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Crowdfunding: The Next New Way to Invest in Real Estate

Historically, commercial real estate investment has been cumbersome for average investors and required a significant amount of money. Today, commercial real estate is primarily funded by pension or private equity funds, insurance companies, and high net-worth individuals with entry points in the millions. 

But a 2012 regulatory change that allows for general solicitation (advertising) has led to increasing opportunities for average investors by means of a process called crowdfunding.

Also known as crowd-sourced funding, crowdfunding results from the united effort of individuals who network and pool their financial resources (via the Internet) to obtain equity and finance a company. Crowdfunding is used to lend support to specific endeavors, too, among them philanthropic undertakings, political activism, software development, film production and marketing, and health-based research.

The Jumpstart Our Business Startups (JOBS) Act, which was signed into law by President Obama in April 2012, amended the Federal Securities Act of 1933, making it legal for small businesses to sell equity or debt securities through SEC-defined and -regulated internet crowdfunding portals. On September 23, 2013, the SEC rule that removes the ban on general solicitation for certain private securities offerings under Rule 506 of Regulation D took effect, demonstrating a key change as to the way securities may be sold by private investment, private equity and venture capital funds.  The SEC has not yet released anything on the crowdfunding portals; this does, however, provide hope that something could be coming soon.

Crowdfunding for commercial real estate investment offers significant advantages, such as centralized and transparent information, increased participation for average investors, and the ability to proceed without the registration and compliance restrictions placed on large public companies. Advocates believe that after the SEC finalizes its literature, crowdfunding – the next new way to invest in real estate — may demonstrate even greater benefits, including jobs creation and enhanced economic activity.

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