Posted: February 7th, 2016
On October 30, 2015, the U.S. Securities and Exchange Commission (the “SEC”) adopted final rules on crowdfunding and issued proposed amendments to certain Securities Act rules with the purpose of facilitating certain kinds of crowdfunding. These adopted rules may provide construction project owners with the more “modern” option of crowdfunding their projects and a broader investor base, and the proposed amendments may provide these owners with a less onerous process by which to seek investors.
The proposed amendments are subject to the notice and comment period and address at least two important securities rules. One of the proposed amendments is to amend Rule 147 of the Securities Act, which addresses intrastate offers, to offers that seek to sell no more than $5 million in a 12-month period, impose limitations on investors, eliminate the offer restriction while keeping residency requirements, and relaxing issuer eligibility requirements. The other proposed amendment is to Rule 504 of Regulation D, and seeks to increase the sale limit from $1 million to $5 million in any 12-month period, and to disqualify certain bad actors from participation in such offerings. These proposed amendments are subject to the notice and comment period, and as such are only initial proposals; you may make comments on these amendments.
The final rules adopted by the SEC require reporting and registration by certain crowdfunding platforms and companies seeking funding (for the portals, i.e., being on the Form Funding Portal and becoming a member of FINRA; for the companies, i.e., disclosure of the price of securities, discussion of financial condition, description of funds use, providing financial reports, among others). These rules also broaden the scope of the investors who may participate in such crowdfunding efforts. Specifically, the final rules allow companies “to raise a maximum aggregate amount of $1 million through crowdfunding offerings in a 12-month period” and would allow individual investors “to invest [over a 12-month period] in the aggregate across all crowdfunding offerings up to”: (1) whichever is greater: (a) $2,000, or (b) 5% “of the lesser of their annual income or net worth,” if their annual income or net worth is less than $100,000; or (2) 10% “of the lesser of their annual income or net worth,” if their annual income or net worth is equal to or greater than $100,000. In layman’s terms, these rules, on their face, allow companies to raise up to $1 million through crowdfunding efforts within a consecutive 12 month period, and would allow individuals whose net worth is less than $100,000 to contribute to such projects.
As the final rules slowly come into effect, it is important to note that existing regulations have not stopped funding portals from being successful even with currently eligible investors. Fundrise is one of several different online portals that facilitate a “crowdfunding” effort for construction projects, most of which appear to be commercial projects. Even with the current rules, Fundrise markets itself by saying that “[c]ommercial real estate has traditionally been one of the most lucrative private investments around, but never before has it been available to you,” seemingly to suggest that funding a commercial real estate project, while previously being “reserved,” in so many words, to the rich or banking/investment institutions, now is being opened up to more of the general public (and the proposed amendments will open this field up even more).
While Fundrise seems to target investors that seek to “build a diversified portfolio of real estate investments,” it also allows project owners to raise capital for their projects. And although Fundrise, especially on pages targeted towards investors, makes it seem as if having a construction project funded through it is difficult (its vetting process ensures quality investments and that fewer than 1% of submitted projects are approved), it still does not foreclose the possibility of a construction owner finding funds through their portal. On pages targeted towards raising capital, Fundrise states that it “guarantee[s] funding for qualified projects. . . . faster, more flexible capital provides increased leverage at a lower cost than traditional lenders and equity partners.” Their process is set forth in a simple infographic (source: Raise Capital, Fundrise, LLC, https://fundrise.com/raise-capital?source=main-menu):
Fundrise also sets out statistics for different kinds of projects that they will fund (and their suggested financing): (1) single-family homes or small-balance commercial projects (blended senior and mezzanine loans); (2) mid-market commercial developments or rehabilitative projects (mezzanine debt or preferred equity); (3) large transaction or institutional co-investment projects (preferred equity). This seems to suggest that, given the right company and proposal, Fundrise can help a project owner to develop a residential community.
As an example of a funded construction project – and a high profile one – Fundrise’s poster-project is 3 World Trade Center – a mixed-use (offering retail and residential spaces) building set in the Financial District in Manhattan. While this funding project is now closed, Fundrise gives the potential investor a litany of information on the project, setting out the minimum investment amount ($5,000), the underlying security, the term, projected annual return, along with other information. And even with these investors being subject to SEC requirements, it still does not beat the fact that, if you have $5,000 sitting around and a good accountant, you could be an “owner” of the 3 World Trade Center project. How cool is that?
Written by Anastasia Fanning (16′), Wake Forest School of Law Student Practitioner
