IBD | Real Estate Investing Gets Crowdfunding OK —Wise or Wild West?

Real Estate Investing Gets Crowdfunding OK —Wise Or Wild West? - Investors.com

11/8/13 11:25 AM

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Real Estate Gets Crowdfunding OK — Wise Or Wild West?

By JOE GOSE, FOR INVESTOR'S BUSINESS DAILY Posted 11/07/2013 05:50 PM ET

A new rule change lets private firms and investment funds widely advertise their securities offerings.

This promises to give individuals more opportunities than ever to invest in income-producing real estate. Or, depending on one's point of view, potentially make them the target of swindlers.

The recent end to an 80-year-old ban on "general solicitation" advertising of private securities offerings lets real estate sponsors market money-raising efforts to the public via the Internet, television, newspapers, billboards and other means.

The Jumpstart Our Business Startups Act of 2012 directed the Securities and Exchange Commission to end the ban, and the change marks a significant departure from the past. It used to be that private placement issuers could only quietly offer their securities to potential investors already familiar or affiliated with the company — or hire investment banks to find buyers.

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"I think we're going to look back three years from now and say, 'Boy, did the way we do deals change,' " said Darryl Steinhause, a partner in the real estate capital markets group at law firm DLA Piper. "Is it possible that it becomes the 'Wild, Wild West' and that the pendulum swings back because of problems? Yes, it's possible."

Unlike shares of Boston Properties (BXP), Simon Property Group (SPG) and other well-known real estate investment trusts, private real estate securities aren't registered with the SEC. So the private sponsors aren't subject to reporting regulations meant to promote transparency and safeguard investors.

Crowdfunding Push The JOBS Act mandate to lift the general solicitation ban was part of Congress' effort to promote capital-raising through "crowdfunding."

So far the rules only let private placement issuers sell to accredited investors: generally those with single or joint income of $200,000 or $300,000 a year, respectively, over the two prior years, or net worth over $1 million excluding a primary residence. The onus is on issuers to verify that buyers are accredited.

The SEC has yet to adopt broader crowdfunding rules letting anyone invest in private offerings, which was also required by the JOBS Act. It took the SEC several months to lift the ban, but the change has already stimulated demand on some online platforms created to connect investors with private issuers.

Many of the online crowdfunding portals feature offerings from a variety of industries. But some now are exclusively dedicated to real estate deals, including Realty Mogul and RealCrowd.

The online real estate platforms typically review offerings and sponsors to verify that they're legitimate, and then open them to investors for a http://news.investors.com/print/business-inside-real-estate/110713-6783…regulation-change-affects-real-estate-private-securities-offerings.aspx

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Real Estate Investing Gets Crowdfunding OK —Wise Or Wild West? - Investors.com

11/8/13 11:25 AM

minimum $5,000 stake. If the issuer fails to raise its goal, the portals return the money to investors.

Investors were on track in October to commit over $4 million to deals on the website of Beverly Hills, Calif.-based Realty Mogul thanks largely to attention surrounding the ban's end, said CEO Jilliene Helman. It's roughly the same amount that rolled onto the platform from the firm's official March launch through September.

"The amount of press, interest and education surrounding private offerings has increased enormously," said Helman, whose firm has raised $8 million and taken part in 23 investments in retail, hotel, residential and other properties. "I think everyone in the (crowdfunding) ecosystem is benefiting."

Investor Limitations Lifting?

Real estate is among the private investment offering types getting

The SEC last month released a crowdfunding proposal that would open

wider marketing now that the SEC has lifted a ban on general

smaller private offerings to all investors. A final approval is expected early next year.

solicitation. View Enlarged Image

Ending the general solicitation ban remains controversial. Proponents argue it gives firms wider access to capital and individuals more investment opportunities. The SEC has estimated that 8.7 million U.S. households qualify as accredited investors. Crowdfunding supporters say the ad ban has kept participation in private offerings low.

State securities regulators and others focused on investor protection maintain that the change gives crooks leeway to fleece unsophisticated investors. On the eve of the ban's end, the Financial Industry Regulatory Authority warned that securities not SEC-registered are "risky and can tie up your money."

Some middlemen are trying to reduce the danger. Realty Mogul estimates that only about 2% of the potential offerings it receives will make it through its review process to be presented on its platform.

"We encourage all of our investors to do their due diligence and ensure that they're comfortable with anything they're investing in," Helman said. "But theoretically there is still risk."

Growth Capital Despite the hazards, Steinhause acknowledges that an issuer's ability to advertise property offerings should expand its money-raising opportunities.

Real estate sponsors typically raise capital from friends and family, through investment banks, or from institutions such as pension funds. But they all have drawbacks. The friends-and-family pool is only so deep, for example, and losing mother-in-law's money can make holidays uncomfortable, he says.

The limits of the friends-and-family network convinced Ann Arbor, Mich.-based Promanas Group to advertise its latest offering. The company's shareholder base of eight investors five years ago has grown to more than 100 primarily by word of mouth, says John Bogdasarian, president of Promanas. Its portfolio of warehouse, restaurant and medical office building properties totals over 1 million square feet.

Promanas began raising $7.7 million in equity for its second fund this spring, charging $25,000 a share. In September, it decided to advertise the offering's remaining $2.5 million via Zacks Direct, an advertising unit of Zacks Investment Research. It sends email blasts announcing the offering and interested parties can follow a link to Promanas' website to register for a prospectus.

The method so far has generated 40 or 50 leads and a few investors, Bogdasarian says. "When it came along, we decided we needed to at least try it and get the word out," he said. "We're looking to grow." Š 2013 Investor's Business Daily, Inc. All rights reserved. Investor's Business Daily, IBD and CAN SLIM and their corresponding logos are registered trademarks of Investor's Business Daily, Inc. Copyright and Trademark Notice | Privacy Statement | Terms and Conditions of Use

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