Potential new SEC rules would change real estate financing

The U.S. Securities and Exchange Commission last week proposed a new set of rules that could open the floodgates for real estate financing.

The proposed rules, under the JOBS Act, would allow companies to sell shares of their properties or development projects, via crowdfunding, to anyone. Currently, such opportunities are generally available only for affluent individuals

"It's going to be a huge change when it goes into effect," said Dan Miller, co-founder of Washington, D.C.-based Fundrise, an online partner for developers seeking to raise equity through crowdfunding.

Specifically, the SEC's proposed rules would allow people who earn less than $100,000 to invest up to $2,000 or 5 percent of their annual income (whichever is greater) through SEC-registered websites. People who earn more than $100,000 would be able to invest up to 10 percent of their annual income - with a cap of $100,000 in a 12-month period. Companies would be able to raise a maximum of $1 million through crowdfunding each year.

Fundrise is partnering with Portland-based Guerrilla Development to raise money for the Fair-Haired Dumbbell project on East Burnside Street. The startup uses a niche regulatory platform to raise money from non-accredited investors - a group most companies avoid because of onerous legal documentation that is required.

The SEC has traditionally allowed only accredited investors (people with a net worth of at least $1 million, or an annual income of at least $200,000) to invest in private real estate. From 2009 to 2012, accredited investors purchased $63 billion worth of privately offered real estate.

Miller said completion of the regulatory paperwork to include non-accredited investors can cost upwards of $50,000 per offering and require up to six months.

"Crowdfunding will allow us to do the same offering in a matter of weeks for a few thousand dollars," Miller said.

Realty Mogul, a Beverly Hills, Calif.-based company that does real estate crowdfunding for accredited investors, is following the SEC's proposal. Through Realty Mogul, investors can buy shares in either debt or equity, from small homes to large apartment complexes. It hasn't represented any properties in Oregon yet, but is actively looking to do so.

The company formed just seven months ago and has already facilitated $8 million in investment activity. Jilliene Helman, co-founder and CEO, said the new crowdfunding rules could be a game-changer.

"It would allow us to expand to a much broader scope of individuals who have not historically had access to real estate investment," she said, adding that approximately 1,000 non-accredited investors have signed up online for a Realty Mogul account. "Crowdfunding is a very big industry, but it's not going to change overnight . . . I think we're going to start to see dollars shift from public equity into more private transactions."

Publicly traded real estate investment trusts - one of the only real estate avenues currently open to small investors - represent a $650 billion industry for 50 million Americans. Global crowdfunding efforts, by comparison, are expected to reach just $5.1 billion this year, though that's up from $2.7 billion in 2012, according to Crowdsourcing.org.

Miller and Helman said the intricacies of the crowdfunding rules aren't fully understood yet. The SEC is seeking public comment on its proposals for the next 90 days, and implementation may not happen until next year. Miller said one potential complication is deciding who will be responsible for vetting investors' income levels.

"The devil is in the details," Miller said. "When the full law is implemented, that's when we'll figure out how workable it is."

Meanwhile, local companies are responding to a change the SEC made in September, per the JOBS Act. It removed a decades-old ban on general solicitation for private financing, enabling companies to advertise investment opportunities to anyone via the Internet and other publications. However, investors still must be accredited.

Coni Rathbone, a shareholder and real estate attorney at Zupancic Rathbone Law Group PC, is working with several local clients who are trying to create Internet sites that would pair real estate investment opportunities with investors.

"I've kind of likened it to a dating site - investor meets project instead of husband meets wife," Rathbone said.

Rathbone believes that simple opportunity will have a profound impact on real estate financing.

"The JOBS Act I think has and will have a dramatic effect on real estate financing, but it is my view that the relaxation on advertising and general solicitation - will have much more of an impact than the crowdfunding itself."