Crowdfunding: the next commercial real estate frontier?

By Stewart McQueen and Prerna Soni,

In a world where we buy groceries, book travel, and even date online, it should come as no surprise that online investment is becoming increasingly prevalent. The rapid shift towards an internet-centric world has made crowdfunding the next “big thing” when it comes to raising capital and finding investment opportunities.

What is Crowdfunding?

In the most basic sense, crowdfunding is a means of raising capital by seeking small amounts of money from a large number of individuals. There are hundreds of websites that act as intermediaries between the investors and the businesses and/or individuals, and provide a platform for the exchange of information and funds to happen in a systematic (and hopefully more legitimate) way.

Regulatory Hurdles

Historically, rigid securities laws and regulations, specifically Section 4(a)(2) of the Securities Act of 1933 and the Regulation D safe harbor, limited the ways in which private companies have been able to raise capital. The JOBS Act of 2012, however, seemed to be these companies’ ticket to the crowdfunding party. The JOBS Act required the SEC to modify Regulation D in a way that now allows private companies to seek individual equity investment from accredited investors through “general solicitation”.

Crowdfunding as a Capital Source for Real Estate Developments?

Budding entrepreneurs and start-up companies have been leveraging crowdfunding platforms since the law’s passage, but recently, crowdfunding has become a source of capital for real estate developments, too. And though initially used for small residential projects, the scope of real estate crowdfunding is continuing to expand, and it is even being used by real estate developers to raise equity, mezzanine financing and debt for larger commercial projects.

This shift in securities regulation and the increased potential of crowdfunding has piqued the commercial real estate world’s interest. However, despite the JOBS Act, real estate crowdfunding could potentially open up a Pandora’s Box of securities regulation issues and create traps for the unwary.

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