The risks of crowdfunding your real estate deal

Luckily today’s real estate investors have expanded tools at their disposal for sourcing, qualifying and closing real estate capital transactions.

Unlike business securities the collateralized nature of real estate has always proven beneficial for real estate issuers looking to bolster or garner additional investors into a specific project.

While real estate is a bit more benign than business securities when it comes to raising capital, there are still significant risks associated with crowdfunding your real estate deal.

The risk differ in scope and complexity, depending on the type of real estate crowdfunding transaction in which you engage.

To fully understand each of the associated crowdfunding risks, it is first critical to comprehend the structure of the different types of equity crowdfunding that can be employed to raise capital for your real estate investing deal.

Types of Crowdfunding

When the JOBS Act was released in 2012, it included several provisions for securities investors that differ depending on the size and scope of the offering a real estate issuer may be intent on pursuing.

Understanding each in at least a high level will be critical for both properly structuring a deal as well as keeping with the rules of advertising and collecting investor dollars.

Here is a basic outline of each of the sections outlined in the JOBS Act. In providing these, please keep in mind that by no means is this list exhaustive nor does it include all the rules required for each offering type. Consulting a knowledgeable attorney is advised to properly perform any such offering.

• Title II. Title II of the JOBS Act, also referred to as accredited investor equity crowdfunding under the new Regulation D 506(c) of the Securities Act, allows for general solicitation among both accredited investors and non-accredited investors. However, issuers are only allowed to collect investment capital from accredited investors who have third-party verified their accredited investor status.
• Title III. Also known as Regulation CF under the JOBS Act, Title III allows real estate and securities issuers to collect up to $1,000,000 per year from both accredited an non-accredited investors in an offering. There are additional restrictions based on income that one can collect from individual non-accredited investors in a deal. This is what is typically referred to when people think of “equity crowdfunding.”
• Title IV. Also known as Regulation A+, Reg A+ or the mini-IPO, Title IV allows for up to $50,000,000 in investment to be collected from both accredited and non-accredited investors in any 12 month period for a single private company. The difference is…

 
 
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