In mid-June of 2015, the SEC finally implemented part of its long promised reform rules, called regulation A+. Many in the real estate crowdfunding press predicted this would be a momentous event, because it would allow nonaccredited investors to invest for the first time.

 

However, once again, the SEC has disappointed the optimists, and created regulations that are too crippled to be useful to the industry. Most sites say they will not be able to use it to open up to nonaccredited investors, leaving them "out of luck" again.

 

A Brief History of Reform: Good Intentions / Questionable Results

 

Back in the darkest days of the Great Recession, the US was in bad shape. Unemployment was sky high, businesses and consumers were terrified and Congress was desperate to stop the bleeding. So it passed the 2012 JOBS act, to make it easier for companies to raise money. Since small companies are the engine of the economy, the reforms would create a lot of jobs and restart the broken engine. The press breathlessly anticipated the start of a new golden age for entrepreneurs and for crowdfunding.

 

Unfortunately, as of July 2015, everyone holding their breath has since turned blue and fallen unconscious to the floor. The SEC (Securities and Exchange Commission) was supposed to implement the rules, but has only implemented a small part of what they were tasked to do. Many critics, such as Samuel Guzik, have said that what they have implemented and/or proposed is also critically flawed and useless to the people it's supposed to help. 

 

So when the SEC said that it would implement part of the reform this June (Regulation A+), some were skeptical; even when the real estate crowdfunding press once again rejoiced. Right now, most real estate crowdfunding sites limit themselves to accredited investors. But regulation A+ would allow any investor to participate. Pundits (such as CrowdfundingInsider, Realtor Magazine and others) predicted a tsunami of investor interest and an explosion of the industry. 

 

So now that it's finally here, what's the verdict? Most marketplace sites have found too many problems with it, to allow them to open up to the average accredited investor.

 

Too expensive and too long

 

Ian Formigle, VP of Investments, at Crowd Street, cited unexpected problems with cost and time. "in my opinion, Regulation A+ is not the silver bullet our segment of the industry was hoping it might deliver. At a cost of $100k+ and 3+ months to complete, I don't see it being an appropriate tool for many of our sponsors, particularly if the objective is to raise single asset capital." Steve Drew, VP of Product and Marketing, added: "We don't have any immediate plans to utilize it".

 

Unworkably low maximums

 

Amy Wan, legal counsel of Patch of Land, mentioned issues with investment maximums that make it unworkable. "Once we hit $50M, we're maxed out. We've been advised that the limit is applied toward the parent company, so we really can't just file another reg A+ every time an SPV hits the 50M max. So really it'd only be a short term solution for us that would last a couple months at tops." (Wan also wrote an in-depth analysis of the issues of the reform here.).

 

No help with fundraising

 

Kendall Davis, Investor Relations at Fundrise, mentioned the difficulty of raising money in the current environment. "So far, we've done three public offerings, but the regulatory environment had made it incredibly difficult for us to do these at scale."

 

Fundrise is in a wait and see mode and hoping for further reform: "We are monitoring the Reg A+ developments closely to see what they might mean for Fundrise in the future. Expanding access to real estate so that anyone can invest is our core mission."

 

"Should we stay or should we go?"

 

Peer Realty, was the only site I interviewed who held open the possibility of perhaps using the reform in its current state. But even they were noncommittal. Daniel Kelly, Head of Marketing ,said "we are considering potential Reg. A+ offerings, but haven't yet made any final decision."

 

Conclusion

 

Regulation A+ will be useful to some companies looking to raise money, as well as some non-real estate crowdfunding marketplaces. However, the sites are saying it will not allow the average investor to participate in real estate crowdfunding, and will not produce the tsunami of change that many were predicting.

 

Hopefully, the SEC will get it's act together and produce more workable reform in the future. However, based on past performance, this is not likely to happen easily or quickly.

 

Related links:

 

• June 2015:

  • Patch of Land announces bankruptcy remote protection and investor collateral
     

    • Response to the above article from Patch of Land
      ​

• July 2015:

   

  • SEC finally implements regulation A+ reform rules. But limitations cripple use by sites.
     

  • FundRise announces first "diversified fund". But limitations hamper effectiveness.
     

  • Exclusive peek into a $500,000+ portfolio: Part 1
     

    • ​Exclusive peek into a $500,000+ portfolio: Part 2
      

• All news and interviews