The burning question is: will the JOBS act will truly create any new avenues for real estate investors?
This week the The SEC finally released its proposed ruling on crowdfunding. While an interesting innovation, it seems the fix and flip investor is perhaps the real winner in the real estate game under this new avenue.
I’ll explain why in a moment, but first – a quick recap on the latest crowdfunding news.
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What is Crowfunding?
Crowdfunding has several meanings. Generally it is the collective effort of individuals who network and pool their money, usually via the internet to support efforts initiated by other people or organizations (See Wikipedia).
The JOBS act created an interesting new mechanism to incorporate the concept. Until the new rule becomes effective, securities law prohibits advertising (general solicitation) unless you comply with the private placement rules. In other words, it violates securities law to publicly advertise for an equity stake in you business generally.
You may advertise for equity investors but the process can range from a very expensive $250k for a full-on listed offering to expensive $25k to $50k for a private placement. Therefore, the JOBS act may create a lower cost alternative. Several existing sites have been crowdfunding this way and limiting their investors to high net worth individuals.
Crowdfunding Under the JOBS Act?
The challenge the SEC faced was a daunting balancing act between protecting the general public (which are less financially savvy) and creating a low burden method for raising capital to spur economic growth.
The US remains the birthplace of innovation and to extend our economic competitive advantage the JOBS act was created. However, the SEC struggled with this new provision. For a variety of reasons – including leadership changes at the SEC – the rules are tardy to the party.
The regulations start with these rules:
- the amount raised must not exceed $1 million in a 12-month period (this amount is to be adjusted for inflation at least every five years);
- individual investments in a 12-month period are limited to the greater of $2,000 or 5 percent of annual income or net worth, if annual income or net worth of the investor is less than $100,000; and
- 10 percent of annual income or net worth (not to exceed an amount sold of$100,000), if annual income or net worth of the investor is $100,000 or more (these amounts are to be adjusted for inflation at least every five years); and
- transactions must be conducted through an intermediary that either is registered as abroker or is registered as a new type of entity called a “funding portal.”
NOTE: Due to the Federal regulation process, this law change will not be effective for three to six months.
Is Crowdfunding Under the JOBS Act Usable For You?
Generally, the long standing private money prerequisite is that the investor must know, like, and trust you before you will be successful in obtaining equity partners. The traditional private money formula is a networking method with the intent of growing you business. Will the new JOBS act be viable in light of that fact?
Websites including Prosper.com and LendingClub provide an interesting additional source of funding for fix and flip activity, but the limits are quickly reach due to low amounts available. Crowdfunding may provide the savy fix and flip investor a great new source of capital.
Buy and hold investors seemingly could use the money raised this way as well, but it seems to me the $1,000,000 limitation would be hit fairly quickly. However, with fix and flipping- you have capital velocity occurring, which means the money is constantly being recycled.
The Great Unknown: Some Interesting Questions that Remain.
It seems this model is an interesting opportunity for the fix and flip investor. The question as to whether it will actually amount to any significant changes in the private money arena remains to be answered. It seems a fix and flip investor could generate a nice war chest to work with under the model. But what about:
- Just because you may use this method… will it be practical?
- Will the requirement of expensive financial audits for amounts over $500,000 raised may serve to be somewhat of a buzz kill?
- Will the financial intermediary’s be too large a pain in the backside to get an offer to the streets?
- Will the fact of an intermediary doing due diligence on your business be enough to satisfy investors?
- Will the public be motivated to invest this way?
What are your thoughts? Does the crowdfunding model appeal to you?
Read the SEC proposed rule here: http://www.sec.gov/rules/proposed/2013/33-9470.pdf
Photo Credit: Thomas Hawk