The JOBS Act Made CRE Crowdfunding Possible
In 2012, the Jumpstart Our Business Startups Act, or JOBS Act, brought big changes for small businesses and startups. Since businesses tend to operate in commercial properties, it also caught the attention of CRE professionals all over the country.
New exemptions meant companies could receive smaller investments without having to register for an IPO. This includes funding for commercial real estate. In the past, crossing a certain investor threshold or having too many assets would force filing for an IPO and going public. Thanks to the JOBS Act, this is less of a concern.
However, commercial property is still typically expensive—costing more than the small investment limits set by the new exemptions. The solution? Financing with multiple small investments through crowdfunding.
This wasn’t the only advantage fueling the CRE crowdfunding movement. Companies can now also have more shareholders without registering with the Securities and Exchange Commission, or SEC. Registration is now only required once a company exceeds $10 million in assets and has more than 500 shareholders. Also, any company with total gross revenue under $1 billion can still be considered an emerging growth company. This comes with additional benefits.
Finally, once companies do become public, they have five years to reach compliance with certain requirements. This is more than double the time allotted pre-2012, which was two years.
In a nutshell, startup CRE investing is easier post-JOBS Act. Companies can stay private for longer, granting more time for fundraising (and acquiring property) before going public.
How CRE Crowdfunding Works
For those interested in becoming a crowdfunding investor, it’s important to understand how the process works. Typically, investors search a crowdfunding platform for deals. When they find one they like, they commit to investing capital. Many investors come together and make smaller-than-traditional investments in a single property.
A group of investors in this situation is known as a syndicate. Because of this, crowdfunding is also sometimes called syndication. Syndication is far from new to CRE investing, but crowdfunding allows individual investors with less capital to partake in the practice.
A crowdfunding platform connects investors to sponsors. Sponsors are the companies that intend to acquire the property and carry out an investment strategy. Sponsors do all the work of negotiating a deal, hiring contractors, and managing and overseeing the project.
If Lyft were a crowdfunding platform, an investor would be a rider. The platform helps connect that rider to the best possible driver, who does all the work of getting the rider to their desired destination. While there’s a bit more homework for an investor than a rider, the relationship between user-platform-executer is similar.
From there, the process is much like any other profitable CRE investment. Income is derived from renting the space out and/or eventually selling the property. Sponsors also make money off of fees associated with handling the deal.
Why CRE Crowdfunding is Attractive
Crowdfunding is attractive for a few reasons:
- Financial accessibility. Before crowdfunding, only large institutions were able to easily invest in commercial real estate. Think pension plans, hedge funds, and insurance companies. For an individual to invest, they’d have to not only have the right connections, but