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Crowdfunding: The New Frontier in Real Estate Finance

By Frank Cammarano

Crowdfunding, the act of soliciting funds from the public, is already a powerful capital raising mechanism; however, until now, was difficult to employ in the real estate industry. New U.S. securities laws intended to facilitate capital raising efforts of startup companies will soon benefit real estate investors by allowing individuals to acquire interest in real estate ventures. The Jumpstart Our Business Startups Act, or the JOBS Act, will ease restrictions on investments in closely held companies, including those set up to own commercial property, by people making less than $200,000 a year and with a net worth of less than $1 million. Before the law’s passage, such firms were restricted from marketing projects to the general public and real estate finance was largely limited to high net worth individuals, known as accredited investors. The law, which changed parts of the Securities Act of 1933, will allow non-accredited investors to put $2,000 a year or 5 percent of their income or net worth – whatever amount is greater – into closely held ventures.

Once the JOBS Act rules are implemented by the Securities and Exchange Commission (SEC), developers will be able to sell equity to investors, regardless of net worth, throughout the United States. “Crowd capital” as a source of third party funding offers an alternative to the real estate industry’s reliance on mortgage debt. Real estate crowdfunding offers a way to involve the public in the development of a community by democratizing the investments in its real estate. Not only is capital raised through this method, but also social support in the project that has simply never before been possible. On the other hand, the eased restrictions will create opportunities for less sophisticated investors to be exploited by illegitimate fundraising efforts. While the law went into effect in April 2012, property investors are not able to take advantage of it yet due to the fact that proposed investor-safeguard rules are still being promulgated by the SEC. In the coming months, the SEC’s rules will clarify how firms are allowed to solicit investments from the public, opening a whole new frontier in real estate finance.