What is the JOBS Act?
The JOBS Act, or the Jumpstart Our Business Startups Act, is a law that was passed in 2012. It is one of the most significant updates to security regulations since Sarbanes-Oxley in 2002. It promotes the funding of small businesses by relaxing many of the securities regulations.
Title III in particular, commonly referred to as the CROWDFUND Act or the Capital Raising Online While Deferring Fraud and Unethical Non-Disclosure Act, has been creating a lot of buzz. It allows companies to use crowdfunding to issue securities, which previously was not allowed. In other words, startups could legally raise small amounts of money (funding) from a large pool of non-accredited investors. Proponents believed that crowdfunding would revolutionize startup investing, since people who don’t have access to VCs or angel investors could now tap into a new pool of capital. As a result, raising equity would become easier, cheaper, and faster. Critics argued that crowdfunding would lead to a bubble and crash (à la the dot-com bubble of the 1990s) and / or would fuel rampant fraud due to laxer restrictions.
What Did the JOBS Act Change?
Prior to the JOBS Act, only accredited investors could make an investment. Accredited investors were people who met one or more of the following requirements:
- An annual income of $200,000 or more
- Net worth exceeding $1 million
- Status as a general partner, executive officer, or director for the issuer of unregistered securities
- Job as a broker or investment advisor
- Sufficient education or job experience that demonstrated knowledge of unregistered securities
An entity could also be considered accredited if it met the following requirements:
- Assets exceeding $5 million
- Equity owners who are themselves accredited
With the JOBS Act, these high barriers to entry were lowered, enabling most anybody to be an investor in private transactions without having to meet stringent criteria or without having the right connections.
How Does the JOBS Act Drive CRE Growth?
Before the JOBS Act, commercial real estate sponsors were limited to soliciting funding from primarily their family and friends. A capital raise would typically involve mass emailing your family and friends to ask for money. Most new connections would be made via networking events.
Crowdfunding in commercial real estate has opened up a global marketplace of potential investors. Further, for the first time ever, sponsors are now allowed to market to this pool (commonly referred to as ‘general solicitation’). Now, capital raises can include posting ads online or in newspapers, promoting on social media, or even plastering on the side of your car. And instead of $50,000, investors only need as little as $5,000 to tap into this potentially profitable asset class – the 4th largest in the US. As a frame of reference as to the size of this industry, the commercial real estate crowdfunding market is currently projected to be valued at over $300 billion by 2025.
Further, with technology, sponsors can now raise capital faster than ever before with features such as a built-in CRM specific to commercial real estate, “invite to invest” options, and deal document distribution. Additionally, sponsors can more effectively manage investors and continue to build meaningful relationships.
To learn more about how new regulations have enabled technology to streamline the capital raise and investor management processes, watch the free on demand webinar: The Full-Stack Capital Raise: Technology, Regulation, and Opportunity