This article was written by Ben Berkin who is an editor of crowdtrader.net.
The relatively young investment crowdfunding industry has gained much publicity in the past few years as well as tons of venture capital investments. There are numerous “platforms” that exist both in the start-up and real estate sectors which offer retail investors the opportunity to invest in previously inaccessible investment opportunities. Wouldn’t it be great to invest in a high grade commercial real estate asset in the heart of NYC? Well the equity crowdfunding industry is aimed at doing just that. Unfortunately, one of the biggest hurdles for the industry has been the fact that the vast majority of investors are still not allowed to invest in these offerings. Legally to qualify for these investments an investor needs to be considered an “accredited investor” which means they have an income of $250k/year or $1,000,000 in assets. This basically makes these investment opportunities out of reach for most Americans.
Three months ago this all changed as the SEC passed Title III of the JOBS Act which effectively allows non-accredited investors to invest in private placement investment deals. In plain English this means when you visit any of the crowdfunding platforms they will allow you to view and invest in their offers without confirming that you are an accredited investor. Well at least in theory this will be the case.
In my opinion it will not have a significant impact because I doubt too many platforms will figure out a way to take advantage of it.
On the surface this seems like the day we have all been waiting for in the crowdfunding industry but in reality it may have a limited impact. While everyone has been jumping for joy about the new legislation, and don’t get me wrong there is a lot to jump for here, there are still some issues. And many experts and people within the industry have voiced their issues with the new legislation.
The problems are mainly twofold:
1) The capital limits placed on the offerings under the new legislation are capped at $1,000,000.
2) Regulatory hurdles which will be in place before an offer can go live may preclude any platform from pursuing this avenue of offerings.
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Regarding the $1,000,000 investment cap, this may seem like a lot, but for most high quality real estate deals the capital limit basically prevents any of these deals from opening up to the small retail investor. In my opinion the greatest potential crowdfunding offers retail investors is precisely in these type of investments which are relatively lower risk investments compared to start-up investing.
This is the exact issue that Nav Athwal, CEO of Realtyshares.com, one of the leading real-estate platforms, has with the legislation. Conversely, the limit will have a small impact on start-up investing platforms such as Seedrs.com and Seedinvest.com as most of these offerings are for less, which is why Chance Barnett, CEO of crowdfunder.com, a leading start-up investing platform, was more welcoming of the new legislation.
Wouldn’t it be great to invest in a high grade commercial real estate asset in the heart of NYC?
In January the legislation officially went into effect so it might still take time for us to see any offerings listed under the new legislation. But the big question is, will this be a game changer for the industry? In my opinion it will not have a significant impact because I doubt too many platforms will figure out a way to take advantage of it.
The interest from the small non-accredited investor is definitely there as is evident from Fundrise.com that recently launched what it dubbed the eREIT. The product is basically a Real Estate Investment Trust (REIT) offered digitally over their platform. Fundrise.com was able to offer this under Regulation A+ which allowed it to offer the investment to non-accredited investors. It has raised money for this fund in small installments and has succeeded in raising around $10,000,000 in a matter of hours. This is a clear indication of the interest of retail investors into these investments but the industry hasn’t figured out a way to offer single assets to investors nationwide.
I feel that for equity crowdfunding to be accepted as an alternative asset class there will need to be some way for these platforms to offer single asset high quality real estate offerings to the retail investor. At this point I don’t see Title III filling that void. I do think that there will be some creative ways to make some offerings in a limited fashion to retail investors which will put pressure on the SEC to modify the existing legislation to make it easier for everyone to access these investments.
In the meantime we will have to be patient and see how many platforms really adopt Title III offerings and the overall impact it will have on the industry.