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Opinion, commentary and analysis on everything that makes the U.S. housing economy tick -- not to mention the ghosts in the machine, too. Written by HW's team of editors and reporters each business day.
Investments

Proposed rule lures small investors into big real estate deals

November 12, 2013

The real estate investment community stands to benefit from a rule proposed by the Securities and Exchange Commission that would permit businesses and intermediaries to take part in equity-based crowdfunding. The novel development may eventually permit unaccredited investors to put their money behind real estate transactions once off limits to them.   

The end goal of the proposed rule is to create an outlet for unaccredited investors to pool their money, investing in real estate projects such as apartment buildings or retail centers, according to Jilliene Helman, founder and CEO of Realty Mogul, a crowdfunding platform for real estate investors.

In fact, she views the proposed rules on Title III crowdfunding, which are outlined in the Jobs Act, as game-changing in that it gives unaccredited investors the parameters for taking a stake in this part of the economy.

"The macro change is that for the first time in 80 years they are adopting new regulations to securities law that are going to enable more investors to get involved in offerings," Helman told HousingWire.

Of course, specific guidelines have to be followed to ensure no one is able to get in too deep.  

Those partaking in it under the proposed rules would be permitted to invest $2,000 or 5% of their annual income or net worth – whichever is greater if both their annual income and net worth are under $100,000, according to Helman. 

If a party has annual income or net worth equal to or more than $100,000, they can invest 10% of their annual income or net worth. For campaigns over $500,000, an independently audited financial statement is required.

Furthermore, issuers can raise $1 million per year from unaccredited investors under the proposed guidelines.  

There is always uncertainty in something new and Helman acknowledges this, which is why there would be clear limits for unaccredited investors. 

"There is uncertainty," she said. "We need to spend 18 months to two years to make sure it’s going to work. But I think it opens up an entirely new market to investors."

And while there are risks, that’s a fact of life in real estate investing already.

"The SEC has limited how much a non-accredited investor can invest," Helman points out. "The SEC has said, yes, there is risk, but we are going to limit your exposure to that risk."

The democratization of finance means that no longer are real estate companies limited in what parties they can turn to. They can now access new types of capital, Helman explained.

The good news is real estate is still a nice area for investors in terms of cash flow, Helman says.

"We focus exclusively on investments that can generate income for our investors on a monthly and quarterly basis," she added. "That is going to drive a lot of investors to real estate and other classes. This new fundraising source is key to what I believe is going to be the largest asset class for crowdfunding – which I believe is real estate."

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