When the JOBS Act was signed into law in 2012, many industry promoters claimed very big things, many of which have unfortunately failed to come to pass. Very few industries have seen the massive capital infusions the JOBS Act and equity crowdfunding had promised to delivery.
In fact, most of the equity in equity crowdfunding has been funneling into real estate ventures. There are a number of reasons for this including collateralization and securitization of the assets, overall investor risk aversion and a bounce-back of both the commercial and residential real estate markets. The market is lucky that at least one area of the financial services industry is receiving a big boon from equity crowdfunding. Here are some of the ways which equity crowdfunding is changing the way individuals and institutions invest in real estate.
Private Placements and Raising Capital
Perhaps the biggest boon to private placements and raising capital that occurred as a result of the 2012 JOBS Act was the lifting of the ban on general solicitation. Since some of the original securities laws, which were enacted some 80 years ago as a response to the Great Depression, individual business owners and investment bankers have been unable to “generally solicit” their securities unless they not only registered them with the Securities and Exchange Commission, but also received permission from each individual state that possessed its own Blue Sky Laws.
Unless a company was going public on a “big board” through a major Initial Public Offering (IPO), there was little ability to truly market or otherwise get the word out about an interesting investment opportunity in a private deal. You had to know someone and because of other restrictions, that someone typically had to be an Accredited Investor (or, in other words, well-off). Now both business equity and real estate deals can solicit to both accredited and non-accredited investors alike. And while there are still restrictions on advertising and investment, the marketing handcuffs have truly changed the way many commercial and residential real estate projects are being funded.
Financing commercial real estate projects is never an easy task, particularly when there are lender requirements for cash flow and down-payment that may preclude even the most astute borrower. And while the debt portion of the capital stack is—in general—more easily sourced, roadblocks frequently occur in the requisition of the equity piece required by the lender. From what most real estate crowdfunding portals are witnessing, this continues to be their bread and butter. For instance, most of today’s crowdfunded real estate deals include equity, not debt. Nowhere is online real estate fundraising being upended more than using some of today’s advanced crowdfunding tools. Thanks to the combination of new laws and advanced fintech tools.
As investors, developers (in both real estate and software) and entrepreneurs continue their march forward hand-in-hand, we would expect that even more new and exciting applications and opportunities will continue to crop-up. And while the real estate investment capital stack gets more crowded (quite literally), many expect the number of deals to substantially increase as access to capital becomes more ubiquitous. One thing is for certain, investing in real estate will never be the same again.
Nate Nead is a licensed investment banker with InvestmentBank.com. Nate works on middle-market commercial real estate deals, assisting corporate and financial buyers across the real estate spectrum for sourcing and presenting quality and interesting real estate debt and equity opportunities across the United States. Nate and his colleagues at InvestmentBank.com provide expert real estate valuation, financial modeling and transaction assistance for companies looking to sell commercial properties or raise capital for quality real estate deals and projects.