What’s Going on with Crowdfunding?
- Oct 31, 2013
James Breitenstein, Landsmith
The much-anticipated SEC rules enabling crowdfunding for entities raising capital are beginning to flow, but it’s impractical as proposed and overly complex. Pure real estate still makes sense, because it can be done without these rules, and is easier for small investors.
The securities commission has just come out with their initial rules (http://www.bloomberg.com/news/2013-10-23/sec-to-vote-on-crowdfunding-plan-as-white-advances-jobs-act-1-.html) , and it’s not as crowd-friendly as first advertised. Currently, equity offerings are restricted to so-called sophisticated, accredited investors with at least $200,000 in annual income ($300,000 for a married couple) or $1 million net worth, but the new ‘crowdfunding’ regs carry onerous parameters as well:
• An investor has limits on participation in any/all crowdfunding over a 12-month period, capped at 10% of annual income or net worth for incomes of $100,000 or more, or the greater of $2,000 or 5% of annual income or net worth on incomes of less than $100,000.
• Investors also must utilize registered broker-dealers or a “funding portal.” It remains to be seen if the well-established investments banks or fund sponsors will endeavor into this part of the market.
• As for issuers raising capital through this new crowd, they can only raise $1 million over a given 12-month period, they must file disclosure documents with the SEC at least 21 days prior to first sale, and file audited financial statements for raises of over $500,000. Any completed equity-raise requires an annual report as well.
It’s expensive for firms to pursue these new vehicles, and for not much more money they can go a safer route with accredited investors. Most probably will.
Equity crowdfunding, as proposed, is just not making a lot of sense for the groups being targeted. Onerous regulation, complex structures and a long to-do list are not going to be attractive to the biggest part of the crowd on either side of the table, only a select few.
In contrast, real estate is still a better option.
What’s the typical investor better off doing? Real estate is something most people understand from their very first home purchase, and ‘everyman’ opportunities in property will have an edge over complex stock investments. The real estate industry is enhancing the way it involves smaller, still-sophisticated, mom-and-pop investors. And it’s going to get even better.