Exclusive Q&A: Everything You Need To Know About The SEC's New Crowdfunding Rules
Real estate crowdfunding has been growing in popularity, with firms like Fundrise and Sharestates coming onto the scene—and institutional investors getting involved. But new SEC regulations on crowdfunding are set to go into effect on Monday, May 16, which will open up crowdfunding more to the actual "crowd." Bisnow sat down with Debbie Klis, a partner at law firm Ballard Spahr's DC office, to get the breakdown on the new rules.
Bisnow: What’s the backstory on these new SEC regulations?
Debbie Klis: When the last market downturn happened, people were starting to use crowdfunding illegally—meaning that they were raising money for their businesses and promising that they would give a return on the money. If you’re doing that over the internet and not registered with the SEC, that’s a violation. So that got the attention of the SEC. But it also got the attention of Congress, because if you and I had lost our jobs and were living on our parents couch, but could go on Kickstarter and raise $8k to get first and last months rent, buy an oven and open a cupcake business and a year down the road have six employees, that’s impressive. That’s what Congress noticed.
Bisnow: So what was the result of that?
Debbie Klis: That’s where the Jobs Act came in—Title II, III and IV of the Jobs Act were three different ways to raise money from the public. But all required SEC rulemaking, so we had to wait until the SEC came out with their new regulations. Title 2 created a new section of the code, called 506(c), which basically said you can raise money through general solicitation any way you want—the internet, newspaper ads, as much and fast as you want, as long as you only raise from accredited investors and you verified they are accredited. And that’s why all of these real estate crowdfunding sites were able to launch before the SEC came out with its Title III crowdfunding rules last October—the ones about to come into play on May 16.
Bisnow: What are the significant changes with the new rules?
Debbie Klis: The Title III crowdfunding rules that are going into effect on Monday, in a nutshell, let you raise money from accredited and non-accredited investors, sort of democratizing the fundraising—but companies can only raise $1M in a 12-month period from Title III crowdfunding. And the crowdfunding portals really take on a quasi-governmental role, it’s up to them to police the amounts raised and the amount that investors are putting in and whether the companies are following all of the rules, including the expansive disclosure rules.
Bisnow: What’s an “accredited investor”?
Debbie Klis: You can qualify as an accredited investor based on income or assets. If it’s based on assets, you have to show that you have $1M in net worth not including your home—because they want you to have liquidity. For the income test, your salary or income for this year and last year has to be $200k, or combined with your spouse $300k.
Bisnow: And these Title III rules are really what enables the so-called “crowd” to participate?
Debbie Klis: That’s right. The Title II rules limit fundraising to high-wealth individuals.
Bisnow: So Monday will be the first time that non-accredited investors will be able to invest in these crowdfunding firms?
Debbie Klis: Right, over the internet, yes. If you and I were raising money to buy a building we were allowed to go up to about 35 non-accredited investors—but we had to have known them, we couldn’t just use general solicitation to find them. So this is really an opportunity for non-accredited investors who might not really know about these nice deals to find them.
Bisnow: It sounds like this could make a big difference with real estate crowdfunding firms like, say, Fundrise, for example.
Debbie Klis: Right. I don’t know if they’re going to use Title III crowdfunding—but if they are that will be interesting because Fundrise chooses great deals.