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Crowdfunding, a method of collective investment in new products and businesses, is being used for everything from board game startups to movie productions, but now those who organize crowdfunding projects are eyeing much bigger investment opportunities in the commercial real estate (CRE) market. Several companies have emerged recently that are currently seeking funds to push into CRE investment and a few of them have already brought in millions. Despite growing interest, some face limitations due to their short market track records and pending federal rule changes and legislation. For more on this continue reading the following article from National Real Estate Investor.

Firms that arrange crowdfunding are making a bigger pitch to raise capital to fund acquisitions and development projects. Yet it remains to be seen whether or not a niche will develop for crowdfunding in the broader commercial real estate investment arena.

The basic premise behind crowdfunding is to raise small amounts of capital from a large group of individuals to be able to access investment opportunities that such investors would normally be cut off from. Companies such as Realty Mogul, Fundrise, Groundfloor and CrowdVested are a few of the firms that have emerged in recent months to seek capital to finance real estate investments. Each has its own platform and business strategy. But one of the common threads is that crowdfunding firms often employ social media to reach a broad pool of potential investors and also rely on technology to manage those investments.

Realty Mogul launched seven months ago and now has $8 million in assets under management that it has invested in 25 different projects. “We think of ourselves as a financial services company,” says Jilliene Helman, CEO of Beverly Hills-based Realty Mogul. “The most important thing for us is that we can generate income for our investors.” As such, the firm’s main focus is on buying cash-flowing assets ranging from apartments and retail to self-storage properties. According to Helman, Realty Mogul also has already delivered more than $500,000 in returns back to investors. At Realty Mogul, the average investment is $20,000, while the minimum investment is as low as $5,000 or $10,000, depending on the project.

Yet investing via crowdfunding does come with distinct downside risk, most notably placing capital with firms that have a limited track record. “I think investors need to be very cautious about who they are working with, understanding their backgrounds and waiting to invest before they are really, really comfortable,” says Helman.

Growing pool of investors?

Crowdfunding is a fledgling industry that is still in the very early stages of finding its footing as a credible investment vehicle.The Jumpstart Our Business Startups (JOBS) Act that was passed in April 2012 created an exemption under the securities laws making it possible for crowdfunding firms to market their projects to accredited investors, or those investors with a net worth of at least $1 million and an annual income of at least $200,000.

More recently, the U.S. Securities and Exchange Commission drafted new rules that would effectively allow crowdfunding companies to raise capital from all investors, not just qualified accredited investors. The 500-plus page draft of the proposed rules is currently out for a 90-day public comment period with responses due back by early 2014.

Although some in the industry have heralded the proposed SEC rules as a game changer for crowdfunding, the reality is that, in its current form, courting those non-accredited investors would place a hefty financial reporting and accounting burden on crowdfunding firms.

The SEC is trying to protect investors, but what the agency might not realize is that those proposed financial auditing regulations could cost between $20,000 and $30,000, notes Helman. For example, on a $1 million equity raise that money comes directly out of the investors’ pockets. “So, if we can’t give our investors meaningful returns, that is not a win-win for us, and it’s not a win-win for the investors,” she adds.

States introduce exceptions

Although the pending SEC rule change could open up crowdfunding to a wider pool of potential investors, some states already have legislation that creates added opportunities for small investors. As part of its Invest Georgia program, the state of Georgia allows local crowdfunding firms to raise up to $1 million per year per project from both accredited and non-credited investors. Non-credited investors are subject to an investment cap of $10,000 per project per year.

Atlanta-based CrowdVested is a new crowdfunding start-up that matches up developers and project sponsors that are looking to work with investors in their local communities to create profitable projects. For developers, it helps to fill their equity requirement and it attracts grassroots support for their projects. Investors get to participate in what will, hopefully, be a profitable project and also help to support development and revitalization in their community, adds Grady Thrasher, CEO and co-founder of CrowdVested.

CrowdVested is currently talking with developers on two projects in Atlanta. One involves the development of loft-style apartments on a former school site, while the second would feature a commercial development that would add new retail space. CrowdVested will not be able to raise any money until it has a specific developer partner that it will be working with to raise capital. Once projects are identified the company hopes to raise between $1 million and $3 million within a 90- to 120-day period.

Nationally, Thrasher expects crowdfunding to develop more quickly for those firms that are going after accredited investors, because the regulatory burden is much lower. Equity crowdfunding for non-accredited investors is more prone to thrive in states such as Georgia that have exemptions. Kansas currently allows crowdfunding, while both North Carolina and Washington are looking at passing new legislation that would permit crowdfunding firms to raise capital from non-accredited investors.

Crowdfunding is not going to change the banks or Wall Street or provide capital for giant real estate deals. It is going to be a great alternative source of capital for projects that might not fit “neatly in the box” for traditional financing, notes Thrasher. “It is going to open up the capital markets to the entrepreneurial developers who have been especially hit hard by the downturn in the commercial real estate market,” he adds.

This article was republished with permission from National Real Estate Investor.