With the Title III of the JOBS Act in full effect for a little while, there seems to be no doubt that real estate crowdfunding is here to stay.
In case you’re not aware of what the new rules in the JOBS Act are, Title III rules have helped to ease some of the filing requirements of companies that want to raise money via crowdfunding. For example, companies aren’t required to disclose their tax returns when filing Form C, instead having the option to take advantage of a “Q&A” format for their disclosures.
However, these crowdfunding companies are required to disclose certain information to its investors, ultimately making them responsible for educating investors about how crowdfunding works, including potential risks. In other words, real estate crowdfunding companies will need to educate people about how their process works, facilitate talks with potential investors and endure that their company is in compliance with investment limitations.
The whole point of these new rules is to help protect investors as well as raise the standards of a still new investing vehicle (even though it’s been around for a few years). It also aims to allow non-accredited investors even more of a chance to partake in alternative investments, equalizing the landscape.
Tougher Rules Means Less Companies?
David Pricco from CrowdExpert.com believes that the rules are tough, but this can be a good thing in his article “SEC’s New JOBS Act Title III Crowdfunding Rules: Overview and First Thoughts”:
I think the SEC made a good choice to shift as much of the compliance burden off of the issuers and investors and on to the portals as possible. Make them deal with it, as they are the ones that have the most to gain.
These rules could mean that companies need to be nimble and truly care about their investors. Those that don’t, will not survive. Companies will need to find ways to be even more transparent and ensuring that their underwriting process is going to benefit everyone involved. Though it may seem like it’ll more work to compete for business, it could mean that the real estate crowdfunding industry will increase in quality.
As fast as this niche has grown, doesn’t mean it won’t die off, especially if companies aren’t diligent. Director of Investor Relations of Realty Shares, Amy Kirsch, admits that there are still many people out there who are skeptical about real estate crowdfunding. “The main drawback is not being able to see and touch the asset,” she says.
To help overcome some of these hurdles, RealtyShares is using drone videos to show more of each property, providing more market information, financial projections and tech-enabled underwriting. Perhaps the most important (or relevant) features is putting together an investor relations team to answer questions investors have at any time.
A Hopeful Future
Even though the industry is still considered new, many companies predict that crowdfunding will be at the forefront of real estate investing as well as alternative investments. “I can see it becoming a much more common tool for diversification,” Kirsch says. “Our company in particular is creating a complex ecosystem where investors can find a diverse set of asset types, geographies and opportunities on one platform.”
Other companies are doing similar things, and with this continued efficiency, real estate crowdfunding has the potential to grow even bigger. and that efficiency will be amplified as we continue to grow.
Another real estate crowdfunding company is clearly taking advantage of these new rules. Fundrise (headed by founder Ben Miller), launched the first ever eREIT with raving results. As of February 2017, they now have five eREITs to choose from, with two currently being sold out. Part of its popularity could be the low minimum investment ($1,000) and the fact that you get to see what properties Fundrise invests in with your money.
Kirsch, is excited about making crowdfunding more accessible. “That’s always been the driving force behind our platform,” she says. “Current regulations for this nascent industry are still evolving, so we are actively discussing ways to be more inclusive within that framework.”
Even though real estate crowdfunding has already paved the way to give direct access to middle-market investment options all across the US, investors are only seeing the beginning of what is to come.
Perhaps real estate crowdfunding attorney Mark Roderick said it best in an article on his blog when he stated:
Realizing how little we know [about real estate crowdfunding] can feel disconcerting, even alarming. But try thinking of it this way: 98% of the innovation is yet come, almost all of the opportunities remain unexplored […] In Crowdfunding, we are nowhere near the closing of the frontier.
Here’s to continuing to exploring the real estate crowdfunding frontier.
Photo credit: InvestmentZen Image Gallery – Creative Commons Attribution License