The Jobs Act: Opening Funding Sources for Real Estate Investors
Famous author, investor, and businessman Robert Kiyosaki says, “the most important job of an entrepreneur is to raise money.”
As real estate investors, we quickly realize that our personal financial resources are limited. When we run out of our own money, we stop investing.
Investors tend to believe the end of the road has been reached until additional cash can be saved up for the next deal. But as Winston Churchill reminded us, “a bend in the road is not the end of the road … unless you fail to make the turn.”
There are many more people with money than people with knowledge, and it is your job as a real estate syndicator to use your knowledge to continue to find great deals. A great deal will always attract money.
But how does one go about raising ‘other people’s money' (OPM) without running afoul of the many, sometimes arcane securities regulations?
Well, the good news is that Uncle Sam has stepped up to make things a little easier!
On April 5, 2012, President Obama signed the Jumpstart Our Business Startups Act (JOBS Act), which is a game-changer by most accounts. If you think the JOBS Act and the issuing of securities do not affect you as a real estate investor, think again.
In general, you are dealing with security whenever you take in other people’s money, manage a real estate project, and promise to provide a rate of return to your investor. It’s important to note that securities are not limited to just stocks and bonds but also extend to tenant-in-common (tIC) acquisitions and contractual arrangements.
Although the JOBS Act addresses several issues, the two most relevant to real estate investors involve an easing on the restriction of general solicitation and a recently popular practice known as ‘crowdfunding’.
When raising capital, 94% of all issuers rely on Rule 506 of Regulation D in order to avoid having to register their equity raise with the Securities and Exchange Commission (SEC).
Prior to the passage of the JOBS Act, this meant that you could not solicit or advertise to the general public and typically had to have a pre-existing relationship with your investors. This severely limited your ability to raise capital because, eventually, you run out of pre-existing relationships.
Congress has now instructed the SEC to eliminate this prohibition so long as you limit your investors to those who are accredited ($1m net worth, excluding primary residence, or $200,000 in annual income). The lifting of the general solicitation rules will not officially take place until the SEC formally amends Rule 506 of Regulation D (it has until July 5th to comply), but once this happens, it will be perfectly legal for you to publish advertisements in any newspapers, magazines, radio, or television or send materials via the mail. It will also be perfectly legal for you to put together seminars or meetings and invite attendees by any general means of solicitation or general advertisement. The only caveat is that your investors must all be accredited. This is VERY welcome news to all kinds of entrepreneurs, including real estate investors!
If you’re unfamiliar with crowdfunding, you may want to check out popular websites like kicksarter.com or crowdtilt.com. These websites allow people to raise money for a variety of projects (publishing a magazine or a book, funding a play or a college band’s tour) for a set period of time. The sites required a fundraiser to reach their desired funding goal. Otherwise, you don’t get any of the funds. This is to ensure that enough money is raised to complete the project at hand.
However, up until now, “backers” (those providing the money) did not get any financial stake in the project but rather received other incentives like a copy of the book or magazine, a DVD of the play, tickets to the concert or a discount on the product that is being designed. The JOBS Act is allowing, under some very strict parameters, “backers’ to get a financial stake in the company now.
Imagine the possibilities for you as a real estate investor!
Suppose you find a great deal, whether a single-family home, a condominium or a 60-unit apartment complex. You put together a compelling presentation and post the presentation on an approved website and have access to millions of potential investors. Those who like your deal can buy right online!
Now before we get too excited about this one, we need to wait and see what the details of this new law will look like once the SEC drafts its rules and regulations. Unlike the general solicitation section, Congress has given the SEC up to 270 days to promulgate the new regulations, so we won’t have all the details until early 2013.
Related Content: Real Estate Syndication - So You've Formed an LLC, Now What?
But for now, here are just some of the highlights of the general parameters that are outlined in the JOBS Act:
- Crowdfunding is a new exemption to SEC registration and preempts State laws.
- Funding will be limited to $1,000,000 per 12-month period.
- Investments will be limited to the greater of $2,000 or 5% of the investor's net worth or annual income; either the net worth or annual income is less than $100,000.
- Investments will be limited to 10% of the investor's net worth or annual income if either the net worth or annual income is greater than $100,000.
- The websites (web portals) will need to be approved by the SEC and subject to some disclosure requirements.
- Depending on the level of the equity raise, the issuer will have different levels of financial disclosures to make to the investor.
Ultimately, the JOBS Act should make it easier for real estate investors to use the internet to raise money for their projects. Stay tuned to The Real Estate Guys™ radio show and other information outlets for updates on this exciting new opportunity.
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