A proposal for new rules was recently issued by the Securities and Exchange Commission (SEC) that will govern “equity” crowdfunding – the ability of businesses to fund their ventures online from the general public. “Donation” crowdfunding, through sites like Kickstarter or Indiegogo, has already become quite popular as a way to raise money online to fund projects or causes. Equity crowdfunding, though, enters into the realm of securities offerings, and thus operates under a regulatory structure that – for the general public -- the government has only now begun to clarify.
The world has been anxiously awaiting the new rules for some time. Congress provided the outlines of public crowdfunding a year-and-a-half ago when it passed the JOBS Act, which the government hoped would make it easier for private businesses to raise capital that they might then use to (among other things) hire more workers, thus helping to fight the lingering unemployment after the Great Recession. Congress left it to the SEC to draw up the details, though, and the SEC was quite deliberate in its process, reflecting its caution about this new area of fundraising.
In the end, the SEC didn’t do much more in its proposal than reprint the parameters of crowdfunding that were outlined in the JOBS Act. The proposal will be subject to public comment for the next 90 days before anything becomes law. To summarize the proposal in its current form:
- An issuer can only raise $1 million via crowdfunding in any 12-month period.
- Persons with annual incomes greater than $100,000 can invest no more than 10% of their annual income or net worth in any 12-month period (in any event not more than $100,000 total), and persons with lesser incomes are limited to caps of 5% of annual income or net worth or $2,00, whichever is greater
- Crowdfunding must be done through a registered broker-dealer or a “funding portal,” which entities may not solicit investments
- A disclosure document must be filed with the SEC at least 21 days prior to the first sale
- Audited financial statements must be provided for capital raises in excess of $500,000
- Annual reports (possibly even more frequent) must be filed with the SEC by the issuer
The SEC is admittedly in a tough spot. Its job has traditionally been to protect the public by forcing offerings that don’t qualify for an exemption to be registered, which entails having a public disclosure document (reviewed by the SEC) that describes all of the pertinent risk factors of the investment. Crowdfunding enthusiasts, in a way, want it both ways – to open up securities offerings to the general public without having to be subject to any of the investor protections that have been put in place over time to avoid Ponzi schemes and other frauds on the public. In the new proposed rules, the government has shown a willingness to pare back some of the usual disclosure requirements, but at the trade-off of establishing dollar limits on how much people can invest, and requiring written offering materials and reviewed or audited financial statements to be on file.
“Accredited” crowdfunding, however, is a revolution that is already under way. For the more limited audience of accredited investors – persons with annual income of at least $200,000 or a net worth of $1 million -- crowdfunding is already changing the way that entire industries raise capital.
As the CEO of a real estate crowdfunding company, I can see the changes that online fundraising is bringing to private real estate ventures. Many larger commercial real estate projects, for example, usually limited their investor participants to larger financial institutions – pension funds, life insurance companies, and a few very wealthy individuals. Now, however, communications technology has enabled smaller investors to participate more broadly in such investments. This more limited type of crowdfunding has enabled large numbers of unrelated individual investors to pool their contributions and make a significant investment through a single legal entity – keeping things easy for sponsors while broadening the source of potential investors.
This “accredited” crowdfunding is already blazing a big trail – my own company has already provided over $8 million of funding on various commercial real estate projects. The number of accredited investors registering on our site – and of real estate sponsors inquiring how they might be able to work with us – is growing every day. The advent of real estate crowdfunding sites has allowed accredited investors to participate in specific real estate projects, and with smaller individual investment amounts, than ever before.
Time will tell whether the new proposed rules for public crowdfunding will achieve the government’s goal of stimulating the entrance of new companies and the growth of the economy generally. No matter what happens, though, crowdfunding for accredited investors is already transforming many industries, including real estate finance. As the SEC continues to refine its approach to crowdfunding, it’s clear that on some fronts, at least, the revolution is already under way.