Crowdfunding in Commercial Real Estate

Crowdfunding has gotten a lot of press coverage recently, but does it have any application to commercial real estate?

The answer might surprise you.

Atlanta Business Chronicle recently wrote about FundRise as an example of a firm that was hoping to bring the power of crowdfunding to the Atlanta real estate scene. But the FundRise model is just one example of how crowdfunding might play a role in getting real estate deals done.

First, you need to understand what crowdfunding is (and is not).

This blog post will tell you a little about the origins of crowdfunding and how Congress changed federal securities law to make it possible to sell “crowdfunded” securities over the Internet. That effort has become bogged down, however, as the SEC has failed to issue necessary regulations when required by the law. In Part 2 of this blog post I will outline some of the ways that crowdfunding is feasible today and how that kind of crowdfunding might be used to facilitate commercial real estate deals.

Crowdfunding – The Background

The idea behind crowdfunding is that having a large number of people – with access to information – makes that group (or crowd) more likely to make accurate guesses about the future than is possible with a small number of people (even if the small number includes industry experts).

The idea was popularized a few years ago in a book by New York Times writer James Surowiecki in his book, The Wisdom of Crowds.

Crowdfunding has taken root in several websites, some of the most popular of which are Kickstarter and Indigogo. These sites are often called donation-based or rewards-based crowdfunding because individuals make cash contributions to the project promoter either as a donation or in exchange for some kind of reward. Often these rewards-based crowdfunding efforts are initiated by artists who are raising money to complete a project (like a band that is raising cash to pay for the studio time to complete a first album, or a playwright who is raising funds for the cash to rent a concert call to exhibit a play for the first time). Contributors give money for the joy of it or to help a needy cause. If contributors get anything in return it is usually limited to a mention on the back of the album, or on the playbill, or through a free T-shirt with the artist on it.

Congress Acts: the JOBS Act of 2012

The success of these sites (which have raised hundreds of millions of dollars) prompted entrepreneurs to imagine what would happen if start-ups and small businesses could raise cause through the sale of securities over the Internet in a similar crowdfunding fashion. That idea found its opportunity in the JOBS Act of 2012.

The JOBS Act amended the federal Securities Act of 1933 to make it legal for start-ups and small business to sell securities (either equity or debt) over the Internet through regulated “crowdfunding portals.” Thinking that permitting securities-based crowdfunding would spark entrepreneurship and job-creation, Congress required the SEC to adopt regulations that would define the requirements for a crowdfunding portal. Once defined, the path would be clear for crowdfunding portals to act as a meeting place for entrepreneurs and investors that would allow investors to purchase unregistered securities.

The regulators at the SEC, however, took a dim view of crowdfunding and, so far, have slow-rolled the introduction of regulations to create crowdfunding portals. Although new SEC chair Mary Jo White has promised that the SEC is working on it as quickly as possible, there is still no firm estimate on when the SEC’s regulations will be adopted. As a result, at the moment, securities-based crowdfunding as contemplated by the JOBS Act is not yet possible.

But that’s not the end of the story. There are two other ways for real estate deals to get funded through crowdfunding and I will cover those two alternatives in Part 2 of this story next week.

Source: Atlanta Business Chronicle – Jonathan Wilson

Link: http://www.bizjournals.com/atlanta/real_talk/2013/09/crowdfunding-in-commercial-real-estate.html?page=all

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