CCIM Feature
Crowdfunding Conundrum
Sometimes
new ideas aren’t so new after all. Take crowdfunding, for example, says Gene
Trowbridge, CCIM, a senior partner of Trowbridge & Taylor LLP and a CCIM
Institute senior instructor. When France gave the U.S. the Statue of Liberty in
1885, publisher Joseph Pulitzer used crowdfunding to raise the money for its
pricey pedestal, with more than 120,000 people contributing nickels and dimes
to the cause.
“If this
happened now, the Securities and Exchange Commission would have no conflict
because there was no profit motive on the part of the donors, so it would not
be considered the sale of a security,” says Trowbridge, who covers the ins and
outs of crowdfunding in his Ward Center course, Ultimate Group Sponsor
Workshop.
That’s
the inherent conundrum of crowdfunding and investment in commercial real estate
transactions. How do commercial real estate professionals juggle the need for
capital with SEC restrictions when selling a security?
The
SEC’s answer in July 2013 was to adopt the new Regulation D, Rule 506(c), under
the Jumpstart Our Business Start-ups or JOBS Act. “This new regulation allows
commercial real estate brokers to advertise to accredited investors,”
Trowbridge says. “The U.S. government thinks those people are rich enough and
smart enough to make investment decisions without government oversight.”
An
accredited investor is an individual with a net worth of more than $1 million,
excluding primary residence, or a person who makes more than $200,000 per year
of income if single or more than $300,000 per year if married, filing jointly,
according to the SEC.
However,
the SEC still has not issued any final rules for equity crowdfunding, which,
under Title III of the JOBS Act, will allow offerings up to $1 million to be
made to non-accredited investors. “There is confusion in the marketplace about
the difference between accredited and non-accredited investors,” Trowbridge
explains. “It is not legal to advertise crowdfunding deals that offer a return
on investment to non-accredited investors.”
Late
last year the SEC indicated thatit will finalize the equity crowdfunding
rules by October2015, but plan on saving your nickels and dimes until
January 2016, the earliest the rules could take effect.
Gene
Trowbridge, CCIM, a senior partner of Trowbridge & Taylor LLP, teaches the
Ultimate Group Sponsor Workshop, May 7–8 in Chicago, July 20–21 in New York,
and September 24–25 in Chicago. Learn more.