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Updated almost 9 years ago on . Most recent reply

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27
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8
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Mike Hoherchak
  • Bethlehem, PA
8
Votes |
27
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May 16, SEC Crowdfunding Law, what does it mean for RE investing?

Mike Hoherchak
  • Bethlehem, PA
Posted

So I came across this article today. Starting May 16th, unaccredited investors can now take part in equity crowdfunding. 

Here's the full article from Entrepreneur.com: https://www.entrepreneur.com/article/275215

Of course, I could see potential downside for uneducated investors but I can also see the tremendous upside for new businesses looking for funding in order to get started. This particularly excites me about funding a real estate investing business. 

Here it is on the SEC.gov website: https://www.sec.gov/oiea/investor-alerts-bulletins...

What are your thoughts on this? What strategies come to mind to make this work for real estate investing?

Most Popular Reply

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127
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Ivan Vargas
  • Royal Palm Beach, FL
44
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127
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Ivan Vargas
  • Royal Palm Beach, FL
Replied

Its not a license, its a registration. A new entity created by the SEC called a funding portal. There's a few applications yes FINRA, and the SEC the process should take about 90 days. 

Once the funding portal is registered it can display Title 3 offerings, but they are only the intermediary just like a registered Broker/Dealer (who can also display Title 3 offerings on its "website").  The "portal" cannot handle money, it needs to go through an escrow agent, directly to the issuer, and the portals need to take extra measures to prevent fraud (similar to 506c taking extra steps to confirm accreditation).

Most existing "funding platform" is now running on 506c exemptions, maybe a few 504 or Reg A+. Those are from Title 2 & 4 of the JOBS Act. These are all Wordpress websites running fancy plugins. They have a great team of software geeks to make their systems functional and polished from the project widgets to the investor dashboard and registration process. With a few million in VC money they can make really nice "websites" and market the hell out of them. 

They are mostly offering single family rehab projects under $1M each. These projects are clearly 506c because they are using general solicitation. The rules state clearly if you use general solicitation NO non-accredited investors allowed. But they don't need non-accredited investors because when they send an email blast (general solicitation), the projects get funded within hours. 

So far the SEC has received 33 applications for funding portals. When these portals open up, they open to non-accredited investors with the same single family rehab projects under $1M and they CAN advertise to non-accredited investors. However these new inexperienced investors with under $1M in assets and less than $100k yearly income are only allowed to invest 10% of their income or net worth whichever is greater, and a maximum of $100k in a year. Funding portals need not verify the investors income or net worth just don't sell them more securities than they are legally allowed to buy. 

The funding portal needs to vet the sponsor more than the existing platforms do (they are not regulated on that department), and the funding portals have a whole section just for that in the 686 pages of rules. Also, Title 3 issuers have to register with the SEC 21 days before they can sell the first security, whereas 506c issuer just files a simple Form D, 15 days after they sell the first security. 

Is there still a chance for fraud? Maybe, but they took great measures to prevent it. There is still a chance for fraud with any Regulation D offering as well.

Will the sponsors be inexperienced or incapable of completing a single family rehab? That's up to the funding portal to be selective and perform due diligence just like the existing platforms. But just think how many investors here on BP can raise the capital to fund their first or next flip.

Will the current platforms bother to run Title 3 offerings? I doubt it, actually I think its not allowed but I'm not 100% on that. They may have to open a separate "website" for that and register it as a funding portal. They can do fine with their top 1% accredited investors and leave the millions of newly available non-accredited investors to the newly created funding portals.

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