SEC Approves Changes to Crowdfunding Laws

Breaking News: SEC Approves Changes to Crowdfunding Laws
Adam Gower

On November 2, the Securities and Exchange Commission approved increasing the maximum raise under Regulation Crowdfunding from $1.07 million to $5 million—a significant acknowledgment of the success of equity crowdfunding.

SEC Amends Security Act of 1933
Following are some of the other approved changes.

Removal of Investment Limits for Accredited Investors
Until now, there have been limitations on the amount an accredited investor can invest in a Regulation Crowdfunding (Reg CF) offering. The SEC has eliminated those restrictions. This increases the ability of small real estate entrepreneurs to raise capital by allowing them to raise money using Reg CF without limiting the amounts they can raise from the wealthiest investor pool: accredited investors.

Improvement of Investment Limits for Non-Accredited Investors
The SEC has altered the way in which the limit non-accredited investors can put into any deal is calculated. This also increases the amount of money a sponsor can raise by allowing non-accredited investors to invest more than previously permitted.

Limits are now calculated “using the greater of their annual income or net worth when calculating the investment limits for non-accredited investors,” per the SEC’s announcement.

Introduction of ‘Test the Waters’ & ‘Demo Day’ Communications
This amendment permits issuers to determine which regulation they will ultimately use for a capital raise before formally filing with the SEC through a process known as “testing the waters.” It allows sponsors to test market their deals to see if there is investor interest before incurring the time and expense of first filing with the SEC only to discover afterward that their deal is a dud.

Similar to testing the waters campaigns, the SEC has further liberalized “demo days.” These events are designed to allow sponsors to discuss deals with prospective investors prior to actively soliciting investment. These events are no longer considered “general solicitation,” which would require filing with the SEC. These opportunities to discuss deals openly with investors are typically used by (non-real estate) startups to discuss their products and services—but equally apply to real estate companies with new deals to finance.

Permission to Use Special Purpose Vehicles
Another new amendment allows the use of special purpose vehicles (SPVs) to invest in Regulation CF deals. This may open the door to feeder funds investing in Reg CF deals.

Increase in Limits for Regulation A+ Offerings
The maximum that can be raised under Regulation A+ has increased 50% from $50 million to $75 million (Tier 2). Regulation A+, open to non-accredited and accredited investors alike, are sometimes called “mini-IPOs.” While they do not incur the same time, cost, and disclosure requirements as a full IPO, they are more restrictive than Reg CF offerings, yet allow for general solicitation of investment from the general public.

When Regulation Crowdfunding was first being debated by Congress prior to the passing of the 2012 JOBS Act, the limit of $5 million was rejected out of concern that there would be fraud. Now, eight years later, with very few instances of fraud having been perpetrated and uncovered, the SEC has acknowledged the benefits crowdfunding can bring to the overall economy and has increased the maximum limit accordingly.

How Real Estate Investors Will Benefit
During these times of unprecedented economic and political uncertainty—and with the threat of more pandemic waves further hobbling the economy—the SEC has acknowledged through its actions the need for extra liquidity, particularly to small and medium-sized enterprises.

As with all JOBS Act-related changes, these modifications are primarily designed to benefit community businesses. However, as almost every new real estate project starts with the formation of a new company to manage that project, they also benefit from these changes. The SEC’s recent announcements are particularly important for real estate entrepreneurs, as they significantly increase the sources one can use to raise capital.

The amount of Reg CF investing has ballooned since the beginning of COVID and shows little sign of abating.  According to Crowdfund Capital Advisors, the amount invested in Reg CF deals has more than doubled since the beginning of the year on a month-to-month basis. CCA also notes that the number of offerings has increased by 50% and that the average amount invested per investor has also increased in the same period.

This all bodes well for the real estate industry—an unintended effect of the original JOBS Act and of subsequent changes to the regulations. As investors remain locked down while they look for opportunities online, and as the regulations restricting what they can invest in continue to relax, the ability of forward-thinking real estate sponsors to finance their deals is becoming easier.

To find out more about the changes to crowdfunding regulations, see the SEC’s press release.

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