Real estate equity crowdfunding is on the rise. According to Ian Formigle, Chief Investment Officer at real estate crowdfunding site CrowdStreet, since mid-March 2020, deal volume has declined 70% due to the pandemic; however, investor demand for those deals increased 50%. There are an estimated 330,000 investors on the various crowdfunding platforms, and that number will only increase into the future.
Many of these real estate crowdfunding sites rely on a 2016 Jumpstart Our Business Startups (JOBS) Act regulation titled Regulation A (or Reg A+), which democratizes access to these types of deals for smaller retail investors and non-accredited investors. Where before most of these larger commercial real estate deals were available only to private equity funds and family offices, now they're offered on these equity crowdfunding portals to people like you and me.
Here's an overview of Regulation A+ from the JOBS Act, the pros and cons of this crowdfunding legislation, and whether real estate investors should try to get in on the action.
What is Regulation A (Reg A+)?
"Regulation A is a crowdfunding exemption from registration for public offerings. Regulation A has two offering tiers: Tier 1, for offerings of up to $20 million in a 12-month period; and Tier 2, for offerings of up to $50 million in a 12-month period. For offerings of up to $20 million, companies can elect to proceed under the requirements for either Tier 1 or Tier 2."
—The Securities and Exchanges Commission (SEC)
In short, Regulation A+ is an evolution of the 2012 JOBS Act. In 2015, Title IV was initiated, also referred to as Regulation A+, which provides an exemption for companies to sell shares to accredited and non-accredited investors. Whereas before you needed to be an accredited investor to participate in these types of offerings, it’s now available to all. This is why many term Regulation A+ a “mini IPO.”
Going through an IPO and issuing an equity security as a public company requires dealing with a myriad of filing and regulatory hurdles. Due to this investment limitation, a Regulation A+ offering is something companies are using more.
Generally speaking, if you need to raise over $20 million and want to market the opportunity across the U.S., a Tier 2 offering is the best option. Whereas, if you have a strong state presence and only anticipate needing to raise locally, then Tier 1 is best as it carries with it fewer burdensome reporting requirements.
Here are some Regulation A+ statistics directly from the SEC’s 2020 report, titled Regulation A Lookback Study and Offering Limit Review Analysis:
Closed and Ongoing Offerings:
- As of December 2019, $2.446 billion was reported raised by 183 issuers.
- Average of $13.4 million per offering.
- This includes $230 million in Tier 1 and $2.216 billion in Tier 2 offerings.
Sought Offerings, Not Closed:
- $9.095 billion sought across 382 qualified offerings.
- Average of $23.8 million per offering.
- This includes $759 million sought across 105 qualified Tier 1 offerings and $8.336 billion sought across 277 qualified Tier 2 offerings.