The Jumpstart Our Business Startups (JOBS) Act was intended to facilitate funding of small businesses by easing regulations. It was passed and signed into law on April 5, 2012. Title II of the JOBS Act went into effect on September 23, 2013, lifting a decades-old ban on the mass marketing of securities offerings. Title III will allow anyone, regardless of whether or not they are accredited investors, to participate in equity crowdfunding. While most crowdfunding platforms focus on the individual investor, a few companies have begun to partner with institutional investors to co-invest in commercial real estate, gaining the same terms enjoyed by those groups, while leveraging their size and experience. Individual investors can now invest in the same projects as major institutions.
Currently, the crowdfunding of commercial real estate and other investments is only open, for the most part, to accredited investors, individuals who have a net worth of $1 million, not including their primary residence, or those whose annual income is $200,000 and above. The loosening of those restrictions by the SEC, due to take place within the next year, will fundamentally change this. As of October 2014, Titles III, and IV are awaiting more detailed rulemaking by the SEC.
The JOBS Act requires the SEC to exempt an intermediary operating a funding portal from the requirement to register with the SEC as a broker. A funding portal is defined as a crowdfunding intermediary that does not: (i) offer investment advice or recommendations; (ii) solicit purchases, sales, or offers to buy securities offered or displayed on its website or portal; (iii) compensate employees, agents, or others persons for such solicitation or based on the sale of securities displayed or referenced on its website or portal; (iv) hold, manage, possess, or otherwise handle investor funds or securities; or (v) engage in such other activities as the SEC, by rule, determines appropriate. Crowdfunding brokers and funding portals have significant duties under the JOBS Act to provide information to investors, reduce the risk of fraud and ensure that investors and issuers satisfy the requirements outlined in Title III of the JOBS Act.
One of the key distinctions between crowdfunding and REIT investing is that crowdfunding offers direct investment in a specific property. Investors buying stock in a REIT, such as a Simon Property Group, are buying shares in that broader real estate company. So, rather than getting an ownership stake in Simon’s Houston Galleria, an investor is buying shares in the company and its 325-property portfolio. The same is true for nontraded REITs such as Inland American Real Estate Trust with over 250-properties.
Blue Vault helps me to stay well informed on the financial status of both open and closed nontraded REITs and BDCs, so that I can help my clients better understand the product, before they make the decision to invest and after.