SEC will allow developers to crowdfund from smaller investors

Some restrictions apply, and fundraising must happen through an intermediary

From left: SEC Chair Mary Jo White and a rendering of 3 World Trade Center, whose construction bonds were recently offered on crowdfunding platform Fundrise
From left: SEC Chair Mary Jo White and a rendering of 3 World Trade Center, whose construction bonds were recently offered on crowdfunding platform Fundrise

Federal regulators finalized crowdfunding rules under the JOBS Act on Friday, giving developers access to a much larger group of investors — but under strict conditions.

In a 3 to 1 vote, the Securities and Exchange Commission declared that crowdfunding platforms can now raise up to $1 million annually for a project from unaccredited investors, without having to register an offering with the SEC.

Registering offerings with the regulator was a cumbersome process that was previously mandated for projects involving unaccredited investors, and often slowed down the pace of fundraising. As a result, most crowdfunding platforms opted to work solely with accredited investors.

“People buying and flipping homes under $1 million will be able to raise capital really fast,” David Drake, chairman of The Soho Loft Media Group and an early advocate for the JOBS Act,  said in an email before the vote. “I see this law giving home flippers jet fuel.”

So far, crowdfunding platforms have been allowed to raise funds through the sale of securities to accredited investors (households with a net worth of more than $1 million or an annual income of more than $200,000) without having to register with the SEC. If they wanted to sell securities to unaccredited investors, they were required to register under Section 5 of the Securities Act much like companies do for a new stock or bond – an onerous process. Wary of the cost and paperwork, most real estate crowdfunding platforms have focused on accredited investors, limiting the number of people with access to investments.

Over time, regulations will ease,” Dan Miller, co-founder of Fundrise who has reportedly left the company, told The Real Deal in June. “At that point we may be able to access more retail investors.”

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On Friday, the SEC eased said regulations, but it specified restrictions on the amount individuals can invest. Households with an income of less than $100,000 can only dish out the greater of $2,000 or 5 percent of their net worth or annual income. Households with an income of more than $100,000 can invest 10 percent of the lesser of their net worth or income per year, but not more than $100,000.

The SEC also specified that crowdfunding must go through an intermediary, either a broker-dealer or a registered funding portal. Offerings need to be checked by outside accountants, and, in some cases, fully audited.

The rules look to balance the goal of giving small businesses access to funding with the need to protect investors, SEC staffers said in prepared remarks before the vote.

Luis Aguilar, one of the four commissioners who voted, said the rules are “about ensuring that the companies with the best ideas, even if those ideas are risky, get access to capital.” Michael Piwowar, the only commissioner to vote against the rules, argued they were too restrictive, putting undue burdens on businesses and investors.

Joan MacLeod Heminway, a law professor at the University of Tennessee, said that the ruling could make it cheaper for platforms to do business. “By exempting first-time crowdfunding issuers from the audit requirements, not requiring full tax return information from issuers engaging in smaller offerings, and allowing simpler disclosure formats for crowdfunding issuers, the SEC may be reducing offering costs,” she said.

Crowdfunding platforms were predictably jubilant about the news. Jason Fritton, CEO of real estate crowdfunding platform Patch of Land, said the firm “is extremely excited to see the Title III regulations enacted and is reviewing them carefully.”

Ben Miller, co-founder and CEO of Fundrise, added that the laws passed today will make it more likely high-risk, high-reward projects will get funding. “This is a tremendously important day and I applaud the Securities & Exchange Commission for the adoption of Regulation Crowdfunding,” he said in a statement. “Many doubt the significance of the regulations adopted today. These critics are wrong.”