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From Dennis Fassett, Cash Flow Mercenary...
Have you heard of the JOBS Act?
If you’re a real estate investor you should have.
It’s a law passed in 2012 that was intended to encourage funding of small businesses by easing various securities regulations.
Keep in mind that this is different from sites like Kickstarter. All Kickstarter can do is solicit donations or pre-sell their products. It can’t solicit for equity investments in projects. So you couldn’t use them to fund your deals.
The JOBS Act changed all of that.
According to Forbes Magazine:
“The JOBS Act would actually open up the market for something like a Kickstarter for equity funding. In this scenario, Average Joe (i.e. a non-accredited investor) can chip in up to 10% of his annual income or $10,000 (whichever is less) in return for a small stake in a startup."
It went on to say:
“According to the bill, companies seeking crowdfunding investment would need to file with the SEC and restrict this method of financing to $1 million a year, or $2 million if they release audited financial statements.”
A million bucks a year in equity. What could you do with a million dollars in new equity PER YEAR?
I know. The possibilities are staggering. And that’s not the best part though.
But Wait, There’s More
The kicker is that the Act allows general solicitation, which means ADVERTISING, to the general public.
That’s a huge change from the old SEC regulations. In the past, you had to pay a securities attorney a ton of money to create an offering document, and then register the offering document with the SEC.
And the old law specifically prohibited advertising to the general public. Ask the people in federal prison for running afoul of the law how strict it used to be.
While the Act has greatly simplified the process of raising equity funding, there are still a ton of rules and regulations in place for using the process.
And the SEC is not something you want to mess with. A friend of mine says that you never want to poke the tiger. And next to the IRS, the SEC is just about the biggest tiger that you’re going to find.
There’s an Easier Way to Navigate the Crowdfunding Process
Over the past year, several companies have sprung up to facilitate real estate-related Crowdfunding. Entrepreneur Magazine highlighted three of them recently.
1. The first is Realty Mogul out of California.
In the article, Entrepreneur said that “with Realty Mogul, accredited investors pool their resources and buy shares of investment properties. Accredited investors have to be making at least $200,000 a year or have net worth of more than $1 million, according to the SEC.”
Eligible investors browse through real estate investment options online and track their various investments with a Realty Mogul dashboard.
2. The second is RealCrowd, also out of California.
Entrepreneur says that “RealCrowd gives accredited investors access to the sort of investment options that are typically only available to real-estate managing companies.”
On the company’s FAQ page, the one-word summary of why investors would need to use RealCrowd is “access.”
These are deals that, without the Internet services provided by real-estate crowdfunding, most investors would very likely never know about.
3. The third company is Groundfloor out of North Carolina.
The article says that “Groundfloor bills itself as a ‘peer-to-peer real estate lending marketplace.’
Unlike the previous two real estate-crowdfunding startups, non-accredited investors can participate on the platform. While investments on RealtyMogul and RealCrowd start at $5,000, investments with Groundfloor start at $100.
The first two properties that Groundfloor funded were an $82,000 single-family home fix-and-flip renovation and a $440,000 new construction of four townhome units for sale in the Atlanta suburb.
Rules, Shmules
Even though the JOBS Act was passed, some of the rules are still up in the air. One of them is particularly restrictive in that it only allows accredited investors to participate in real estate-crowdfunding across state lines.
But things are changing. So keep an eye on crowdfunding. At some point, the doors are going to open wide.
Be ready for it.
Dennis Fassett
earned a BS in Economics and followed that up with an MBA in finance. After working and corporate finance and banking for several years, he started buying single family houses, and quickly built a very nice portfolio of cash flowing rentals. When the credit markets started to dry up and he couldn’t get any additional single family mortgages he shifted his focus to apartment buildings. He now has over $3 million in rental real estate. He manages most of it his self and still has a day job. Dennis has even created his own Private Equity fund to buy apartment buildings.