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Real Estate Crowdfunding: Is It Legal? How It Got That Way
By Adam Gower Ph.D.
Something big happened just a few years ago that changed everything for the commercial real estate industry. It is now legal to raise capital online for real estate projects.
But it wasn’t always that way.
In the wake of the Great Depression
The Great Depression transformed American capital markets. Before the crash that devastated the U.S. economy in the 1930s, American capital markets operated with few rules, and, in the worst cases, became a swamp of investor fraud and stock market manipulation.
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Firms that wanted to raise capital operated with few or no disclosure requirements. Investment syndicates favored those with connections to a deal’s principals—with special treatment and preferential terms—at the expense of others.
After the Depression, President Franklin D. Roosevelt and U.S. Rep. Sam Rayburn, D-Texas, wrote the U.S. securities laws as we now know them today in direct response to the collapse of the capital markets. The Securities Act of 1933, the Exchange Act of 1934, and the Investment Company Act of 1940 strengthened securities laws, making them the most stringent and transparent laws in the world. The laws resulted in what we have now: the most efficient, most trusted and most valuable capital markets in the world.
Public Offerings vs. Private Offerings
One fundamental new rule governed the financing of the real estate development industry. It made a distinction between private offerings and the public offerings of securities. In a public offering, you were allowed to advertise for investors, but were subject to considerable time consuming and costly disclosure requirements. Real estate developers buying apartment buildings, for example, were de facto prohibited from such advertising because the scale of their projects simply did not warrant the expense in time and money of ‘going public.’
Instead, real estate developers and others took advantage of an exemption under the 1933 Securities Act that said they were not required to make such disclosures provided they raise money only from people they knew or people who knew the people they knew. Technically they had to demonstrate they had a ‘preexisting relationship’ with a prospect before being permitted to invite them to invest. That meant a real estate developer had to work through an inefficient series of barely connected private networks.
Everything changed in 2012.
The JOBS Act of 2012
President Barack Obama signed into law the JOBS Act of 2012 to provide financing for small and medium-sized companies. JOBS Act stands for “Jumpstart Our Business Startups Act.” There are a lot of complicated rules included in the Act but the one that matters most to real estate developers is the reversal of the 85-year-old rule against advertising. That single change transformed the capital formation industry. Before the JOBS Act, you could not advertise; after the JOBS Act, you can advertise virtually any way you want including, importantly, on the Internet.
How things changed under the new law
The JOBS Act rendered moot clauses in sponsors’ contracts that warranted or represented that a sponsor had a pre-existing relationship with an investor. There’s no longer a requirement of a pre-existing relationship in the post-JOBS Act world. You can bring in any investor from anywhere and this means you can put up a website and distribute content related to your real estate projects on social media.
The official term for this is general solicitation. It means a private developer can go to the public to solicit investment in the same way a public company can go to the public for investors through an initial public offering.
This means that the Internet has come to capital formation in the real estate industry. In the past, when the Internet came to an industry, it always did the same thing in an industry-specific context: It always directly connected buyers and sellers and displaced the middleman.
The changes the JOBS Act brought creates a marketing opportunity for developers. It frees the commercial real estate entrepreneur to use digital marketing and social media services to reach a potentially unlimited audience of high net worth investors and to raise capital.
Just Getting Started?
If you have only just started in real estate development, have completed no deals, have no email list, but know you want the freedom and wealth being a real estate developer brings, then I suggest your first step is to start evaluating deals so you can recognize a good one when you see it.
Here’s where you should start. You’ll learn everything you need to know – the different types of real estate, different development strategies, how real estate cycles influence the market, and all about due diligence.
If you want to find deals and raise money for them so you can start your real estate development business, then learning how to conduct due diligence so you can pitch your deals better to investors is a great place to start.
Up to $20 Million in Assets
If you’ve already purchased one or more real estate project and are seeing more opportunities than you can finance, then now is the time to start building your investor network so you can finance all your next deals quicker.
You’ve already got some momentum; now start finding and educating prospects about what you’re doing so you can build an email list of people to pitch to when you’re ready to raise money for your next deal.
This is what we build for private clients all the time – it’s called the Investor Acquisition System and you can access the entire program right here so you can find prospects, and convert them into being deep pocketed, repeat investors in your deals.
If you are a seasoned pro with multi-cycle experience, a substantial portfolio, a decent deal pipeline, and find yourself spending too much time raising equity capital because you’re still doing it in-person, then it’s time you put technology to work for you.
The wonderful thing about doing this is that you’re not going to be doing anything different than you’re already doing and, guess what, you’ll never have to sit through investor meetings again.
Sounds crazy I know, but I lay the whole thing out for you in this white board workshop where I personally show you exactly what it takes for you to transform your equity raising into a fully automated, capital raising machine so you can find new investors while increasing commitments from your existing network.