Monday, November 2, 2015

Breaking News-SEC FINALLY Adopts Final Rules to Permit Crowdfunding: What It Means To Commercial Real Estate Investors

Last Friday, the SEC finally, after 3 years, adopted final rules to permit companies to offer and sell securities through crowdfunding.  But, to me, the more interesting SEC news is what’s on the horizon (keep reading to the end of this article for more details).  What does this mean to commercial real estate investors—both those who are considering using crowdfunding to raise money for their next deal and those who would like to use crowdfunding to invest in more real estate deals?

At the outset, as most of my readers know, I am a syndicator (although I prefer joint ventures) and commercial real estate investor as well as a syndication lawyer.  With that “dual capacity”, I look at every investing strategy wearing those two hats.  I first ask myself, as an investor, is this a strategy I would use myself.  If it makes sense from that business analysis, I then analyze the legal pros and cons.  I would never recommend an investment strategy to any of my clients that I, myself, have not used or would not use.

With that preliminary explanation of my mindset, it is my personal opinion that crowdfunding is not, in its current form and under current laws (which can and will change in the future), any better, less expensive, easier, faster or safer of a strategy to raise money for your deals than taking advantage of any one of multiple exemptions to the securities laws which have been in place for decades.

This latest development (the SEC’s approval of crowdfunding rules) doesn’t change my opinion, despite all the media brouhaha (which unfortunately generally contains a lot of misinformation and more often results in confusion than clarity).  Basically, the new rules would:

  • Permit a company to raise a maximum aggregate amount of $1 million through crowdfunding offerings in a 12-month period;
  • Permit individual investors, over a 12-month period, to invest in the aggregate across all crowdfunding offerings up to:
    • If either their annual income or net worth is less than $100,000, than the greater of:
      • $2,000 or
      • 5 percent of the lesser of their annual income or net worth.
    • If both their annual income and net worth are equal to or more than $100,000, 10 percent of the lesser of their annual income or net worth; and
  • During the 12-month period, the aggregate amount of securities sold to an investor through all crowdfunding offerings may not exceed $100,000

In addition, all transactions relying on the new rules would be required to take place through an SEC-registered intermediary, either a broker-dealer or a funding portal.

The rules also prescribe disclosure requirements, which are far more extensive and burdensome than what would be required under several already-available securities laws exemptions.

For investors who are hoping these new crowdfunding rules will give them “better” opportunities to invest, all I can say is that they will give them more opportunities to invest.  Whether or not those opportunities are any “better” than are already available is a matter of opinion and must be evaluated on a deal by deal basis.  I have just two words for those thinking of jumping in to a crowdfunded opportunity: “Investor Beware”, and make sure you get good advice before making your final decision.

I am much more intrigued by the news that also came out of the SEC last Friday, but for whatever reason nobody seems to be talking about.  According to the SEC press release, it is considering whether to propose amendments to Regulation D, Rule 504.  Those proposed amendments would increase the aggregate amount of securities that may be offered and sold under Rule 504 in any 12-month period from $1 million to $5 million.  If that amendment is passed, that would be probably the most impactful securities development in decades for commercial real estate investors.  Why?  Because Rule 504 has two big advantages over every other SEC exemption: (1) it allows you to advertise, and; (2) it allows you to sell to non-accredited investors without the heavier disclosure requirement of other exemptions. 

We help investors around the country raise money for the deals, whether through syndication or joint ventures (which allow you to raise money without worrying about the securities laws).  Whichever strategy you use, YOU MUST work with an experienced lawyer.  Since I am an investor as well as a lawyer, I can help and understand you in ways other lawyers cannot. Just read some of the many testimonials from satisfied clients.

If you would like to discuss this or any other real estate matter in greater detail, call our office to schedule your private strategy session with me. You’ll get the special attention of me and our dedicated staff and we’ll make you feel right at home.  Every one of our clients is like family.  We firmly believe that you can’t do any better than having our firm represent you.  Let us prove it to you.

Jeff Lerman
The Real Estate Investor's Lawyer

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