As we start the beginning of 2015, expectations are increasing that final rules for both Title IV and Title III crowdfunding will finally be released to the public with the first offers commencing later in 2015. Yes there are many questions regarding the final rules from industry participants and observers. Some commentators expect that Congress will need to finally, and conclusively, address the remaining issues. Still the SEC Commissioners may agree on final regulations that efficiently free up access to capital, or they can choose to encumber the statute to a degree that makes it “dead in the water”.
Today I would like to tackle a single aspect of Title III retail crowdfunding. This is the portion of the JOBS Act that allows anyone, rich or poor, highly educated or not, to participate in a new asset class. Title III crowdfunding has been heralded as the “democratization” of the access to capital and with good intent. But I see a significant problem with the proposed regulations as they stand today and it has to do with the somewhat arbitrary cap of a $1 million raise for small companies.
Now the SEC may feel compelled to stick to the outlines of the legislation that states;
“the aggregate amount sold to all investors by the issuer, including any amount sold in reliance on the exemption provided under this paragraph during the 12-month period preceding the date of such transaction, is not more than $1,000,000”
But why should the funding amount be capped? Is it because if the total dollar amount inches one dollar higher there is a greater inclination for the deal to go bad? Or perhaps larger funding rounds increase the opportunity for fraudulent deals? I would guess this is not the case. In fact the million dollar stop is just an easy number to label. Yes there is some basis in fact that early stage companies seeking seed funding skew to a lower amount but that is not a justification to create a hard cap.
Recently several engaged industry advocates have pointed out limitations on the one million cap. Congressman Patrick McHenry, widely credited with shepherding the JOBS Act legislation through the approval process, has publicly stated the amount should be raised to $5 or even $10 million. His request has merit.
In the United Kingdom, a domicile that allowed investment crowdfunding to grow before actively regulating the new approach to capital formation, authorities have not placed an artificial cap on the amount a company can raise. Late last year, Seedrs listed a company called Chapel Downs that was not only a publicly traded company, but the offer raised nearly £4 million on the equity crowdfunding platform. Now perhaps I have missed the news but as far as I am aware the sky has not fallen nor has London bridges fallen down.
Now I am compelled to discuss a topic that is clearly near to my heart: Equity crowdfunding in real estate.
This is an industry that I know quite well. I have raised over $340 million in capital for prime real estate projects in Manhattan during the last year. Over $75 million of this amount has been via equity crowdfunding. These investors have participated in these offers from around the country, and the world, seeking solid double digit returns on a hard asset in the most vibrant real estate market in the world. These investments are not risky startups but are collateralized by property. Investors benefit from return of capital and appreciation. Yet none of these projects fall within the million dollar tier. Currently the only investors that have access to these types of deals are accredited investors but this excludes the vast majority of the population from an opportunity that was – until recently – the domain of only the very wealthy few.
Access to investment opportunities should not be exclusive domain of the very rich. It is the governments priority to protect us from fraud but not from ourselves. Now there certainly needs to be parameters and guidelines but arbitrary and unnecessarily restrictive caps on investment totals for equity crowdfunding is one that must be addressed. I know there is the possibility the definition of an accredited investor will be rationalized or that Title IV may “save the day”, but all of these questions leave me wondering how are we protecting small investors by excluding them from participating in large commercial real estate projects, the single most profitable asset class there is, with an undemocratic cap on Title III retail crowdfunding?
Rodrigo Nino is the CEO and founder of Prodigy Network, a commercial real estate crowdfunding platform. Nino has raised more than $300 million from 6,200 investors and is currently developing commercial real estate projects in Bogota and Manhattan with a projected value of more than $850 million. Major money center banks like Deutsche Bank, CIBC and Bank of America provided traditional financing for Prodigy’s Manhattan projects. As a proponent of the Crowd-Economy as the main tool against inequality, Nino has spoken at worldwide conferences and was a noteworthy guest at New York University, MIT, Yale University, Harvard University and the AEDES gallery in Berlin, Germany. Nino is often featured in leading publications, including The Wall Street Journal, Businessweek, Forbes, The Economist, The New York Times and Fast Company among others. A Colombian native and a Manhattan resident, Nino belives Prodigy Network’s crowdfunding model as an efficient and secure mechanism that enables smaller investors from around the world to invest in specific projects that were solely accessible to the very wealthy before.