Your Guide to Real Estate Crowdfunding and the Law
Crowdfunding has proven itself an excellent way to generate funds. By tapping into the reach of social media, you have can reach out to everyone to be a potential investor. Tiered investments allow access to just about everyone while maintaining perks on a relative scale.
The real estate industry has watched this phenomenon grow. They’ve developed a means of crowdfunding, following the Security and Exchange Commission rules. Essentially, this allows easy access to development investments for most individuals.
However, not all crowdfunding is created equal. There are legal requirements involved when it comes to crowdfunded property.
Keep reading for your guide on how the law affects real estate crowdfunding.
Differences in Crowdsourcing
Kickstarter and GoFundMe are two of the better-known crowdfunding sites. Each solicits donations to help fund specific projects.
This is in exchange for perks or rewards. Legally these contributions aren’t recognized as donations. Contributing to a project doesn’t entitle you to shares or part ownership of it.
Crowdfunding property, on the other hand, is considered an investment. It’s the opportunity for people to invest in development projects that what otherwise be out of reach for them.
Before, only membership in private equity of the development firm, or through a real estate investment trust (REIT.) REIT’s can require complicated legal filings. Each project is considered finite, meaning each investment involves more legal filings.
That’s why crowdfunding is an attractive prospect. It allows developers to solicit directly to a wider range of potential investors.
It was the Jumpstart Our Business Startups Act of 2012 that opened up the doors for direct investments. In an effort to loosen up investment laws for small businesses, it recognized the legitimacy of crowdfunding as a means to garner funds.
The SEC is continuing to monitor materials relating to this act. In the meantime, investors need to be classified to determine whether or not they’re able to contribute to these types of investments.
At issue here for investors is the possibility that, should a development deal fall through, their investment could be wiped out. Commercial crowdfunding sites may have minimum requirements before they collect donations. Investor crowdfunding does not, carrying more risk.
That’s why the SEC still classifies investors. It helps ensure that only those who can risk a loss take part.
Another risk is, unlike with REITs, the investor is at the mercy of the developer’s plan. A REIT involves professionals to make a decision as to where to allocate money. Crowdfunding investors are contributing directly to the decision makers. This leaves them with little to no input on decision making.
Final Thoughts on Real Estate Crowdfunding
Though it does come with risk, real estate crowdfunding is an exciting opportunity for the average investor. It’s the opportunity to capitalize on housing and building construction. For developers, it offers a more direct line to financing. This allows them to better stick to their plans without interference.
If you are thinking about owning a piece of a crowdfunded property, drop us a note. We’re always here to help.