Crowdfunding firms have been busy raising both debt and equity for commercial real estate investments from “the crowd,” which so far has been limited primarily to accredited investors. That pool of potential investors is set to get a lot bigger with the passing of Title III of the JOBS Act, which opens up the online investing platforms to non-accredited investors as well.
The SEC approved Title III on Oct. 30th, thereby allowing non-accredited investors to start investing with crowdfunding firms in early 2016. Crowdfunding firms would face a cap of $1 million per year raised from non-accredited investors, and further limits will be set on the amount non-accredited individuals could contribute based on their annual income or net worth.
In theory, opening the flood gates to non-accredited investors significantly expands the potential investor base and would bring even more capital into the commercial real estate investment arena. The question is whether or not that is a segment of the market that crowdfunding firms are going to aggressively target, and if so, what impact it could have on this still emerging industry.
“It could really go one of two ways. Title III has the potential to be an incredibly transformative way to raise capital and access investors—or it will fall flat,” says Adam Hooper, co-founder and CEO of crowdfunding firm RealCrowd.
On the plus side, Title III will open up a huge source of liquidity for real estate crowdfunding firms. However, what remains to be seen is what additional burdens will be added in order to access this capital. “The biggest cons are going to be the regulatory, reporting and ongoing logistical burden of raising capital in this fashion, and the potential for bad actors to get involved, trying to take advantage of a potentially less savvy investor pool versus what you might find in the more traditional private equity markets,” says Hooper.
Once the SEC implements the new Regulation Crowdfunding rules it will likely stimulate many more offerings, especially from the smaller real estate companies, says Ben Miller, co-founder and CEO of Fundrise. Since it was founded in 2012, Fundrise has grown its crowdfunding investor network to more than 60,000 members and provided capital to a variety of commercial and multifamily projects, including 3 World Trade Center in Manhattan.
“Regulation Crowdfunding provides potential advantages for the small fundraiser, who can tell their story online,” he says. The downside is that some of these smaller investments are likely to be high risk and high reward, he adds.
Arguably, real estate crowdfunding is opening up to non-accredited investors at a time when many real estate assets are reaching peak prices, and there is some concern about communicating the risks and illiquidity of real estate to a group that will surely include some real estate investor newbies.
“As these platforms continue to gain traction and people get more comfortable with the process, I think we are going to see a huge amount of additional liquidity in the market,” says Joy Schoffler, a principal with Leverage PR, a public relations firm that works with clients in technology and finance-related fields. That is really when it is important for people to be careful with the underwriting, for sponsors and for individuals too, to do their due diligence and verify assumptions, she adds. Schoffler is a former private equity firm director and a leader in the crowdfunding industry. She has helped to launch more than three dozen crowdfunding platforms, and she currently serves on the board of the non-profit group Crowdfund Intermediary Regulatory Advocates (CFIRA).
Yet firms such as RealCrowd are “cautiously optimistic” about the change. The initial goal for many crowdfunding firms was to drive change in the commercial real estate industry in terms of how it raises capital, as well as giving individuals greater access to direct real estate investment opportunities.
“We are still waiting for clarity on Regulation Crowdfunding, Title III, but opening up investment to everyone—both accredited and unaccredited—is core to our mission and values,” says Miller.
Crowdfunding investors have to show that they understand the investment risks. So there is an education component to crowdfunding. However, crowdfunding firms also have to exercise caution. The crowdfunding platforms can’t be shown as offering investment advice or by law they would have to file as a broker-dealer.
“I think there are some that are going to be reluctant to go after (non-accredited investors), but I think more so they will see it as part of the capital stack,” says Schoffler.