Wednesday, January 7, 2015

Disclosures in Crowdfunding Projects

Crowdfunding, a way of funding a project from a large number of individual contributions, has become very popular in the commercial real estate world as a result of the JOBS Act of 2012, which eased securities regulations to give small businesses better access to funding. For example, Fundrise, a leading crowdfunding website, allows individuals to invest in commercial real estate projects, such as hotel or restaurant construction, for a low amount of money, opening up investment opportunities to everyone and not just wealthy accredited investors.

Now that crowdfunding is on the rise, it is important that everyone who is looking to invest in a project knows that they are entitled to certain disclosures under law. Rule 506(b) of Regulation D under the Securities Act is a new rule as of 2013 which established specific requirements to determine whether or not a transaction or project is exempt from Securities Act registration. When securities (i.e. investments) are registered, they provide important disclosure information to investors, such as a description of the company’s properties/businesses, a description of the securities, the company’s management information, and the company’s financials. Under Rule 506(b), some companies do not need to register their securities if they do not advertise their securities to the general public and do not sell the securities to more than 35 non-accredited investors. Therefore, it should be noted that if companies on Fundrise want certain transactions or projects exempt from registration, they must be careful not to sell securities to more than 35 non-accredited investors. However, these companies, despite being exempt from registration, must still give the same important disclosure documents and financial information to non-accredited investors and must answer questions from non-accredited investors. This rule is in place to protect individuals, who are not as knowledgeable or savvy as accredited investors, from being victims of fraud or misrepresentation.

If you are thinking of investing in a real estate project in the near future, remember that you are entitled under law to certain disclosures about the project and company in question. Regardless of any exemption, this information must be given to you as long as you are a non-accredited investor.

Click here if you would like to know the top 60 real estate crowdfunding platforms.