Crowdfunding is a new tool for raising money for businesses and an easier way to access such ventures for investors. It utilizes social media outlets like Facebook, Twitter and LinkedIn to reach an audience of potential investors. The idea behind crowdfunding is that many people are willing to invest a small amount, and when they do, large sums of money can be raised quite quickly. It opens doors for businesses to investors they could never reach otherwise.
In the past, real estate development was only available for investment through private equity in the development company or through real estate investment trusts (REITs) and was not feasible as a direct investment for most individuals. This is because each real estate development venture is a finite project, and registering each product as a security, even under Regulation D filings, is inefficient. Furthermore, real estate developers were not allowed to actively market or solicit investments for their projects due to restrictions by the Securities and Exchange Commission (SEC).
As the concept of crowdfunding was growing, the Jumpstart Our Business Startups Act of 2012 modified certain rules under Regulation D that opened the door for more direct marketing and solicitation to accredited investors. Now, real estate developers can rely on crowdfunding sites to solicit investments from high-net-worth investors who are eager to make an investment in this market. The SEC is reviewing material in an attempt to open this market up to all investors, but for now, crowdfunding sites must classify each investor to ensure they qualify to make private investments in real estate in this manner. It is the hope that the online investment market for real estate will flourish in the coming years, giving investors a great alternative.