Online private placements, commonly referred to as “crowdfunding,” have been a major theme in the current real estate cycle. Recent changes to the Securities Act of 1933, including Regulation D Rule 506(c), have opened new funnels to raising private capital via general solicitation, giving way to the online private placement industry. Online private placement platforms host a variety of real estate deals, including everything from single family fixers for less than $250K to multi-million dollar equity purchases of prime real estate. As raising private capital online continues to gain momentum, commercial real estate professionals need to understand the impact of general solicitation on the real estate industry to find ways to work in conjunction with online real estate investing platforms.
Private placements, not crowdfunding?
Online private placement platforms provide a solution for those seeking capital to turn to the Internet to solicit investments. Raising private capital online became a viable option after the JOBS Act took effect in 2013. Prior to the JOBS Act, Section 4(a)(2) of the Securities Act of 1933 and the Regulation D Safe Harbor limited the ways in which private companies could raise capital, specifically how deals were marketed. The JOBS Act created Rule 506(c) under Regulation D, which allows issuers of private securities to generally solicit or market the offering to accredited investors.
Rule 506(c) allows issuers to market an offering, including the use of the Internet, which has led to the development of online portals to help companies raise private capital. Because of the JOBS Act, many portals have emerged with specialties in different areas such as real estate, short term debt, growth equity and more.
Why has raising private capital online become so popular for real estate?
Online private placements represent a natural progression in commercial real estate because of the large influence that technology has played overall in the industry. Technology innovations have been occurring in the commercial real estate industry from all angles. Private placement platforms utilize the Internet to give users access to deals from across the country. It makes sense to make investing in real estate easier by utilizing such a far-reaching medium.
Who is involved with raising private capital online in the commercial real estate industry?
There are numerous groups involved. On one side, there are the platforms who host the deal. According to Times Realty News, there are 144 real estate crowdfunding platforms in North America alone. The number of platforms will continue to climb as more firms enter the industry. On another side, there are the users of the platforms, which include those investing in real estate, debt and even hybrid deals. And, finally, there are the issuers that need to raise private capital. As more popularity grows around raising private capital for real estate using technology, larger and more sophisticated deals are being presented and funded.
How do these platforms work?
The process of using private placement platforms can be very simple and transparent with each platform being unique. The main goal of the platform is to make it easier for those seeking private capital to showcase their deals to investors. Investors can search through platforms to find a deal that meets their requirements. Once found, they can sign up and invest. To raise capital through a platform, a firm submits the deal to a platform. Most platforms will underwrite prospective real estate deals and only accept the ones that fit their criteria. Once accepted, the deal will be marketed through the portal until the necessary funds are raised or until the open investment window expires. It’s an industry best practice to utilize a broker dealer for these transactions. Raising capital through Reg D still involves issuing securities to investors and requires full compliance with all of the securities rules and regulations. It’s important and valuable to have a registered 3rd party participate to ensure full compliance for all parties throughout the capital raising process.
What are the benefits of raising private capital for real estate online?
First, it can be very fast. For example, deals that are successful in completing their capital raise do so in less than 30 days on average on the WealthForge platform. Second, there is a high level of transparency when investing in commercial real estate. When investing through a typical platform, the investor knows exactly which project or building they are investing in comparison, when investing in a REIT, the investor has very little control of where the capital is allocated. And finally, raising private capital using technology is easier than traditional paper-based methods. Investors enjoy the ease and access to deals that platforms provide. In addition, if an investor meets the suitability and/or accreditation requirements of the deal, they can invest from anywhere with Internet access.
Commercial real estate professionals need to be aware of online private placements so they can continue to find ways to more efficiently raise private capital. The effects that this method of raising private capital will have on commercial real estate professionals is still developing, but to be successful, CRE professionals will need to learn how to take advantage of general solicitation to continue to provide value to their clients.
Raising private capital online for real estate is here to stay. The future will produce more online real estate platforms; some will survive and some will fail. Changes in the industry will also bring unforeseen innovations. However, the fundamentals behind online private placements such as transparency, ease of use, and increased efficiency will continue to add momentum to not only its adoption by those looking to raise money but also by the investors who will continue to demand an easier way to invest.
Wondering when a real estate interest falls under the definition of a security? Learn more in this whitepaper:
Securities offered through WealthForge Securities, LLC. Member FINRA/SIPC. This post is an industry update from WealthForge. The message does not constitute a research report or recommendation and does not take into account the specific investment objectives, financial situation or particular needs of the recipient. This message is not an offer to sell or the solicitation of an offer to buy any security or interest in any fund, which only can be made through a private placement memorandum that contains important information about the risks, fees and expenses of a fund. With any investment, there is risk of losing of capital, and each individual investor should consult their investment adviser and/or tax expert before making any investment decision.
Disclaimer: WealthForge provides this information to our clients and other friends for educational purposes only. It should not be construed or relied upon as legal advice.