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Real Estate Crowdfunding for Retirement

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Real estate is an important part of any well-diversified portfolio. Not only is it a good way to protect yourself against volatility in the stock market, it can also provide retirement income.

One of the best things about investing in real estate is that you have so many different ways to do it. House-flipping is one option if you want to pocket big profits all at once. Becoming a landlord is another way to go if you’d rather be on the receiving end of monthly rental payments.

Real estate crowdfunding, is an alternative that’s gaining popularity. It’s estimated that the real estate crowdfunding industry topped $2.5 billion in 2015 and is still growing. If you are wondering if this is a good time get in on the game and start fortifying your retirement goals, here’s a overview of real estate crowdfunding.

Real estate becomes more accessible. Private real estate deals have historically been reserved for high net-worth investors who possess the right connections to gain access. Real estate crowdfunding opens up many of these opportunities to the average investor.

This is a great opportunity for investors who are struggling to find an entry point into the real estate market. Crowdfunding enables investors of all ages, risk profiles and wealth levels to acquire real estate for the first time. With as little as a $5,000 investment or in some cases even less, investors can buy a stake in a property. From residential projects to shopping malls to office buildings, there are numerous options.

Crowdfunding is removing barriers to investing in real estate that previously shut a large number of investors out of the game. The SEC’s approval of Title III of the JOBs Act in October 2015 widens the possibilities even further by allow non-accredited investors to take part in crowdfunded real estate deals.

The opportunity for diversification expands. With direct ownership, your options are more limited when you don’t have the ability to purchase multiple properties. Real estate crowdfunding eliminates that obstacle.

Instead of being locked in to a single property type, investors have more flexibility where they put their money. They also have a choice between investing in equity in return for a share in a particular property, or debt investments, which are tied to the property’s mortgage.

If you buy a property to flip or rent, you’ll most likely feel more comfortable investing in your own backyard. When you are investing through crowdfunding, you can invest throughout the country and more easily diversify across property types, investment types and geographies.

It’s a less stressful way to invest in real estate. Owning a rental property or tackling a flip project is great for investors who prefer an active role but it’s not necessarily a good fit for someone who wants to relax in retirement.

With house-flipping, investors have to factor in all the costs involved, from buying the property to physical construction, as well as the interest paid to lenders if you’re financing the project. Besides that, there are the tax implications that go along with realizing short-term financial gains. Bottom line, it takes a long time to master the art of rehabbing. Investors have to be able to anticipate problems and have a counterattack ready.

Owning a rental house is no less of a challenge. There are the difficulties that go along with finding tenants and making sure you’re adhering to the legal guidelines for renting. Then there’s the day-to-day demands associated with managing a property, which can be time-consuming.

The passive nature of real estate crowdfunding as being more suited to retirees who have less of an interest in direct involvement.

Real Estate Investing is a Great Way to add Retirement Income
For some investors, real estate is a viable option for generating money and diversifying your investments.

Understand the risks. While real estate crowdfunding may be more preferable to direct ownership for some retirees, there are some potential drawbacks.

Liquidity is one issue that may be of more concern to retirees. Depending on how a deal is structured, you may be looking at a holding period of anywhere from 18 months to seven years before you’re able to recoup your investment.

In that scenario, owning a rental property or flipping homes could begin to look more attractive because there’s a more immediate payoff. Factoring in the holding period is important if you have a pressing need for sustainable cash flow outside your existing investments.

With crowdfunding deals that are structured as debt or loans, investors receive returns for loaning the owner/ developer money.

FinLaw: Who will buy your company’s stock?

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By Scott Andersen, Reprinted from CrowdFundBeat

There is a maxim used by securities professionals that “stocks are sold, not bought.” This maxim summarizes the view that for a securities offering to be successful, it needs a broker-dealer to solicit and recommend the offering to prospective investors.

Now with the JOBS Act and companies selling securities directly to investors through general solicitation (advertising), the question is raised: who will buy your company’s stock? Moving away from a broker-dealer to reliance on advertising alone requires careful planning for an offering to be successful. This is difficult for a company that has not raised capital before. For one, there may be no securities professionals involved in structuring the offering, or marketing or selling it. Other professionals, such as attorneys, may recommend a Reg A offering but are not retained to provide guidance on how to market a successful offering. Failure means a blow to a company’s reputation and coffers; simply wasted money.

To raise capital under Rule 506(c) or Reg A, a company must plan carefully its marketing campaign, including how it will attract interest in its securities offering, how it will draw visitors to its website hosting the offering, and why it is likely that an investor will press the “invest now” button and invest? The company is driving the ship here, and must take responsibility for the offering to be successful. If the company lacks the experience or confidence to do so, it should hire a broker-dealer to solicit the offering as this will increase its odds of success. Broker-dealers have existing relationships with investors whom they can solicit and can provide advice on the terms of the offering. A company initiating a marketing campaign needs to find ways to introduce itself to the public and network to and develop relationships with prospective investors. The marketing should not be limited to creating a website and video and then expecting investors to come find the company as this alone generally will not work.

A few things to consider:

While a company may view its securities offering as great and a no brainer, others including prospective investors may not necessarily see it the same way. A company needs to market the offering, and in a manner compliant with securities laws.

Who is the targeted audience? Customers of a company and true believers are an ideal target audience. If not them, who? And what is the marketing strategy for reaching them?

Is a Reg A the right type of securities offering? Maybe a Reg D or Title III make more sense initially, especially if this is the first time a company is raising capital. In this way, a company pays lower legal fees while having an opportunity to test its online marketing strategy, the offering is ready to launch faster, and with Title III, a company can tap into a funding portal’s network of investors.

The minimum offering should both help a company take the next step in growing its business and be low enough that it is realistic for the company to successfully raise this amount.

A securities offering is not a race, and speed is a lot less important than success. Careful planning of a company’s marketing strategy is essential, and the company should obtain the help it needs to be effective, persuasive and compliant.

The key goal for any securities offering is to be successful. Without a proper marketing strategy, how can any company expect to attract visitors to a website to invest? Without a proper marketing strategy, the answer to the question of who will buy your company’s stock is clear: possibly no one.

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About: Scott Andersen
Scott is principal at finLawyer.com and General Counsel of FundAmerica. He was most recently the Deputy Regional Chief Counsel at FINRA, and prior to that was the Enforcement Director at FINRA and the NYSE, Co-Chief of the Securities Prosecutions Unit of the NY Attorney General’s office, and Asst. Attorney General for the State of NY. He concentrates his practice on securities law and regulatory defense.

The information in this article is provided for general informational purposes only and is not intended to be legal advice. The issues discussed include complicated areas of law and legal advice should be obtained from a securities attorney about your specific circumstances.

Improving Legal Documents in Crowdfunding: Get Rid of the State Legends!

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By Mark Roderick, crowdfunding attorney with Flaster/Greenberg PC.

I see lots of offering documents like this, with pages of state “legends.” The good news is that in Crowdfunding offerings – Title II (Rule 506(c)), Title III (Regulation Crowdfunding), and Title IV (Regulation A) – you can and should get rid of them.

The legal case is pretty simple:

Before 1996, states were allowed to regulate private offerings. Every state allowed exemptions, but these exemptions often required legends, differing from state to state. The National Securities Market Improvement Act of 1996 added section 18 to the Securities Act of 1933. Section 18 provides that no state shall “impose any conditions upon the use of. . . .any offering document that is prepared by or on behalf of the issuer. . . .” in connection with the sale of “covered securities.” The securities sold under Title II, Title III, and Title IV are all “covered securities.” Hence, section 18 prohibits states from imposing any conditions regarding the issuer’s offering documents, including a condition that requires the use of a state legend.

If the capitalized legends just take up space, why not include them anyway just to be safe? Take Pennsylvania’s legend as an example:

These securities have not been registered under the Pennsylvania Securities Act of 1972 in reliance upon an exemption therefrom. any sale made pursuant to such exemption is voidable by a Pennsylvania purchaser within two business days from the date of receipt by the issuer of his or her written binding contract of purchase or, in the case of a transaction in which there is not a written binding contract of purchase, within two business days after he or she makes the initial payment for the shares being offered.

If you include the Pennsylvania legend “just to be safe,” you’ve given Pennsylvania investors a right of rescission they wouldn’t have had otherwise!

Two qualifications.

First, the North American Securities Administrators Association –the trade group of state securities regulators – suggests including uniform legend on offering documents. I include this or something similar as a matter of course:

IN MAKING AN INVESTMENT DECISION INVESTORS MUST RELY ON THEIR OWN EXAMINATION OF THE COMPANY AND THE TERMS OF THE OFFERING, INCLUDING THE MERITS AND RISKS INVOLVED. THESE SECURITIES HAVE NOT BEEN RECOMMENDED BY ANY FEDERAL OR STATE SECURITIES COMMISSION OR REGULATORY AUTHORITY. FURTHERMORE, THE FOREGOING AUTHORITIES HAVE NOT CONFIRMED THE ACCURACY OR DETERMINED THE ADEQUACY OF THIS DOCUMENT. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. THESE SECURITIES ARE SUBJECT TO RESTRICTIONS ON TRANSFERABILITY AND RESALE AND MAY NOT BE TRANSFERRED OR RESOLD EXCEPT AS PERMITTED UNDER THE ACT, AND THE APPLICABLE STATE SECURITIES LAWS, PURSUANT TO REGISTRATION OR EXEMPTION THEREFROM. INVESTORS SHOULD BE AWARE THAT THEY WILL BE REQUIRED TO BEAR THE FINANCIAL RISKS OF THIS INVESTMENT FOR AN INDEFINITE PERIOD OF TIME.

Second, some states, including Florida, require a legend to appear on the face of the offering document to avoid broker-dealer registration. Because Section 18 of the Securities Act doesn’t prohibit states from regulating broker-dealers, some lawyers recommend including those legends, while others believe those requirements are an improper “back door” way for states to avoid the Federal rule. I come out in the latter camp, but opinions differ.

Markley S. Roderick concentrates his practice on the representation of entrepreneurs and their businesses. He represents companies across a wide range of industries, including technology, real estate, and healthcare.