Will Title III Crowdfunding Change Commercial Real Estate?

The Jumpstart Our Business Startups (JOBS) Act was signed into law in April of 2012, with the intention of allowing a greater number of Americans to invest in small businesses and startups. With the release of the SEC’s final rule on Title III, non-accredited investors will be able to purchase equity stakes through SEC/FINRA-registered crowdfunding platforms. The new regulations should take effect in mid-2016 (180 days after publication in the Federal Register).

This is distinct from popular crowdfunding sources such as Kickstarter, in that the Title III intermediary platforms will be registered with the SEC and carry obligations of due diligence, while investors will be purchasing equity stakes rather than essentially making a donation or pre-purchasing a proposed product.

The crowdfunding market for Real Estate is already strong (estimated to be around $2.5 Billion in 2015, per a recent Massolution report), consisting of accredited investors operating under Title II of the JOBS Act and operations which do not fall under the SEC’s definition of “crowdfunding”. With Title III opening the doors to non-accredited investors (who by some estimates make up 91% of the investing population), that market is only expected to grow larger. At the same time, Title III also specifies several caps for both investors and issuers, some of which may throttle the excitement as we approach the 2016 roll out date. Everything is prone to change of course, but we are at least getting a glimpse of how the new regulations will take effect.

Below is an overview of the key provisions and some highlights of the debate over how they will affect the Commercial Real Estate market. If you’d like to read the full text of the SEC’s final rule on Title III, you can find all 686 pages of it here.

Key Provisions of Title III of the JOBS Act

Under the SEC’s final rules on Title III:

Security issuers may raise a maximum of $1 million in any rolling 12 month period.

of $1 million in any rolling 12 month period. Investors with a net worth or annual income less than $100k may invest $2,000 or 5% of their annual income/net worth, whichever is greater . This limit covers all investments with crowdfunding issuers in a rolling 12 month period.

. This limit covers all investments with crowdfunding issuers in a rolling 12 month period. Investors with deeper pockets may invest up to 10% of their net worth or annual income, whichever is less . These limits apply to investors whose annual income/net worth is greater than $100k, and is structured on the same rolling 12 month period.

. These limits apply to investors whose annual income/net worth is greater than $100k, and is structured on the same rolling 12 month period. All investors are capped at $100k in investments over a rolling twelve month period, no matter their total annual income/net worth. This is true regardless of whether the investor is accredited or non-accredited.

investors are capped at $100k in investments over a rolling twelve month period, no matter their total annual income/net worth. This is true regardless of whether the investor is accredited or non-accredited. Securities purchased through a Title III offering may be resold after one year.

Crowdfunding portals are required to perform due diligence upon any issuer they do business with, though portals will not be held strictly liable for misstatements or misrepresentations made by the issuer. (For a helpful summary of the obligations placed on crowdfunding intermediaries, see the SEC press release on Title III.)

What does all this mean for Real Estate investors? To understand the implication of these constraints we need to view them within the greater context of the impending crowdsourcing boom.

The Coming Crowdfunding Storm

As mentioned above, crowdfunded real estate investment is expected to cross the$2.5 billion mark this year, but the aggregate global crowdfunding market is an even more impressive $34.4 billion. With the potential market now expanding to include non-accredited U.S. investors, platforms are rushing to fill the newly created niche, with companies such as Seedrs already moving into beta testing and announcing plans to open their doors by mid-2016. Their hope is that issuing companies and investors will be eager to join the crowdfunding blitz.

Of course pooling investing dollars is nothing new. Real Estate has long seen various forms of syndication, and REITs debuted back in 1960. But for many investors the onerous restrictions and red tape of syndication and the diluted pool of investments in REITs make them less attractive than crowdfunding. The question is whether or not issuing companies will be as excited as investors. There’s clearly a demand for this kind of monetary infusion for real estate projects that had trouble raising capital from traditional sources, but will the restrictions on Title III investments damper this enthusiasm?

The High Cost of Participation

In a recent Forbes piece, Nav Athwal, Founder & CEO of Real Estate crowdfunding platform RealtyShares, weighs in on the SEC’s final rule with mixed emotions. As Mr. Athwal notes, the opening of a new asset class that it not correlated to the stock market is a good thing, especially for non-accredited investors who have been previously unable to make such investments directly. But he also rightly points out that the $1 million cap on funds could be a serious hindrance for capital intensive projects such as Commercial Real Estate.

Founder and CEO of Prodigy Network Rodrigo Nino agrees that the cap on funds seems an unnecessary hurdle. In a CrowdFundInsider.com article, he points out that in the UK, where there is no cap on crowdfunded startup capital, companies have raised almost £4 million (over $6 million US) in a single round of crowdfunding with no apparent ill effects.

Meanwhile, Forbes columnist and angel investor Tanye Prive points out that in order to qualify for Title III investments, issuing companies are expected to shell out between $16,000 and $60,000 in filing fees and preparation costs, while also shouldering an on-going burden of $7,000 to $25,000 per year for annual reports and audits. That’s a hefty cost for funding that can’t exceed at $1 million.

Regardless of these concerns, the fact is that crowdfunding will certainly continue to be a hot topic in the coming year. Only time will tell how deep Title III’s impact will be on our industry, but it’s an area that will be exciting to watch and report on.