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April 7, 2015

Over $1 billion dollars was raised by crowdfunding for real estate investments last year and that amount is expected to exceed $2 billion in 2015.

Crowdfunding is becoming an increasingly common means of funding new real estate projects. It is the link between real estate developers needing capital for their projects and investors seeking diverse investment opportunities. Investors have access to professionally managed real estate projects which were once only accessible to institutional investors, unless such investor purchased shares in a publically traded REIT. Crowdfunding can cut capital raising costs to a fraction of what they are for traditional real estate syndications and allow operators to reach even more prospective investors. Online platforms such as Fundrise, IFunding, Realty Shares, Realty Mogul, Crowd Street and Patch of Land facilitate the process.

The Jumpstart Our Business Startups (JOBS) Act of 2012 loosened SEC regulations which prohibited advertising investment opportunities to the general public. Title III of the Act allows accredited investors to gain direct access to the real estate market through crowdfunding.

Under SEC Rule 506(c), a company can now broadly solicit and generally advertise the offering, but still be deemed to be undertaking a private offering within Section 4(a)(2) of the Securities Act of 1933 if:

(i) The investors in the offering are all "accredited investors"; and

(ii) The company has taken reasonable steps to verify that its investors are accredited investors, which could include reviewing documentation, such as W-2s, tax returns, bank and brokerage statements, credit reports and the like.

For an individual to qualify as an "accredited investor," such person must have (i) individual income in excess of $200,000 in each of the two most recent years or joint income with that person's spouse in excess of $300,000 in each of those years and has a reasonable expectation of reaching the same income level in the current year, -OR- individual net worth, or joint net worth with that person's spouse, exceeding $1,000,000 (excluding the value of such person's primary residence).

Entities in which all of the equity owners are accredited investors or entities with total assets in excess of $5,000,000 which were not formed for the specific purpose of acquiring the securities offered will meet the "accredited investor" qualifications.

Additionally, there are exemptions available in some states which may allow up to $2,000,000 to be raised from non-accredited investors. The amount that may be invested by such non-accredited investor will be based on either such investor's net worth or income level bracket, whichever is higher. 

With the recent release of rules under Title IV of the JOBS Act, it is looking increasingly doubtful that federal non-accredited crowdfunding under Title III of the JOBS Act will ever be a reality. Regulations have been in the works since 2012, but nothing final has been issued.

The recently issued final rules under Title IV, deemed "Regulation A+," expands capital raising for non-public companies and allows companies to raise up to $50 million by general solicitation from all investors, not just accredited investors – without approval from state regulators. This Mini-IPO will require an offering statement with the SEC, and investors – both accredited and non-accredited – will still be limited to investing 10% of the greater of income or net worth.

Clark Hill represents emerging start-up companies and experienced real estate funds in their acquisition, disposition and financing of property including, multi-family, industrial, retail and office properties. Our professionals know the real estate industry and have demonstrated ability to guide clients through the complexity of all facets of real estate transactions.

If you have any questions about the subject matter of this e-alert please contact Joseph S. Kopietz at | 313.965.8815 or Chad M. Poznansky at | 312.985.5531.

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