JOBS Act

SEC says YES to Equity Crowdfunding!

After over three years in regulatory limbo, the Securities and Exchange Commission (SEC) has finally voted the adoption of the Title III of the Jumpstart Our Business Startups (JOBS) Act at a public meeting, Friday 30 October 2015. SEC is led by Chair Mary Jo White with Commissioners Luis A. Aguilar, Kara M. Stein, and Michael S. Piwowar. Three Commissioners – White, Stein and Aguilar – voted yes to equity crowdfunding law.

President Obama signed the JOBS Act on 5 April 2012. While Title II (Regulation D) and Title IV (Regulation A+) have been given the green light on 23 Sept 2013 and 25 March 2015 respectively, there has been much hesitation where Title III (Equity Crowdfunding) was concerned. This present decision will shake up the crowdfunding world as non-accredited investors will no longer be barred from equity investing.

Press Release: http://www.sec.gov/news/pressrelease/2015-249.html

Final Rules: http://www.sec.gov/rules/final/2015/33-9974.pdf

1Although the SEC had allowed private firms to make general solicitations to the public, only accredited investors, those with net worth over $1M excluding their private residence, were able to participate in investments. It was believed that the general population was not educated enough to be able to understand how the market works and to make smart investment decisions.

There are many individuals who had amassed small fortunes over the years, as well as pensioners, who had the ability to make large investments but were unable to do so because legally they were not qualified by virtue of SEC standards. This is one of the reasons the SEC has been under pressure to adopt Title III, dubbed the real crowdfunding law. Six members of Congress wrote a letter to SEC Chair Mary Jo White on 5 October 2015 urging her to come to a positive decision where this rule was concerned. This may have been what spurred the decision to come to a vote once and for all.

Under Title III of the JOBS Act, entrepreneurs will have a wider pool of funds to tap as they dip into the pockets of the average citizen. More small business ventures will be funded, creating more jobs. Investors will be able to meet their funding needs faster since there is a wider network.

2The process has been a long and trying one as I recall being a part of the team that lobbied for the JOBS Act in Congress. One month before President Obama signed the JOBS Act into law, on Sunday 18 March 2012, I founded the Crowdfunding Intermediary Regulatory Advocates (CFIRA) with Startup Exemption and Gate Tech, a branch of it being the Crowdfunding Professional Association (CfPA). I made efforts to not only educate individuals on crowdfunding, but also to track the growth of the platforms as they emerged. The 2015 Times Realty News Real Estate Crowdfunding Report gives insight into the top and emerging firms in the real estate crowdfunding industry. It has been remarkable to see how taken the market has been with the concept as the real estate sector, more than any other, grew significantly after Regulation A+. Now with Title III being adopted, and everyone given the right to invest according to their funding capabilities, the market is expected to catapult even further.

Crowdfunding platforms will be expected to comply with “funding portal rules” as well as the newly established rule 4518 which will help FINRA to accurately keep record of entities subscribing to Title III. The funding capability has been increased dramatically and as such, so will the potential for fraud. There is the fear among some as they remember the great depression of the 1930s that initiated the creation of the SEC to govern securities. Blue Sky state laws had left many loopholes that were manipulated, leaving the market open and vulnerable to the beating it took. While this fear is reasonable, the market has evolved since that time and sufficient rules have been established to allow for a smoother transition. FINRA implementation of the law will delay its effectivity date, and we may have to wait till late spring 2016 before transactions can be done.

Just after JOBS Act was enacted, in December 2012 I wrote that this equity crowdfunding law will take more than 3 years before it is approved. Now that this law has been passed, no one can reasonably tell the natural outcome of this law but the market is ripe for it. Many expect that the full implementation of equity crowdfunding will be the turning point for alternative financing. The United States of America finally follows Italy to be the only two countries in the world with a specific crowdfunding law.

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Credits

Image 1: First meeting of Crowdfunding Intermediary Regulatory Advocates (CFIRA) with Securities and Exchange Commission (SEC) on 20 April 2012. From left to right: Vince Molinari (Gate Tech), Brian Meece (RocketHub), Douglass Ellenoff, hidden (Ellenoff Grossman & Schole LLP), D.J. Paul (Crowdfunder), Candace Klein (SoMoLend), Jason Best (Startup Exemption), David Drake (LDJ Capital and The Soho Loft), Chance Barnett (Crowdfunder), and Alon Hillel-Tuch (RocketHub). Photo credit: The Soho Loft

Image 2: The Crowdfunding Intermediary Regulatory Advocates (CFIRA) founders first met with Financial Industry Regulatory Authority (FINRA) on 20 April 2012. From left to right: Vincent Molinari (Gate Tech), David Drake (LDJ Capital and The Soho Loft), Jason Best (Startup Exemption) and Sherwood Neiss (Startup Exemption). Photo credit: The Soho Loft

David Drake is an early-stage equity expert and the founder and chairman of Victoria Global, LDJ Capital, a New York City-based family office, and The Soho Loft Media Group, a global financial media company with three divisions: Corporate Communications, Publications, and Conferences with 200+ annual global summits and talks on finance and investments. Mr. Drake has been involved in technology, media, telecommunications and impact investments for more than 20 years. He is an advocate of the US JOBS Act and was invited to the White House Champions of Change and represented the US Commerce Department to the European Union in Rome and Brussels as a Small and Medium-sized Enterprise expert.

 

GROUNDFLOOR launches peer to peer Real Estate Crowdfunding platform

By David Drake

GroundFloor, a peer-to-peer real estate lending platform, is launching a landmark securities offering that enables crowdfunding of real estate transactions. This innovative move will allow approximately 43 million Americans in six states to invest in real estate in a way that wasn’t possible until now.

Lending money to a real-estate developer used to be something reserved for banks and other accredited investors. GroundFloor is changing the rules of the game, allowing individuals to become lenders in real-estate projects. The developers of such projects will pay investors interest on the loan just as they would a bank. This new initiative provides the general public with the opportunity to diversify their investments, without being limited by their income or wealth. Also, real estate developers will have access to a new way of financing their projects and ideas, which will stimulate new real estate developments.

Federal regulations generally define an accredited investor as someone with an annual income of over $200,000 or liquid net worth of $1 million. These regulations are keeping the vast majority of Americans out of real estate investing. GroundFloor came up with an interesting and novel strategy. Instead of waiting for new crowdfunding regulations promised by the Securities and Exchange Commission (SEC) that will supposedly allow non-accredited investors to participate in real-estate crowdfunding, the company decided to work within existing state laws. So far, regulators in six states (Pennsylvania, Georgia, Arizona, Illinois, Virginia and Massachusetts) authorized the company’s initiative to solicit residents’ participation in its deals.

GroundFloor’s initiative is granting access to virtually any person interested in real estate investing, regardless of their income or net worth. Anyone can become an investor and the minimum investment is $100. Loan terms vary from six months to five years. As for safety measures, the company has a thorough pre-screening process for developers before they are able to list their projects. Most importantly, the loans are secured by the properties themselves, which is not a feature of other platforms that provide equity in real estate.

GroundFloor concentrates on smaller, residential projects. The pilot project for this whole new real-estate investment philosophy was the renovation of a historical single family home in Atlanta by John Mangham, a successful independent developer. The project was listed in February, and 39 Georgia residents lent the developer $40,000 to complete the restoration. The cash was raised in just five days and the developer will pay to investors 8% interest on the loan.

After the success of the pilot project, GroundFloor has now expanded to five more states (Virginia, Arizona, Illinois, Pennsylvania, and Massachusetts). The long-term goal of the company is to make this type of investment accessible to all Americans.

Other real-estate crowdfunding platforms are relying on wealthy accredited investors to raise money for their projects. GroundFloor, on the other hand, is building a platform for the rest of us, where any investor can access quality real estate investment opportunities. GroundFloor investors will invest anywhere from a few hundred to a few thousand dollars, making a safe investment that will bring nice returns on short to medium terms (from six months to five years). In other words, the company is focusing on a new market, tens of millions of potential investors, and it might just be the boost that the real estate industry and construction industry really need to make a recovery from the recession.

This type of real estate investing comes with a series of advantages for both developers and investors. Developers gain access to funds more rapidly: let’s remember that the funds for the pilot project in Atlanta were raised in just five days! Also, the developers are no longer dependent on financial institutions or accredited investors, which allows them more flexibility and creativity in their projects. Investors, on the other hand, have access to a form of investing that is safer than stock market investing and more profitable than depositing money in a bank.

One more thing worth mentioning: this form of financing is a way of bringing ethics back to real estate. Communities are offered the opportunity to back up projects that bring them something valuable, instead of dealing with real estate projects drawn by huge corporate developers who are far removed from the needs of the community.

GroundFloor makes investing in real estate projects accessible to anyone, building the path to a new way of financing the real estate industry – more flexible, more transparent, more dynamic, and more importantly: open to all.

David Drake is an early-stage equity expert and the founder and chairman of LDJ Capital, a New York City private equity advisory firm, and The Soho Loft – The Voice of Capital Formation – a global financial media company with divisions in Corporate Communications, Publishing and Expos & Events. You can reach him directly at David@LDJCapital.com.

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