Regulation Crowdfunding: How To Raise Capital And Include Non-Accredited Investors Via RegCF

What Is Equity Crowdfunding?

Most likely, you’re familiar with popular crowdfunding sites like Kickstarter, which allow you to raise money for various creative and innovative projects, like movies you want to make, board games you want to launch, smartphone accessories that will revolutionize the market, and on and on.

With a typical crowdfunding campaign, your customers have the opportunity to back your proposed project by making a pledge. In most cases, if customers pledge an amount above certain thresholds you set, they get access to early release products, swag, and other prizes or rewards you set.

With Kickstarter crowdfunding campaigns, you are supporting the companies, individuals, and projects essentially via a donation, or a pre-purchase if there’s a product to buy. This is different from the crowdfunding we’re talking about with Regulation Crowdfunding, which allows you to actually invest in the company itself.

A Regulation Crowdfunding transaction generally gives everyday investors the opportunity to invest in early-stage startups and projects (including real estate deals), before those companies go public. These opportunities have traditionally been available only to high net worth accredited investors, venture capitalists, and angel investors.

Now, through SEC-registered FINRA member intermediaries, each of whom has their own funding portal, you’re able to sell securities and raise capital via crowdfunding, accept an unlimited number of non-accredited investors, and give your investors actual equity in the deals, rather than just a t-shirt or tcotchkes.

How To Raise Capital Via Regulation Crowdfunding

Okay, let’s start with the basics. Regulation Crowdfunding (aka, RegCF) and is a type of offering that allows companies to offer and sell securities through crowdfunding.

Regulation Crowdfunding opportunities have only opened up in recent years, as part of the JOBS Act of 2012, though Regulation Crowdfunding itself, also known as Title III or RegCF, didn’t go live until 2016. Prior to that, they hadn’t been available since before the Securities Act of 1933.

A Regulation Crowdfunding transaction generally levels the playing field, allowing all investors – including non-accredited investors – to invest at very low minimums, making these opportunities much more accessible to the masses.

If you raise capital and sell securities, what this means for you is that you now have an additional path with which to raise capital and reach more people for your real estate deals. 

While there is a limited amount of capital that you can raise via a Regulation Crowdfunding opportunity, and there are legal and financial fees, as well as other costs to consider (including working with an intermediary and using their funding portal), opening up a crowdfunding offering can be a great way to expand your audience, deepen your relationships with your existing audience, and offer a new path for investors to participate in your deals.

Related: How To Find Investors To Fund Your Real Estate Syndication Deals

Regulation Crowdfunding Vs. Reg D Offerings

These days, most real estate syndications are done through Reg D 506(b) or 506(c) offerings, which have quite a different structure than Regulation Crowdfunding offerings. 

Reg D 506(b) Offerings

With Regulation D 506(b) offerings, you can raise an unlimited amount of capital and can accept up to 35 non-accredited investors, but the offering cannot be publicly advertised.

That means that you can’t post the opportunity on Facebook, run Google ads for it, or talk about it on stage at a public event. You can only sell securities and offer the investment to people you already have a substantial and pre-existing relationship with. 

This ensures that your LPs (limited partner investors), particularly those who are non-accredited, are protected, as they have a direct relationship with you.

Pro tip: If you have a big enough audience of accredited investors and don’t need to advertise your offerings, 506(b) might be a good way to go, as investors can self-certify their accredited status.

Reg D 506(c) Offerings

With Regulation D 506(c) offerings, the good news is that you can publicly advertise your offering. That means you can post it in Facebook groups, blast it to your LinkedIn followers, mention it on your podcast, and otherwise shout it from the rooftops.

But, the catch is that you can only accept accredited investors into a 506(c) offering. And, investors have to go to significant lengths to prove their accredited status. This could include submitting their tax returns or getting a letter from their CPA or attorney. 

Because both 506(b) and 506(c) offerings are private placements, there are no regulations around the funding portals you can or need to use, which is different from a crowdfunding transaction.

Pro tip: If investors plan to invest via an LLC or other entity, they will need to show that the entity itself (not just them as individuals) is accredited. This typically means that all owners of the entity need to be accredited. This most often impacts investors who co-own LLCs with their young adult children.

Related: How To Raise Private Money For Real Estate Investing

Regulation Crowdfunding Offerings

Whereas 506(b) offerings can’t be advertised, and 506(c) offerings can’t accept non-accredited investors, Regulation Crowdfunding offerings allow you to do both.

That’s right, with a Regulation Crowdfunding deal, you can publicly advertise it, and you can accept non-accredited investors.

The main catch to be aware of is that there is a cap to the amount of money you can raise via a crowdfunding transaction. According to current Regulation Crowdfunding rules, you can sell securities and raise up to $1,235,000 without needing a financial audit, or up to $5,000,000 with a financial audit. 

These caps are per year, per entity. That means that for real estate deals where you’re forming new entities for each acquisition, you can raise up to $5 million for each crowdfunding transaction.

Is Regulation Crowdfunding Too Good To Be True?

As you’re reading this, you might be thinking that Regulation Crowdfunding sounds too good to be true, and in a way, they are. Regulation Crowdfunding offerings were created in part to help democratize the access to investment opportunities that had previously been behind closed doors, only available to the ultra wealthy.

Regulation Crowdfunding Benefits For Investors

For investors, Regulation Crowdfunding means that more people have access to these types of investment opportunities, which could be a great way to diversify away from the stock market and hence provide more stable long-term growth. 

Regulation Crowdfunding also means that individual investors who may not have millions of dollars in cash to invest can invest in more offerings by spreading their money out, since each crowdfunding transaction tends to have lower minimums than 506(b) or 506(c) deals.

However, investors should know that, just like a 506(b) or 506(c) deal, a Regulation Crowdfunding investment is illiquid, and thus investments made through a crowdfunding transaction generally cannot be resold.

Regulation Crowdfunding Benefits For Sponsors

For sponsors, Regulation Crowdfunding allows you a new avenue with which to raise capital for your real estate deals. For example, if you’re doing a 506(c) deal which only allows accredited investors, you might do a RegCF offering in addition, to be able to include non-accredited investors as well.

Another example would be if you’re doing an open-ended fund with multiple assets. You could open up a Regulation Crowdfunding opportunity to invest in just one of those assets, to give your investors more options so they can fine-tune their own investments and portfolios.

On top of that, increasing the opportunities for people to invest in your deals means you are able to grow your audience, help more people build wealth, get more referrals, strengthen your brand, and expand your overall impact.