The Jumpstart Our Business Startups (JOBS) Act, passed in 2012, was the first act to allow crowdfunding, opening doors to deals that investors previously couldn't access. Title III of the JOBS Act, also referred to as Regulation Crowdfunding (Reg CF), allowed an issuer a maximum fundraising amount of $1.07 million within any twelve-month period from an unlimited number of investors, including non-accredited investors. That amount is increasing to $5 million, which will open up even more opportunities to non-accredited investors.
What is an accredited investor? Why is it important?
The Securities and Exchange Commission (SEC) created the classification as a way to determine an investor's sophistication level.
The SEC defines an accredited investor as an individual meeting one of the following criteria:
- Has at least $1 million in assets, excluding personal residence.
- Had income of $200,000 per year ($300,000 if combined with spouse) for the past two years, with a reasonable expectation to follow that for the current year.
- Holds a Series 7, Series 65, or Series 82 license.
The third bullet is a relatively new addition to the definition, as it was done to prevent unnecessarily tying sophistication level with net worth or income. That being said, this modernized definition of an accredited investor isn't a catch-all, which is why expanding from $1.07 million to $5 million is so important.
What are the implications of this rule change?
Put simply, the amount of capital that real estate sponsors can raise from non-accredited investors is increasing five-fold. This makes the Reg CF far more attractive to the sponsors running the deal because they can get more "bang for their buck."
For example, if a sponsor is working on a multifamily deal that requires them to raise $15 million in equity, the most they could previously raise from non-accredited investors was $1.07 million. Now they can carve out $5 million. This is important for a few reasons:
- Sponsors that have not gone the Reg CF route before have more of a reason to try it out. Instead of an upside of $1.07 million from this avenue, sponsors can raise five times as much.
- This will likely lead to access to better deals for non-accredited investors, since it is becoming more attractive to the sponsors.
- You may soon see more deals that are exclusively financed with Reg CF.
As an example, NYCE recently became the fastest real estate firm to raise $1 million through a Reg CF raise. The company actually did two separate raises: one was for the real estate company, while the other was for a smart-tech student housing project in Philadelphia.
NYCE is on a mission to help democratize access to real estate for minorities. Rule changes like this to Reg CF are a huge push in helping that become a reality.
The Millionacres bottom line
Keep an eye on non-accredited deals coming through the pipe this year. Since sponsors will be able to raise up to $5 million per year via crowdfunding, you should be seeing more institutional-quality deals available. But make sure to do your diligence because while there will likely be more high-quality deals coming, you'll probably be sifting through some duds, too.