What is the fundamental issue?
The Jumpstart Our Business Startups (JOBS) Act of 2012 is intended to encourage funding of U.S. small businesses by easing various securities regulations, including allowing non-accredited investors to engage in “crowdfunding” activities, and ultimately to increase opportunities for small businesses and startups. The Security and Exchange Commission (SEC) was charged with proposing regulations on crowdfunding.
"Crowdfunding" refers to the financing of an activity through the collective cooperation of people who pool their money or other resources, sometimes through a networking site on the internet. Crowdfunding has been in practice for some time before the JOBS Act was enacted, but now there are federal guidelines in place for many aspects of crowdfunding, including individual investment limits and controlling the way the funds are managed through a third-party platform.
I am a real estate professional. What does this mean for my business?
Crowdfunding could present an alternative funding stream to traditional lending sources for both residential and commercial buyers and sellers.
NAR policy support laws and regulations that ensure an adequate flow of capital for real estate purposes. NAR has no policy specific to crowdfunding at this time.
Regulation A+, or Title III of the JOBS Act took effect in 2015. It is designed to increase capital-raising opportunities for small businesses by making it easier for small businesses to raise capital by removing many of the regulatory compliance hurdles previously in place. The new rules allow companies to raise up to $50 million under Regulation A, which is a less-complicated route in terms of compliance and administration, as the previous limit was $5 million.
The rule exempts companies using Regulation A from registration with state securities administrations. It also establishes two tiers of fundraising:
- Tier 1: up $20 million in a 12-month period, with not more than $6 million in offers by selling security-holders that are affiliates of the issuer.
- Tier 2: $20-$50 million - for offerings of securities of up to $50 million in a 12-month period, with not more than $15 million in offers by selling security-holders that are affiliates of the issue. Also subject to ongoing review.
Title IV of the JOBS Act was finalized in October 2015, effective January 2016. The highlights of the rule for Title IV include:
1. Investor/Investment Limits
- Permit a company to raise a maximum aggregate amount of $1 million through crowdfunding offerings in a 12-month period;
- Permit individual investors, over a 12-month period, to invest in the aggregate across all crowdfunding offerings up to:
- If either their annual income or net worth is less than $100,000, than the greater of: $2,000 or 5 percent of the lesser of their annual income or net worth.
- If both their annual income and net worth are equal to or more than $100,000, 10 percent of the lesser of their annual income or net worth; and
- During the 12-month period, the aggregate amount of securities sold to an investor through all crowdfunding offerings may not exceed $100,000.
2. Companies that use a crowdfunding platform – Companies that rely on the recommended rules to conduct a crowdfunding offering must file certain information with the Commission and provide information to investors and the intermediary facilitating the offering. The information required is defined in the rule and is similar to what would be necessary for an audit or other financial reporting. There are ongoing reporting requirements for companies that have used a crowdfunding platform to complete a capital raise.
3. Crowdfunding Platforms - A funding portal would be required to register with the Commission on new Form Funding Portal, and become a member of a national securities association (currently, FINRA). A company relying on the rules would be required to conduct its offering exclusively through one intermediary platform at a time.
In May 2016 the Department of Treasury released a report on the state of marketplace lending, including an overview of the existing regulations that are part of the regulatory universe surrounding crowdfunding.
Commercial Federal Policy Committee
None at this time.
Letters to Congress
NAR Federal Issues Tracker
NAR Library & Archives has already done the research for you. References (formerly Field Guides) offer links to articles, eBooks, websites, statistics, and more to provide a comprehensive overview of perspectives. EBSCO articles (E) are available only to NAR members and require the member's nar.realtor login.
Real Estate Crowdfunding: Should I Consider It? (The Balance, Dec. 30, 2021)
“Crowdfunding, which started as a donation-based way to raise money, has become a popular form of real estate investing. When you participate in real estate crowdfunding, you pool your money together with many other investors to fund a particular project. If all goes well, you all earn passive income from it. In this guide, you’ll learn what real estate crowdfunding is, how it differs from other forms of real estate investing, and whether it’s right for you.”
Crowdfunding Models: Keep-It-All vs. All-Or-Nothing (Financial Management, Jun. 2020) E
“Reward‐based crowdfunding campaigns are commonly offered in one of two models via fundraising goals set by an entrepreneur: "Keep‐It‐All" (KIA), where the entrepreneur keeps the entire amount raised regardless of achieving the goal, and "All‐Or‐Nothing" (AON), where the entrepreneur keeps nothing unless the goal is achieved. We hypothesize that AON forces the entrepreneur to bear greater risk and encourages crowd funders to pledge more capital enabling entrepreneurs to set larger goals. We further hypothesize that AON is a costly signal of commitment for entrepreneurs yielding a separate equilibrium with higher quality and more innovative projects with greater success rates.”
Crowdfunding for Investors: Updated Investor Bulletin (U.S. Securities and Exchange Commission, Apr. 14, 2021)
“The SEC’s Office of Investor Education and Advocacy is issuing this Investor Bulletin to educate investors about securities-based crowdfunding.” In this bulletin find information about how to make a regulation crowdfunding investment and how to calculate net worth. The bulletin then details the risks you should consider before making a crowdfunding investment, as well as places to access educational materials regarding crowdfunding investments.
Real Estate and Crowdfunding
The Best Real Estate Crowdfunding Investment Platforms (Business Insider, May 6, 2022)
“Investing in real estate doesn't have to be difficult. If you're looking to avoid the legwork of conducting extensive property research, finding tenants, and regularly maintaining and attending to the investment, there are easier ways to add real estate to your portfolio. Real estate crowdfunding platforms make this possible. You can add residential properties, commercial properties, and other real estate investments to your portfolio at low costs. Some of the most common investments these platforms offer are real estate investment trusts (REITs), electronic real estate funds, and non-traded REITs.”
Real Estate Crowdfunding: What to Know Before You Invest (Boston Business Journal, Dec 8, 2021)
“Once the exclusive arena of only the savviest investors, real estate crowdfunding platforms like Crowd Lending, Inc. have broken down barriers to entry, allowing individuals to reap the benefits of alternative real estate investment assets…If you’re new to the world of real estate investing, it’s important to keep in mind that not all real estate investment platforms are created equal. Before investing, it’s critical you understand the structure of the investment platform and its specific advantages and disadvantages.”
Crowdfunding REITs: A New Asset Class for the Real Estate Industry? (Journal of Property Investment and Finance, 2021) E
“The paper aims to study the performance of crowdfunding REITs with respect to traditional REITs in order to evaluate the differences in the risk–return profile and their usefulness for a diversification strategy within the indirect real estate investments. The paper considers the crowdfunding REITs introduced after the JOBS Act in the United States and evaluates their performance and risk during the time period 2016–2018. Performance achieved by crowdfunding REITs is compared with other types of REITs in order to evaluate their usefulness for constructing an optimal portfolio strategy based on a standard mean variance approach.”
When Online Lending Meets Real Estate: Examining Investment Decisions in Lending-Based Real Estate Crowdfunding (Information Systems Research, Sep. 2020) E
“Lending-based real estate crowdfunding, which involves the use of real estate to secure loans, has emerged as a promising alternative with lower risk than peer-to-peer lending. This study provides insights into understanding how lenders' investment behavior is shaped by various information in such an emerging market. Using a data set from a large platform over 17 months, the authors find that lenders as a whole prefer loans secured by a borrower's house to those secured by a mortgage, as reflected in quicker and larger lending transactions. Experienced lenders tend to invest more aggressively, in both time and amount, but exhibit a weaker preference for loans secured by a borrower's house.”
Real Estate Crowdfunding Platforms
CrowdStreet is a software and services company disrupting the commercial real estate industry by enabling innovative real estate operators and developers to efficiently engage in online capital formation, communicate with investors, distribute investment documents and centralize ongoing investor relations.
Fundrise is an online investment platform for commercial real estate, often times referred to as a crowdfunding platform or investment marketplace. Fundrise gives investors the ability to: Browse investment offerings based on investment preferences including location, asset type, risk and return profile; Transact entirely online, including digital legal documentation, funds transfer, and ownership recordation; Manage and track investments easily through an online portfolio; receive automated distributions and/or interest payments, and regular financial reporting.
iFunding is a real estate investing marketplace that connects thousands of accredited retail investors and institutions with real estate operators seeking financing. We are ‘revolutionizing real estate investing’ through ease of access to high-quality, commercial projects, using our secure web platform, detailed reporting process, and responsive client service team.
Patch of Land is crowdfunding real estate through its P2RE (peer-to-peer) online marketplace offering various typologies of secured real estate debt on assets backed by first position liens and personal guarantees. We match investors and lenders seeking alternative fixed income opportunities to borrowers seeking alternative sources of financing for their real estate investment needs.
Prodigy gives you the opportunity to invest as little as $10,000 in commercial real estate investments that were previously only available to a handful of institutions and ultra-high net worth individuals.
RealtyMogul.com is an online marketplace for real estate investing. We are often referred to as a crowdfunding platform, marketplace lender, or peer-to-peer lender. Whatever term you choose to use, we are here to connect investors who want to invest in real estate with real estate companies that need real estate capital – either debt or equity - it’s that simple.
RealtyShares is an online investment platform that brings together investors, borrowers, and sponsors. Accredited or institutional investors can invest in pre-identified commercial real estate investment opportunities with as little as $5,000. Legal document signatures and fund transfers can all be handled securely through the RealtyShares platform, so that investors can complete the entire transaction through the website.
eBooks & Other Resources
The following eBooks and digital audiobooks are available to NAR members:
Crowdfunding: A Guide to Raising Capital on the Internet (Audiobook, eBook)
Crowdfunding: The Corporate Era (Audiobook, eBook)
The Crowdfunding Handbook (Audiobook, eBook)
Crowdfunding for Beginners (eBook)
Equity Crowdfunding for Investors (Audiobook, eBook)
The Everything Guide to Crowdfunding (Audiobook, eBook)
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The inclusion of links on this page does not imply endorsement by the National Association of REALTORS®. NAR makes no representations about whether the content of any external sites which may be linked in this page complies with state or federal laws or regulations or with applicable NAR policies. These links are provided for your convenience only and you rely on them at your own risk.