New U.S. securities laws intended to help startup companies raise money are poised to benefit real estate investors as well, allowing individuals to buy stakes in offices and other commercial buildings once off limits to them.
The Jumpstart Our Business Startups Act will ease restrictions on investments in closely held companies, including those set up to own commercial property, by people making less than $200,000 a year and with a net worth of less than $1 million. Before the law’s passage, such firms could market and sell shares to individuals who exceed those levels, known as accredited investors.
The JOBS Act probably will lead to more property-investing programs like those being pioneered by Fundrise LLC, a startup that recently raised $325,000 from 175 people, giving them a 28 percent stake in a two-story building that the firm bought in its home city of Washington. Because Fundrise began soliciting investors before the law’s change, the company had to get permission from the U.S. Securities and Exchange Commission.
“When we started, we had no inkling the JOBS Act would come along,” Ben Miller, who co-founded Fundrise with his brother Daniel, said in a telephone interview. “It took us nine months to get the first offering qualified with the SEC, and with the JOBS Act it should end up taking us a day.”
The law, which changed parts of the Securities Act of 1933, will allow non-accredited investors to put $2,000 a year or 5 percent of their income or net worth — whatever amount is greatest — into closely held ventures. While the law went into effect in April 2012, property investors aren’t able to take advantage of it yet because proposed investor-safeguard rules are still being worked on by the SEC. The commission missed its own end-of-the-year deadline for drafting the regulations.
“Whatever rules they come out with, it has to be less restrictive than they are today,” Miller said.
Investing “through friends and family” was one of the few ways for investors to gain access to property purchases before passage of the JOBS Act, said Paul Habibi, a real estate professor at the University of California, Los Angeles. The new law is “something that could work on smaller deals and it definitely has some promise.”
A full implementation of the JOBS Act will help companies such as Fundrise, which currently solicits money from non-accredited investors only if they’re residents of states where the offering is registered. Once the JOBS Act rules are in place, the company and other firms will be able to sell equity to investors throughout the U.S.
With Fundrise’s first property — the 5,380-square-foot 1351 H St. NE — investors are entitled to a portion of the real estate’s value and a share of its rent, as well as part of the potential profits from the sole tenant, Maketto, an upscale Asian restaurant.
Gina Schaefer, who owns hardware stores in Washington and Baltimore, said she and her husband, Marc Friedman, 39, used Fundrise to buy a portion of 1351 H St. NE for $10,000 as a way to become more involved in their community and make the kind of investment they couldn’t before.
“This was a way for small guys like us to get involved in the commercial market on a larger scale,” Schaefer, 42, said in a telephone interview. “I’ve never owned commercial real estate before because it was too expensive.”
Fundrise issued its offering under the SEC’s Regulation A, a burdensome process requiring the company to spend hundreds of thousands of dollars on legal fees, Miller said.
“Our filing weighed 12 pounds,” he said. “That’s more than my newborn and took longer to produce.”
Raising large amounts of money through small, individual contributions is nothing new. The process, known as crowdfunding, has been used for causes from former U.S. Rep. Ron Paul’s presidential campaigns to a Louis C.K. comedy special. Before the JOBS Act, such contributions were either donations or payment for a product or service — a video of the comedy show, for example — and not in exchange for equity in a business venture.
Efforts using Kickstarter Inc., the largest of these crowdfunding platforms, have raised $399 million from more than 2.5 million people since the New York-based company started in 2009, according to its website. This money was either donated or exchanged for goods. For example, anyone who contributed more than $8,000 to Formlabs Inc., a maker of machines that produce three-dimensional printouts, received a signed printer along with a private lesson and invitation to the company’s headquarters in Cambridge, Mass.
Crowdfunding platforms that want to offer equity instead of products are waiting for the release of the SEC’s rules, which will clarify what and how they’re allowed to solicit investments from the public.
“In the event they write the rules and say it’s go time, we’re ready to turn the switch on,” said Tim Sullivan, chief executive officer of MicroVentures Marketplace, which currently presents deals only to accredited investors. The Austin, Texas- based company raises money mainly for technology startups.
Companies such as San Francisco-based Primarq Inc., which brings together real estate investors and owners, are eager for the rules to be in place.
“The JOBS Act is great for bringing equity into the small-business market,” Steve Cinelli, Primarq’s chief executive officer, said in a telephone interview. The company wants to use “crowd capital as a source of third-party funding rather than the continued use of mortgage debt.”
