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Exclusive Q&A: What Today's SEC Ruling Means for Non-Accredited Investors

Following more than three years of wrangling, the Securities and Exchange Commission finally votes this morning to put the finishing touches on the rules of Title III equity crowdfunding of the JOBS Act.

While welcome news for non-accredited commercial real estate investors, the advantages of the ruling remain somewhat unclear.

To get the lowdown on tomorrow's ruling, Bisnow sat down with leading securities attorney, crowdfunding expert and iDisclose co-founder Doug Ellenoff.  

Bisnow: The SEC vote is undoubtedly a major bonus for the commercial real estate industry, especially non-accredited investors who might otherwise be left out in the cold when it comes to crowdfunding. Why has Title III taken so long to come to fruition even though it won bipartisan support in Congress and President Obama signed into law back in 2012?

Doug Ellenoff: There was still a natural tension between the legislative process and the SEC, who were being told they had to do this. It’s not something they initially wanted to take on, plus there were the other provisions with Title II and Tile IV, which they wanted to roll out first to see what would happen. This is a very sensitive issue and the SEC basically said, “If we’re going to do this, we’re going to do it slowly and we want to monitor things before we move forward on Title III.”

Bisnow: Is there any chance it might not happen tomorrow?  

Doug: None whatsoever. The rules on this were already choreographed between FINRA and the SEC a couple of weeks ago, so it’s a done deal at this point. It will probably officially go into effect within the first couple of weeks of January, although unlike Title II and Title IV, nobody can immediately start doing crowdfunding except for licensed broker-dealers.

Bisnow: Given that it’s the non-accredited investor who stands to gain the most from Title III, can you give us an idea of what the average deal size might be and where these deals will likely occur? 

Doug: I think the average deal will be in the half million to $1M range. Most of them will be highly regionalized in places where smaller communities come together to renovate an old movie theater or some other local landmark. From that standpoint, and not unlike Title II on a smaller scale, Title III will be a tremendous asset, because it can pick up the slack when community banks aren’t doing what they need to do for whatever reason. 

Bisnow: Once it gets on its feet, could Title III crowdfunding conceivably open up opportunities overseas as well, particularly in frontier markets?

Doug: Crowdfunding is most definitely a global phenomenon. Right now, Title III rules are only applicable to US-sponsored entities, but I believe there is going to be connectivity with all of these platforms that have sprouted up worldwide, probably within a five-year period. This means that if you’re sitting on a beach in Monaco and you want to be able to buy a hot property in Austin, TX, you’re eventually going to be able to do that assuming the rules permit it. I have absolutely no doubt that they some day will. 

Bisnow: Aside from the obvious advantages of streamlining the process, what are some of the other benefits of Title III? 

Doug: Besides the obvious efficiencies you just mentioned, I think there will be more data collection sites that make it more proactive than reactive. There are going to be alerts and analytics across all of these platforms where the data is collected. That’s No. 1, but I also think that having standardized documentation and availability of information in a centralized portal community where everybody can socialize about the people involved in the deal and the value of the deal is a much more responsible way of doing things. 

Bisnow: When it comes to actually finding these deals, will Title III have any impact in terms of upping the ante value-wise? 

Doug: Especially at the million-dollar level, most deals still aren’t going to be virally interesting to the point where everybody suddenly wants in on them. Having said that, I do think they might be funded 10% to 20% faster because of the broader reach a sponsor has to their community because of these platform portals. 

Bisnow: A major issue with a lot of platform portals has been compliance. Another common complaint is the lack of a proper investor exit strategy. How will Title III help remedy this?  

Doug: Title III has to be used through a funding platform that is regulated by FINRA. That means they have to vet investors and know what their levels of participation are. They also have an obligation to properly educate them. What the education is going to be has yet to be determined, but it’s going to be a fundamental part of the process. 

Bisnow: Is there anything else investors/portal platform providers should know?

Doug: First off, they need to understand there are lots of laws and motivations in Title III, Title II and Title IV, and that they’re not all the same. You also have to understand what the portal platform’s revenue model is and whether or not they’re getting a straight commission. For the services providers, it’s very simple: Don’t take other people’s money if you’re not going to use it responsibly.