After 5 years of raising capital for real estate syndications via more traditional offerings – namely Reg D 506(b) and 506(c), we recently launched our first RegCF offering (Regulation Crowdfunding), and it was an instant and massive success.
Within just 2 weeks, we were able to hit our targets within our Regulation Crowdfunding opportunity and also attract new investors via the funding portal. Many of the investors who jumped into this offering were investors who were not able to participate in our previous offerings, either because they’re non-accredited investors, or because they wanted to invest with a lower amount than our typical $50k minimums.
Whether you are currently a co-GP or doing your own deals, we’ll share with you the most important things we’ve learned about Regulation Crowdfunding through our experience with this offering, including how it works, guidelines to sell securities under RegCF, things you’ll need to consider, and whether it’s right for you and your business.
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.
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.
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.
The Nitty Gritty: Regulation Crowdfunding Rules & Regulations
At this point, you might be seriously thinking about putting together a crowdfunding transaction to sell securities for your current or future real estate deals. So, let’s take a moment to walk through some of the Regulation Crowdfunding rules and regulations you’ll need to understand.
SEC Form C
In order to set up a Regulation Crowdfunding opportunity, you’ll need to file a special form with the SEC – Form C.
Form C lists important information about the terms of the raise and provides important information about your entity and the real estate investment opportunity, including:
Overview of the business
The team who will be managing the business
Each crowdfunding transaction generally will require you to submit Form C and have it approved, before you can solicit any investments. Once filed, your Form C for a crowdfunding transaction generally will be publicly accessible through the SEC’s website.
Unlike a 506(b) or 506(c) deal where you can use any investor funding portals or even just raise capital via emails, Regulation Crowdfunding offerings are much more regulated, so as to protect the investors.
As such, you are required to use an SEC-registered, FINRA member intermediary (i.e., a broker-dealer or an approved funding portal).
A third party funding portal can add an additional layer of complexity to the overall user experience for your investors. However, the funding portal might also be able to make the fund collection process easier for your investors, by allowing them to invest via ACH rather than wire transfer, for example.
Another thing to consider is that, if the intermediary has a strong audience of their own, being featured on their funding portal can help give your offering further exposure and help you grow your audience.
If you want to raise more than the Regulation Crowdfunding threshold of $1,235,000 (up to $5,000,000), you’ll need to complete a financial audit, which can take time and be costly.
The good news is that a Regulation Crowdfunding transaction generally can be launched first, without completing the financial audit, and then if you see strong momentum and feel like you will hit the maximum threshold, you can start the financial audit at that point (though there may be a bit of a waiting list for your investors as if the financial audit takes longer than expected).
Educating Your Investors
Because your Regulation Crowdfunding investors may not have much experience with real estate deals, may not be accredited, and may not know you personally, it’s more important than ever to ensure you provide ample educational resources so investors can make an informed decision.
This includes making sure you provide complete and accurate disclosures and full information on the assets you’re investing in, as well as walking through the ins and outs of the funding portal they’ll be using to make their investment.
Your investors, particularly more inexperienced investors, may come to you for investment advice, but you must resist the urge to provide any investment advice, unless you are certified to do so.
For your crowdfunding transaction generally you’ll be working closely with your attorney and intermediary, so lean on them to help guide you through the legal and compliance aspects of setting up a Regulation Crowdfunding investment.
Accredited investors can self-certify via the funding portal and then invest as much as they want into your Regulation Crowdfunding deal. This is a very attractive aspect for accredited investors, as they don’t need to go through the lengths of submitting their tax returns or getting a CPA letter, as they do with 506(c) offerings, and they can invest instantly via the funding portal.
Non-accredited investors have a maximum amount they can invest per year across all Regulation Crowdfunding offerings, depending on their overall net worth. Let’s take a look at the non-accredited investor limits so you have a better understanding of your overall raise capacity via Regulation Crowdfunding.
If an investor’s annual income or net worth is below $124,000, they can invest up to either $2,500 or 5 percent (whichever is greater) of their income or net worth (whichever is greater) into Regulation Crowdfunding offerings.
Pop Quiz! Let’s say a non-accredited investor has an annual income of $80,000 and a net worth of $120,000. Which of the following is the maximum amount they could invest?
Up to $2,500
Up to $4,000 (5% of $80,000)
Up to $6,000 (5% of $120,000)
Any amount they want
Answer: C – Up to $6,000
Because their net worth ($120,000) is higher than their salary ($80,000), they can use that number as the benchmark. Taking 5% of that, that gives us $6,000, which is the maximum they can invest.
If, on the other hand, both the investor’s annual income and net worth are equal to or above $124,000, then they can invest up to 10% of whichever one is greater. However, the investment amount cannot exceed $124,000.
Pop Quiz! Let’s say a non-accredited investor has an annual income of $150,000 and a net worth of $400,000. Which of the following is the maximum amount they could invest?
Up to $2,500
Up to $7,500 (5% of $150,000)
Up to $15,000 (10% of $150,000)
Up to $20,000 (5% of $400,000)
Up to $40,000 (10% of $400,000)
Answer: E – Up to $40,000
Because this person is above the $124,000 threshold in both income and net worth, they are able to invest not just 5%, but 10% of whichever is greater (income or net worth).
In this case, the net worth of $400,000 is greater than the income of $150,000, so the maximum Regulation Crowdfunding investment amount for this investor for the year is $40,000.
For more information about these thresholds, and to see the SEC’s own examples, see the October 2022 SEC Investor Bulletin.
Regulation Crowdfunding Considerations For Sponsors
Now that you know the rules and regulations, as well as how much non-accredited investors could invest in your deal, let’s talk about some other considerations to keep in mind as you think about launching a Regulation Crowdfunding opportunity.
Because there are multiple hoops to jump through, as well as regulatory and compliance considerations, give yourself ample time to put together your Regulation Crowdfunding offering, particularly if it’s the first one. A crowdfunding transaction generally takes several weeks to set up, and then another several weeks to fill up.
You’ll need to factor in the time it takes to educate yourself, find the right intermediary to work with, test the waters your audience to ensure there’s adequate interest, customize the funding portal, set up a new entity and associated bank account, and get audited financial statements, if you decide to pursue that step.
This means that, if you’ve got a deal under contract right now that’s set to close in the next few weeks, you likely won’t have time to launch an offering in time and also collect the funds.
Based on our experience going through the process, we’d recommend giving yourself a minimum of 6 to 8 weeks or more to put your offering together, test the funding portal, and get your investors warmed up to the idea of your new offering.
Collecting The Funds
Unlike a 506(b) or 506(c) offering where investors wire funds directly into the bank account for the entity you’ve created for the deal, because there’s an intermediary, investors will send their funds via the funding portal, and the intermediary is the guardians of the funds.
That means that you won’t have direct access to the funds until you’ve hit certain funding thresholds, at which point you can arrange to have some or all of the funds disbursed.
Cost Of Capital
Based on the intermediary you’re working with, they will charge fees of their own for the privilege of raising funds via their funding portal and leveraging their services. Often, the fees are a percentage of the amount you raise, so this is another thing you’ll need to consider as you decide whether this is a viable option that makes sense for your real estate deal.
The Strength Of Your Existing Audience
When we launched our Regulation Crowdfunding offering, it filled up to the $1,235,000 maximum threshold in just two weeks (versus most crowdfunding offerings, which can take 90 days or more to fill up).
This was in large part due to the strength of our ongoing branding and marketing, as well as how closely we knew our target investor avatar, which served to ensure we were not only growing the size of our audience but also keeping them warm and providing value, even when we didn’t have anything they could invest in.
The ongoing marketing efforts ensured that our audience was building and deepening their trust with us and hence were eager to jump into a deal with us as soon as we opened it up. On top of that, we gave our investors very clear guidance on what to expect from the funding portal and how to navigate through the funding portal without getting lost, as this new funding portal was significantly different from our typical investor funding portal.
If you’re in the business of raising capital, be sure that you’re keeping your investors informed and in the loop on everything behind the scenes in your business, whether or not you have an open deal. This will help potential investors get to know you better and thus increase the likelihood that they’ll invest with you.
If you’re considering launching a Regulation Crowdfunding offering, start by educating yourself through reading articles like this one, connecting with intermediaries and checking our their funding portals, and talking to others who have successfully launched similar offerings.
If you haven’t already, be sure you’re keeping your audience warm and engaged through providing consistent and ongoing value to help them reach their investing goals.
If you’d like support with marketing, branding, and/or launching your own Regulation Crowdfunding offering, we’re here to help!
Through our Real Estate Accelerator program, we’ll give you all the resources, tools, and vendors we’ve used to make our Regulation Crowdfunding offering a massive success, so you don’t have to reinvent the wheel.