On Monday, I shared some of the best crowdfunding real estate sites available for you to invest with. Today, I’ll spend some time explaining the history of crowdfunded real estate.
In 2012, the US Congress passed the JOBS (Jumpstart Our Business Startups) act, which legalized equity crowdfunding—the sale of corporate equity stakes through online platforms—for accredited investors only. An accredited investor is someone with a net worth of over $1 million (minus their primary residence), or an annual income in excess of $200,000, and is defined by the Securities Act of 1933.
Despite the mandate to have rules set in place by the end of 2012, the SEC ended up taking until May of 2015 to release them, after a lengthy deliberative process. One of the end goals of the act was to allow startups to be able to “engage public channels, and advertise publicly to be able to solicit investment.”
In October of 2016, the SEC further expanded the pool of potential investors allowed to participate in equity crowdsourcing by ending depression era policies designed to protect inexperienced investors from fraud, and allowing non-accredited (or “less sophisticated”) investors to participate in equity crowdfunding.
The bill, which had bipartisan support, was backed by the start-up and technical world (Google, National Venture Capital Association), and was opposed by groups such as the AARP, labor unions, and the Consumer Federation of America who called the legislation “dangerous” and said it embraced “the discredited notion that the way to create jobs is to weaken regulatory protections.”
Despite fears about deregulation, as of May 2016 anyone is now allowed to invest through crowdfunding platforms. So what does this mean to non-accredited investors?
First of all, with equity crowdfunding, you become a part of a group who pool money into a specific startup in exchange for equity shares. This is the method often used to get seed funding for an early-stage company. If you’re a non-accredited investor (and willing to take some risk), you see the potential for a solid return if the startup has a successful IPO.
Second, with the new rules, you can also start participating in crowdfunding without a substantial amount of money (as little as $1000). This levels the playing field for accredited and non-accredited investors and could act as a market balancing force for capital.
So what does this mean for commercial real estate? Well, for one we’re now seeing diverse crowdfunded real estate platforms (one great example is Fundrise) with their own investment paradigms.
Some states have developed their own laws regarding real estate crowdsourcing, ahead of the SEC. Georgia and Illinois both allowed for residents to invest in crowdsourced real estate deals early in 2015, rather than waiting for the SEC to finalize its regulatory development process. The law in Illinois, for example, “reduces to $1 the minimum entry price for investments in private offerings, such as real estate development.”
According to Anthony Zeoli, the manager of crowdfundinglegalhub.com and a Chicago lawyer, the future of real estate investing in Illinois looks like this: “if you’re walking down the street in the Loop seeing all this development that’s going on and wondering how you’ll get in on it, there’ll be a sign on the construction fence saying, ‘invest in this building at our website.’”
Needless to say, we are now in the midst of an unprecedented time in capital flow—a truly democratized system where anyone—not just large banks, investment firms, or wealthy individuals can enjoy substantial returns on their real estate investments. Stay tuned to myNOI.com for videos and updates on individual crowdfunded real estate platforms.
Troy Muljat is a Washington State certified commercial appraiser and broker with over 25 years of experience in the commercial real estate industry. He holds the Certified Commercial Investment Member (CCIM) and Certified Property Manager® (CPM) designations through the National Association of Realtors.He specializes in brokerage, leasing, property management, development, and commercial appraisal.Visit TroyMuljat.com for more information about Troy.