph.D., builds digital marketing systems for real estate professionals who want to find more investors so they can raise more money. He is known as the creator of the Investor Acquisition System and combines a lifetime of experience in real estate investment and finance with best-of-class digital marketing tactics, techniques, and strategies to help crowdfund real estate syndications. Visit his BiggerPockets profile here.
    Victor Thompson Investor from Athens, GA
    Replied 3 months ago
    Anyone have specific crowdfunding stories to share? Specifically, I would like to hear about the challenges REI must overcome to set up their first crowdfunding round.
    Adam Gower Specialist
    Replied 3 months ago
    How, Victor, do you want to set up your first round? Are you talking about posting on a real estate crowdfunding platform, or setting up your own direct to investors?
    Victor Thompson Investor from Athens, GA
    Replied 2 months ago
    Setting up direct to investors. I read your responses below Adam and thanks for adding additional detail on the crowdfunding platforms. We have sold a property on Roofstock in the past. Now were looking to grow our pool of Private Money Lenders for short term flips and longer term sub to owner finance wraps, that we treat similar to buy and holds.
    Adam Gower Specialist
    Replied 2 months ago
    The single most important thing you can do, Victor, is to create a website that is packed with high value educational content, rotate that content on social media to attract prospects, and set up some auto-responding emails systems. You're in a competitive space and that's the way to stand out.
    Jay Kulkarni Investor from Houston, TX
    Replied 3 months ago
    I’ve seen it done here in Houston with restaurants and bars at a small level, but this will be huge. I would love to hear how other utilize or plan to utilize this in the near term, too.
    Adam Gower Specialist
    Replied 3 months ago
    Yes. Regulation CF offerings are primarily taken up by non-real estate offerings i.e. by small businesses. FINRA regulate the funding portals that can list these kinds of deals and you can find a full list of all of the portals they regulate at finra.org/about/firms-we-regulate/funding-portals-we-regulate. As I have mentioned in other replies to comments on this article, only two of these specialize in real estate - but that may have changed since I last checked so if you find others, do please let me know!
    Joanna Wright Rental Property Investor from Gastonia NC
    Replied 3 months ago
    Where do we start to get our deals to the CF investors for funding? Also I have heard it is difficult to get approved. Do you have a list of suggestions for presenting our deals to the CF platforms?
    Adam Gower Specialist
    Replied 3 months ago
    Joanna, there are only two Regulation Crowdfunding (Reg CF) funding portals you can choose from, SmallChange.com and BuyTheBlock - these are the only two that specialize in real estate and include offerings to non-accredited investors. I would recommend speaking first to Eve Picker at SmallChange whose site is very easy to follow and understand (by design).
    Troy Larson Specialist from Albuquerque N.M.
    Replied 3 months ago
    @Joanna Wright, you can find information about finding sources of private lenders at this link; https://www.biggerpockets.com/blog/find-private-money-lenders Branding and networking are key to any real estate endeavor. By replying to this blog article you have begun. Be persistent and present a qualified message.
    Joseph Leibovitch Rental Property Investor from Baltimore
    Replied 3 months ago
    Can anyone share some CF platforms?
    Adam Gower Specialist
    Replied 3 months ago
    Joseph, yes. At GowerCrowd we recently conducted a review of reviews, identifying the top crowdfunding websites in the country. The top sites based on an analysis of all major reviews are as follows: 1. RealtyMogul 2. Fundrise 3. Crowdstreet 4. Equity Multiple 5. Roofstock 6. Peerstreet 7. Groundfloor 8. RealCrowd 9. Patch of Land However, each of these sites cater to very different types of real estate offering so narrow it down by identifying which are suitable for you. If you are interested in Reg CF offerings (that allow you to solicit non-accredited investors also), then you want to look at SmallChange and BuyTheBlock which are, as far as I know, the only two Reg CF platforms that focus on real estate.
    Brian Dally Lender from Atlanta, Georgia
    Replied 3 months ago
    RealtyMogul, EquityMultiple, and Fundrise do not actually allow non-accredited investors to participate directly in their deals. They only offer REITs and in some cases other fund structures for broad participation. PeerStreet, RealCrowd, PatchOfLand, and CrowdStreet are open only to accredited investors. They do not submit to SEC regulation of their disclosures, so you don't get audited financials or any other regulatory protections. With Rootstock, non-accredited investors are allowed to buy the rental properties they list, but only accredited investors can participate in their $5,000 minimum offering of securities to participate in rental deals.
    Brian Dally Lender from Atlanta, Georgia
    Replied 3 months ago
    RealtyMogul, EquityMultiple, and Fundrise do not actually allow non-accredited investors to participate directly in their deals. They only offer REITs and in some cases other fund structures for broad participation. PeerStreet, RealCrowd, PatchOfLand, and CrowdStreet are open only to accredited investors. They do not submit to SEC regulation of their disclosures, so you don't get audited financials or any other regulatory protections. With Rootstock, non-accredited investors are allowed to buy the rental properties they list, but only accredited investors can participate in their $5,000 minimum offering of securities to participate in rental deals.
    Blake Dailey Rental Property Investor from Panama City, FL
    Replied about 1 month ago
    @Adam Gower this is good stuff! I just ordered your book to see if this is will open the doors to make syndicating easier in the future.
    Adam Gower Specialist
    Replied about 1 month ago
    Thanks Blake. Let me know if you have any questions - happy to help in any way I can.