Real estate investors and developers are increasingly looking to raise money for their projects through “crowdfunding,” as legal and regulatory issues become better understood.
In the real estate context, “crowdfunding” is the raising of funds for a project through the use of social media to obtain contributions from many individuals. Technically, each one of these investments in a real estate project by individuals is considered the purchase of a “security” from the project sponsor under federal law and regulations. In the U.S., a project sponsor cannot offer to sell a “security” to the public without either registering the security with the U.S. Securities and Exchange Commission (a time-consuming and expensive process) or qualifying for an exemption from registration. Therefore, the goal of any project sponsor is to structure the investment opportunity so that it qualifies for an exemption.
In the real estate context, there are several different ways of implementing a “crowdfunding” strategy. This article…
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When people hear the word “crowdfunding,” websites such as Kickstarter or IndieGoGo usually come to mind.
Those sites provide a platform for people to donate money to charitable events, help a music band launch a new album and help local businesses get off the ground.
But if a private company wants to raise money through shareholders, similar to selling shares a public stock exchange, the general public can’t participate by federal and state law. That’s reserved for only “accredited investors,” or wealthy, financially savvy individuals.
But that could soon change in Arizona.
House Bill 2591 would allow “equity crowdfunding,” meaning any Arizona resident with any income could buy stock in a locally based private company.
The idea behind equity crowdfunding is to create a new avenue for small businesses and start-ups to gain access to capital they otherwise couldn’t obtain through traditional routes, such as a bank, angel investor or venture capitalist.
“They’re struggling to find those earlier and smaller amounts of funding,” said Sidnee Peck, director of the Center for Entrepreneurship at Arizona State University’s W.P. Carey School of Business. “So they’re not quite ready for an angel group, they’re definitely not ready for venture capital and they don’t have what a bank typically requires in order to get a loan. So they might be stuck needing $10,000, $20,000, $50,000 and they just can’t obtain it.”
During a Senate Financial Institutions Committee hearing last week, Senator David Farnsworth said he thinks it’s one of the most important bills this session.
“I have yet to find someone who is not in favor of this most important piece of legislation,” Farnsworth said.
The basis for the bill stems from the Jumpstart Our Business Start-Ups Act, also known as the JOBS Act, signed by President Barack Obama in 2012. A portion of the JOBS Act required the Securities and Exchange Commission, which regulates the nation’s securities industry, to create new rules to allow equity crowdfunding nationwide.
Those rules were supposed to be in place by December 2012, but the SEC still hasn’t acted.
Thus, some states began taking matters into their own hands.
About 15 states have passed their own equity crowdfunding laws so far and Arizona is among several currently considering doing the same.
These state laws allow crowdfunding only if the business and investors are located within that state. Crowdfunding can’t happen across state lines until the new SEC rules are in place.
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The proposed Colorado Crowdfunding Act would open up the potential pool of investors that start-ups can approach for funding.
By law, only accredited investors can buy stock in a private company today, and such investors must make at least $200,000 annually and have a $1 million net worth.
The bill allows any Colorado resident to invest up to $5,000 in a company without the need for accreditation.
“The challenge right now with a Colorado company trying to raise money is if they want to get outside investors, wealthy investors or venture capitalists, they have to go through such a labyrinth of securities laws and lawyers,” said bill sponsor Rep. Dan Pabon, D-Denver, during a press conference Wednesday. “The overwhelming cost and burden is on that particular business.”
Pabon’s bill would require the company and investor to be based in the state and that 80 percent of the proceeds of investment is spent here. House Bill 1246, introduced Tuesday, limits it to companies raising $1 million — or $2 million if they provide audited financial statements.