On May 16, the final provision of the JOBS ACT to be enacted, called Regulation Crowdfunding, will be fully effective. Small businesses will be able to advertise on the internet and raise up to $1 million in a 12-month period from any investor, not being restricted to accredited or sophisticated investors. Only $1 million? Yes, for now, says columnist Gene Trowbridge, CCIM, senior instructor at the CCIM Institute. According to Trowbridge, observers of the financial market project that regulation crowdfunding will be popular, but they are concerned with the cost of capital related to the small amount of money that can be raised.

The views expressed in the commentary below are the author's own. Gene Trowbridge, CCIM, is a senior instructor with the CCIM Institute and founding partner at CrowfundingLawyers.net. He has been actively involved in the commercial and investment real estate industry since 1975, with a strong focus on syndication.

There is some discussion in Congress to issue new regulations that would raise the maximum dollar amount to something greater than $1 million.

With the assumption that many of the offerings under regulation crowdfunding will affect the smallest of businesses, many of which will be start-up businesses, the possibility of a high rate of business failures and fraudulent offerings has the regulators concerned and they have imposed requirements to reduce fraud, provide communication channels among the investors, and restrict the payment of commissions for solicitation of investors.

As it stands, individual investors can invest as little as $2,000 with a maximum of $100,000, per year, depending on annual income or net worth requirements. Businesses are required to list their offering on a “funding portal” which is similar to a securities broker dealer, regulated by the SEC and FINRA (the self-regulatory organization for licensed securities broker dealers), and state securities regulators.

The rules require the business to: make certain disclosures about the officers, directors or owners of more than 20% of the business; describe the business and the sources and uses of the proceeds from the offering; and in some cases provide audited financial statements.

While primarily designed for small businesses, there may be some application for real estate investing in smaller property acquisitions of lending in real estate.

How It all Began

In 2012 Congress passed the JOBS ACT with the goal of improving the efficiency of capital raising and increasing the overall level of capital formation with the purpose of helping the over 5 million small businesses in the US with less than 500 employees.

The JOBS ACT contained three major provisions: Regulation Crowdfunding, Rule 506c, and Reg. A and Reg. A+. These required the SEC to issue regulations before the public could use these new ways of raising money to support their business growth. In each of the provisions, Congress added the ability for businesses to advertise for investors in their securities offerings. The marketplace has attached the word crowdfunding to securities offerings done under each of the provisions of the JOBS ACT and websites called crowdfunding platforms have become prominent.

Rule 506c and Crowdfunding Platforms

The creation of Regulation D, Rule 506c was the first provision, fully implemented in September 2013. Rule 506c was a split from the original Rule 506 which did not allow businesses to advertise. 506c allows the business to advertise for accredited investors and raise an unlimited amount of money. The stated goal of the new Rule 506c was to facilitate capital formation for what they called “early stage” companies by providing accredited investors access to a greater number of investment opportunities

With the advertising allowed in Rule 506c, accredited investors may be exposed to more investment opportunities than they would see without the business being able to advertise their offering.

Since September of 2013, of the approximately $1.5 trillion has been raised in all Rule 506 offerings, over 10% of that amount has been raised under the new Rule 506c. While established business and new businesses may have been slow to learn about and embrace this new rule, there is little doubt that businesses will expand their use of Rule 506c.

Regulation D, Rule 506c, with its ability to allow offerings of any size is popular for businesses and quite popular for real estate investment offerings.

Regulation A and A+

The change to Regulation A and the addition of Regulation A+, implemented in June of 2015, was designed to:

• Give businesses access to a broad investor base by attracting non-accredited as well as accredited investors;
• allow advertising and general solicitation in the attraction of investors;
• allow the preemption of state securities laws; and
• make liquidity possible by allowing access to secondary markets.

The original Reg. A offering limit of $5 million for was raised to $20 million and the new Reg. A+ was added to allow offerings of up to $50 million.

These benefits come with a cost, both in money and time. Currently, the processing time for the application and issuance of a permit for a Reg. A+ offering is four to six months and the total offering costs range from $50,000 to $100,000.

Since the effective date of these changes in June 2015 there have been approximately 75 filings of Reg. A offerings. Half were under the smaller Reg. A limit and half were under the larger Reg. A+ limit. The average offering size under the smaller offering limit is $13M and under the larger Reg. A+ limit the average size is $24 million. While really implemented to support IPOs, many of the initial filings have involved real estate offerings.

It has been over three years since the passage of the JOBS ACT and the SEC has taken some time to write the regulations that allow businesses and real estate operators to use advertising to access capital for their offerings. While all the provisions have been branded “crowdfunding,” there is only one actual crowdfunding provision and it will be effective this month. The market is waiting to see the full effects of the JOBS ACT on capital formation.

On May 16, the final provision of the JOBS ACT to be enacted, called Regulation Crowdfunding, will be fully effective. Small businesses will be able to advertise on the internet and raise up to $1 million in a 12-month period from any investor, not being restricted to accredited or sophisticated investors. Only $1 million? Yes, for now, says columnist Gene Trowbridge, CCIM, senior instructor at the CCIM Institute. According to Trowbridge, observers of the financial market project that regulation crowdfunding will be popular, but they are concerned with the cost of capital related to the small amount of money that can be raised.

The views expressed in the commentary below are the author's own. Gene Trowbridge, CCIM, is a senior instructor with the CCIM Institute and founding partner at CrowfundingLawyers.net. He has been actively involved in the commercial and investment real estate industry since 1975, with a strong focus on syndication.

There is some discussion in Congress to issue new regulations that would raise the maximum dollar amount to something greater than $1 million.

With the assumption that many of the offerings under regulation crowdfunding will affect the smallest of businesses, many of which will be start-up businesses, the possibility of a high rate of business failures and fraudulent offerings has the regulators concerned and they have imposed requirements to reduce fraud, provide communication channels among the investors, and restrict the payment of commissions for solicitation of investors.

As it stands, individual investors can invest as little as $2,000 with a maximum of $100,000, per year, depending on annual income or net worth requirements. Businesses are required to list their offering on a “funding portal” which is similar to a securities broker dealer, regulated by the SEC and FINRA (the self-regulatory organization for licensed securities broker dealers), and state securities regulators.

The rules require the business to: make certain disclosures about the officers, directors or owners of more than 20% of the business; describe the business and the sources and uses of the proceeds from the offering; and in some cases provide audited financial statements.

While primarily designed for small businesses, there may be some application for real estate investing in smaller property acquisitions of lending in real estate.

How It all Began

In 2012 Congress passed the JOBS ACT with the goal of improving the efficiency of capital raising and increasing the overall level of capital formation with the purpose of helping the over 5 million small businesses in the US with less than 500 employees.

The JOBS ACT contained three major provisions: Regulation Crowdfunding, Rule 506c, and Reg. A and Reg. A+. These required the SEC to issue regulations before the public could use these new ways of raising money to support their business growth. In each of the provisions, Congress added the ability for businesses to advertise for investors in their securities offerings. The marketplace has attached the word crowdfunding to securities offerings done under each of the provisions of the JOBS ACT and websites called crowdfunding platforms have become prominent.

Rule 506c and Crowdfunding Platforms

The creation of Regulation D, Rule 506c was the first provision, fully implemented in September 2013. Rule 506c was a split from the original Rule 506 which did not allow businesses to advertise. 506c allows the business to advertise for accredited investors and raise an unlimited amount of money. The stated goal of the new Rule 506c was to facilitate capital formation for what they called “early stage” companies by providing accredited investors access to a greater number of investment opportunities

With the advertising allowed in Rule 506c, accredited investors may be exposed to more investment opportunities than they would see without the business being able to advertise their offering.

Since September of 2013, of the approximately $1.5 trillion has been raised in all Rule 506 offerings, over 10% of that amount has been raised under the new Rule 506c. While established business and new businesses may have been slow to learn about and embrace this new rule, there is little doubt that businesses will expand their use of Rule 506c.

Regulation D, Rule 506c, with its ability to allow offerings of any size is popular for businesses and quite popular for real estate investment offerings.

Regulation A and A+

The change to Regulation A and the addition of Regulation A+, implemented in June of 2015, was designed to:

• Give businesses access to a broad investor base by attracting non-accredited as well as accredited investors;
• allow advertising and general solicitation in the attraction of investors;
• allow the preemption of state securities laws; and
• make liquidity possible by allowing access to secondary markets.

The original Reg. A offering limit of $5 million for was raised to $20 million and the new Reg. A+ was added to allow offerings of up to $50 million.

These benefits come with a cost, both in money and time. Currently, the processing time for the application and issuance of a permit for a Reg. A+ offering is four to six months and the total offering costs range from $50,000 to $100,000.

Since the effective date of these changes in June 2015 there have been approximately 75 filings of Reg. A offerings. Half were under the smaller Reg. A limit and half were under the larger Reg. A+ limit. The average offering size under the smaller offering limit is $13M and under the larger Reg. A+ limit the average size is $24 million. While really implemented to support IPOs, many of the initial filings have involved real estate offerings.

It has been over three years since the passage of the JOBS ACT and the SEC has taken some time to write the regulations that allow businesses and real estate operators to use advertising to access capital for their offerings. While all the provisions have been branded “crowdfunding,” there is only one actual crowdfunding provision and it will be effective this month. The market is waiting to see the full effects of the JOBS ACT on capital formation.