New Crowdfunding Rules for Non-Accredited Investors
Overview
Attorney Mauricio Rauld updates us on the new crowdfunding rules issued by the SEC.
Finally, the doors are opening for non-accredited real estate investors to get in on private equity opportunities.
While this is very exciting news, purveyors of private placements need to know the
rules…or risk running afoul of the regulators.
Bringing you the oh-so important information about the new crowdfunding rules:
- Your regulated host, Robert Helms
- His irregular co-host, Russell Gray
- Syndication attorney and regular contributor, Mauricio Rauld
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(Show Transcript)
Welcome
Robert: Welcome to The Real Estate Guys Radio Program. Thanks for tuning into the show. I’m Robert Helms your host along with our co-host financial strategist, Russell Gray.
Russ: Hey, Robert.
Robert: It is the most wonderful time of the year.
Russ: Yes it is.
Robert: We are rounding down the year 2015 and off to the New Year, which we’re always excited about.
Russ: I don’t know man. After Thanksgiving, I think I’m kind of rounding out.
Robert: Definitely. Round is a shape, and I’m definitely in shape. In fact, our real estate trivia question, not jumping too far ahead, has something to do with that very topic, and it’s related to real estate if you can believe that.
Basic Crowdfunding Definition
Robert: We’ve got a lot to talk about today. There has just been some news at the very end of October about the SEC finally adopting the new rules for the part of crowdfunding, Title III of crowdfunding, that allows little guys and gals to invest in all kinds of new stuff. Just to bring everyone up to speed, no investor left behind, let’s talk about crowdfunding.
Russ: The basic concept is … it’s really more of a technology platform than anything else … but the basic notion is that you can raise money from the crowd, hence the name crowdfunding. Brilliant name. It really supposes that you have a crowd. So, the first order of business is to have a crowd. A lot of people are throwing these things up there just thinking, “hey, if we put it up there people will come”. But there’s rules involved. There’s always been rules involved in raising money.
How The SEC Is Involved
Russ: Before technology ever came into existence in the space, it was really just a matter of making sure that investments were suitable, if you will. They had to put that responsibility on somebody. So, if you wanted to go put money in somebody’s safekeeping and someone was going to turn a business into doing that, they called that a bank, and that was regulated. If you wanted to be in the insurance business and you wanted to pool money and then go out there and cover people for risks, that was a financial business covered under insurance laws.
If you wanted to go out there and raise money and then invest it on other people’s behalf, that was regulated by the Securities and Exchange Commission and laws regulated the rules by which you could do that. And most of them were that you could only do business with people you knew. You had to have a preexisting relationship. There had to be some basis. You just couldn’t go raise money from a bunch of strangers. It was designed, presumably, to protect people from guys just going out there and hustling, just conning people. Of course, it didn’t stop people from doing that because like with most laws, criminals don’t obey them. They just do what they want to do, but at least if you get caught doing something like that, the legal system has grounds to come in and shut you down.
In the Jobs Act a few years back, which was a fancy acronym for creating jobs, the government decided that it would be a good idea, because the banks and credit had basically seized up in the financial crisis, to loosen things up so that the money would be able to flow more quickly from people who had it to people who could put it to work. Inside of this legislation, there was a lot of different stuff, but there was a component of it that was going to open it up to where you could raise money from people that you did not have a preexisting relationship with, and they divided those groups of people into two categories.
Accredited vs. Non-Accredited Investors
One was accredited investors who have always been treated differently. That basically is if you have a million dollar net worth, make $200,000 a year as an individual or over $300,000 a year as a couple. And, that’s consistent. Meaning, it’s happened for the last couple of years and you have reasonable expectancy of doing it in the upcoming year. Then, you’re qualified as accredited under the law. That means that if I’m out there and I’m a purveyor of some type of an investment opportunity, I can run and ad and stick you in a room and pitch you my deal. If you say yes, you could put the money in and now I’m compliant with the law. That was a big, big game changer. We’ve written a report on that. We’ve been talking about that for quite a while.
Robert: We’ve covered conferences of crowdfunding, and there’s been anticipation of this whole thing. Let’s step back for a minute. Crowdfunding started as non-economic participation model. Meaning, there were crowdfunding sites like Kickstarter, which is probably the best known one. But, there are several of them where an independent rock band or an artist can go out and raise money for their next show or recording or whatever it is, and individuals could put that money up, typically via websites and get something in return that was non-monetary. I couldn’t get a return on my investment, but I could a tee shirt from the band or an autographed CD. So, crowdfunding has been around even longer than the Jobs Act. The idea of saying well what if I put up money and wanted a return. That all of a sudden becomes a security and is regulated by the SEC.
Russ: It depends on if it becomes a security. Because there’s the equity side and there’s debt side like peer-to-peer lending platforms like Prosper and there’s a couple of other ones out there like that. These are platforms where people say, I want to borrow some money and so you can invest in my debt. You’re going to loan me some money and I’m go do whatever I’m going to do with it and then I pay you back. That was kind of the next level.
Where these Securities and Exchange Laws really come in to play are in the equity side. When you’re going to be an owner in the company or you’re going to be an owner in the entity if you will. That’s where they had divided people up to accredited, presumably you were sophisticated and could afford the risk and then non-accredited meant that you were underneath that million-dollar net worth threshold or you were underneath that $200,000 or $300,000 earning threshold.
Robert: Which most people are, by the way.
Russ: Which most people are, that’s where the bulk of people are. Those people have had to go into the publicly traded securities arenas, buy stocks, bonds …
Robert: Much safer. 😉
New Crowdfunding Rules Finally Being Implemented
Russ: Yeah, whatever. We could go off on that. The point is, these types of investments were really for insiders and they weren’t available for the little guy to get involved in. This latest iteration of the Jobs Act which is really … the way it works is Congress passes a law. It’s a statute. Then, they turn it over to the bureaucrats, the people that have to actually implement the law, and they create what are called regulations. In this particular case, this was a law called the Jobs Act that created a statute that made this permissible.
Robert: More than two years ago.
Russ: According to Congress, and then it got turned over to the SEC whose job it was to create the regulations that everybody would use to follow that. The first set of regulations they came out with was in September 2013 about how you could do this for accredited investors. The latest and greatest now here we are in late 2015 is that now the regulations have come out so how does the game get played when you’re going to make an offering to non-accredited investors, which arguably is a lot bigger market so we’re going to find out about that today.
Robert: Absolutely. It’s good news, but it also is brand new. So, when the first part of this came out and accredited investors could not be prospected by these various folks raising money, we call them promoters or syndicators, someone who is looking to raise capital from somebody, it opened up this new world of opportunity.
We have a report on that and it’s been a big topic of conversation in Real Estate Guys circles. To get your copy of the report, just send an email to [email protected] or you can visit the special reports section in our resource center at realestateguysradio.com.
New Crowdfunding Rules Mean New Opportunities … But Few Precedents Set
The big change now is the fact that there are a lot more rules, and there are companies that have been in position for this to happen for months and months and months and in fact years. Finally, we’re going to see where it all lays. Even though we had, since 2013 all the regulations for the accredited investors, as you probably heard on our Halloween horror stories episode, attorney Mauricio Rauld recounted the fact that one of his clients who used these exact rules and went out and prospected and got people in a room got contacted by the state saying, “hey, there’s been a complaint”. My point in that is even though it becomes law, it doesn’t mean that it’s evident yet.
Russ: In real estate circles the term LLC, the concept of an entity called the limited liability company has just been kicking around for a long time. It’s pretty ubiquitous. Everybody knows about it. Most people use it. The LLCs didn’t exist in the ’90s, right?
Robert: Right.
Russ: It was like the late ’90s, like ’97 or something LLCs really started to come out. The problem was a lot of attorneys back in the beginning were not willing to recommend it. They still recommended corporations or trusts. Why? Because there was a whole lot more established case law. Somebody has got to be the pioneer. Somebody has got to go out and take new law and then try it out and then figure out how the courts are really going to interpret it when there becomes a conflict. That’s because the way our system of law is, it isn’t so much what the law says, it’s really what the law intended. That leaves some room for interpretation and that’s where a lot of people get hung up.
When you go to your attorney and you’re asking them for legal advice, it’s harder for them to give it to you because they don’t have court precedents to look at. As this progresses and the pioneers go out and pave the way, what will happen is more and more of this will become more clear. In fact, one of the reasons we think that we’ve gotten these regulations finally from the SEC for the non-accredited, which is arguably the little guy they’re trying harder to protect than the big guy, is because they rolled out the regulations with the big guys a couple of years ago, and they really have had very few problems. Because of that, they presumably feel safer, “hey, let’s go ahead and roll it out for the little guys now too”. Or maybe it just takes two extra years to write those few extra lines of regulations. I don’t know.
Our Guest On This Episode, Attorney Mauricio Rauld
Robert: That could be as well. Our guest today is attorney Mauricio Rauld, he’s a practicing attorney licensed in California but he does a lot of consultation with folks who are raising capital. In fact, he’s one of our featured speakers at our syndication events. When we come back, Mauricio will fill us in on the latest with crowd funding today on the Real Estate Guys Radio Program.
Welcome back to the Real Estate Guys Radio Program. We’re talking today about the new changes in the ability to raise capital through crowd funding. Joining us now, our good friend and attorney Mauricio Rauld. How are you sir?
Mauricio: I’m doing great Robert, thanks for having be back!
A Brief History On Jobs Act and Accredited vs. Non-Accredited
Robert: Well, absolutely. I’ve been waiting to do this show until the rules were finally set. For listeners that didn’t hear the show, probably our first one was a couple of years ago when this was announced, that all of a sudden the rules are changing in terms the ability to raise money and there were a couple of different ways to go about crowdfunding. But of course like anything that is actually law, it has taken a long time for the government to finally give us what the rules are. So, paint the picture of that. Where are we in the process of feeling like we know what’s happening?
Mauricio: Yeah, I feel like we’ve been talking about this forever. This started, just to kind of take a step back, this started back in April 2012. We’ve been talking about this for almost three-and-a-half years. This is the infamous Jobs Act. In that act, essentially there was two new ways of raising capital. One was allowing people to advertise and generally solicit the syndication that you were doing.
Robert: Which is a big one because previously you couldn’t do that. You couldn’t have any public display. You couldn’t go out and advertise, promote. You couldn’t put ads in the paper. You couldn’t do any of that in a private placement.
Mauricio: Absolutely. That was one of the big restrictions that we had and so that lifting of that ban was a huge, huge new rule for us investors. The only caveat with that of course, was that you had to limit your investors to accredited investors only, and you had to take some reasonable steps to verify that they were accredited. That was good. That took a couple of years to implement, not so much two years. It’s been in the books for a couple of years but this new one with the crowdfunding sort of addresses that gap which even though now you can advertise and solicit to accredited investors, you still can’t do for non-accredited investors and this law was meant to address that gap.
Robert: Accreditation, no investor left behind. Most of the folks listening understand that but if you don’t, it just means that there is a financial requirement for you to be able to invest. Accredited rules change all the time, but it has to do with how much income a person makes and what their net worth is. And you can find that out by Googling around.
Mauricio: I’ll tell you real quick because it does apply somewhat to what we’re going to talk about. Accredited investors, if you make over $200,000 a year for the last couple of years then you’re accredited. Or, if you have over a million dollars in net worth exclusive of your personal residence.
Robert: Okay, that’s the rule. Again, these things do change so make sure, depending on when you listen to this, that that’s still the rule. But the idea is, if I’ve earned that much money or I make that much money, the government feels that I’ve earned the right to make my own investment decisions. If I’m not accredited and I haven’t amassed a net worth of a million dollars separate from my house, and I don’t make $200,000 a year, obviously I can’t make my own financial decision, I need some help. To protect the folks out there from being fleeced by these promoters, these are the rules. Like it or not, doesn’t matter. The reality is I could make the argument that you could be a lot more fleeced in the stock market or in bonds or in whatever other pyramid scheme the government has going on, but it doesn’t matter. These are the rules. The thinking behind it, the more sophisticated an investor is, probably has some parallel to how much money they have made or make.
Mauricio: There’s a lot of controversy as to whether that’s a good measuring stick, but that’s exactly right. If you’re non-accredited, the law assumes you’re not sophisticated, and therefore, you have a requirement to provide additional disclosures to these investors, because again, they assume they’re not quite sophisticated.
The New Crowdfunding Rules For Non-Accredited Investors Are Finally Here
Robert: We knew kind of what the framework of this looked like but the actual law hadn’t been written. We didn’t have the concrete parameters we could go after and it’s my understanding that we now do.
Mauricio: We do, it actually happened October 30th, so on Halloween or just before Halloween. Again, it’s been three-and-a-half years in the making, because even though the laws are passed three-and-a-half years ago, they require that the Securities and Exchange Commission, the SEC actually make some rules. The law is a little bit broad, a little bit vague, and now somebody had to go and actually make the specific rules. We didn’t think it was going to take three-and-a-half years. They were actually mandated to do it within six months but they obviously didn’t listen, and it took a while.
Robert: It took longer, the government took longer, that’s amazing.
Mauricio: Amazing, right?
Robert: All right, now the good news is we have these rules. Now this doesn’t mean, those of you raising money for real estate projects that you can go out and assault people to invest. There are still some rules and parameters and the way that this money gets raised has also been dictated. Let’s talk about that.
Mauricio: Yeah, let’s talk about that a little bit. I’m going to talk very general here because the actual rule is 685 pages. It’s got some complexity into it, but I think I’ve sort of narrowed it down to really three important points that I want to discuss.
You Have To Use An Intermediary (Portal)
The first one is that you are, like you mentioned, you can’t just go out and start raising money on your own. You have to use what is called an intermediary, which essentially is a website. They call it a portal that is approved by the SEC.
Robert: We’ve already seen these kinds of websites out there and of course, there have been websites for traditional crowdfunding, which isn’t economically based, if I’m going to put some money in to support my friend’s independent film or recording project or whatever. But now the idea is it’s not necessarily vetted or sanctioned but the website is. This portal, this particular venue to accumulate these types of investors as well as these types of projects.
Mauricio: They’re going to be vetted pretty heavily by the SEC. You’re going to have financial disclosures. They’re going to have to show that you’re able to do this. You’re not allowed to go set it up on your own. It’s not like the other crowdfunding that we’ve heard about now with the accredited investors that we just talked about where you could set up your own website and advertise your deal. Here, you have to go through this portal, and all you can do really is point to the portal. In your advertising, you can say I’ve got a deal, it’s in this particular portal, go check it out over there and then the investor would have to go the portal, open up an account with them and then go through the process.
Robert: The point is these portals, and again, anticipating this law being finalized, these have been in the works for years. The idea is there’s two memberships bases of this. There’s the membership of the individual investors who want to see deals and then there’s the promoters, the syndicators that have deals to put up there, and both sides have to become vetted if you will from the portal.
Mauricio: Right. The portal is going to have all kinds of education material, obviously information about the syndication itself, which is most likely going to be provided by the sponsor. But the investor is going to have a lot of information available to them prior to making their investment decision.
The Parameters Of The Investment
Robert: Let’s talk about the parameters of an investment, because these are non-accredited investors, there are also rules about how much they can invest.
Mauricio: There are actually two main rules. One is the amount of money that you as the sponsor can raise through these portals.
Robert: Okay, if I’m out there doing a real estate deal and I want to raise money, I’ve got a maximum.
Mauricio: Your maximum is one million dollars for any 12-month period.
Robert: Okay, so I can do two deals at $500,00 each?
Mauricio: You can do two deals at $500,000 each, it’s an aggregate amount of how much money you raise over that 12-month period.
Robert: While we’re on that topic, here’s a quick question. Say I’m raising two million dollars and I have a buddy putting in a million. Can I raise the other million this way or is it just the project can be maximum of a million dollars?
Mauricio: There’s nothing that prevents you from still raising money sort of in a parallel course where you can raise a million dollars from this new … I’m going to call it regulated crowdfunding because that’s what the SEC is calling it. The regulated crowdfunding you can raise a million dollars but that doesn’t prevent you if you can find another exemption. You can raise another million or five million or ten million through another existing exemption to registration. But the one that relies on this particular law, limits you to a million dollars through this process.
Robert: What about the investor’s side? What’s their limitation?
Mauricio: It depends on how much money they make or how much net worth they have. It’s a little bit different than the accredited investors. The cut off is essentially $100,000. If your earn $100,000 or less or you have net worth of $100,000 or less, you’re limited to either $2,000 or 5% of the lowest of those two numbers. I’ll let you do the math, but that’s the restriction. I think most people will fit into that $2,000 number based on those numbers but that’s limitation number one.
Now, there are scenarios where you really could be an accredited investor for example. You could be a doctor or a lawyer making $200,000 a year but because of student loans, because of whatever other decisions you’ve made, your net worth might be $80,000. Even though you’re an accredited investor, you’re going to be limited to 5% of that $80,000 because that’s your lower amount.
Robert: Using a portal. You wouldn’t have that same limitation if you were just investing as a doctor or a lawyer that had good income but lower net worth.
Mauricio: That’s correct, using the portal, which again goes back to my prior point that if you have accredited investors, you may be able to rely on another exemption in order to raise additional funds and not really be part of this one million dollar traunch, let’s call it.
Robert: Let’s say this $2,000 number if that’s the amount, is that again per deal or per year?
Mauricio: It’s aggregate through the 12 months. You can invest up to $2,000 across the board, ten different deals at I guess, $200.
Robert: All right, $2,000 for the investor, a million dollars for the promoter. As you can tell, this is why The Real Estate Guys have not held this out as the end all, be all for syndication. Because most of the deals people eventually do are going to be bigger than that, and frankly, having done this for a long time raising capital, raising $2,000 from a person, that might be most the expensive money you ever took in terms of their sophistication, the questions they have, dealing with communication, all that. I would much rather have ten guys at $100,000 than a hundred guys at a couple thousand.
Mauricio: That’s one of the big challenges. You end up, if you’re going to raise half a million or a million dollars, you end up with 100 people or 150 investors that you have to now regularly communicate with and if things aren’t great, they’re going to have more people that are upset. But let’s not forget what happens if you have more than $100,000 in income or a net worth in excess of $100,00 …
Robert: But not yet accredited.
Mauricio: But not yet accredited. Then, your limitation is 10% of either your net worth or your income, whatever is lowest with and the big caveat of a cap, a complete cap of $100,000. If you’re an investor who has 10 million dollars in net worth and makes 5 million dollars a year, you’re not going to be able to invest $500,000. Your cap is going to be $100,000 for a 12-month period.
Deals That May Make Sense
Robert: Let’s talk about the kind of deals that make sense for this. Obviously, if I’m raising money to go buy a $60,000 house that’s a rental property, this might work perfect well for that. I’ll be able to stay within my limit. I could do 10 of those a year and still be within my limit. I took ten investors with a $1,000, $1,500, or $2,000 and that could be a great way to play. This definitely serves a need. It’s just not the right tool for everybody.
Mauricio: It’s also great I think if you’re raising money for a lending facility. If you’re trying to raise money that then in turn loans money, you can give yourself sort of a consistent rate of return. I think this also fits in part of your overall strategy. Again, this limitation is just for this particular exemption. Again, you could raise … Let’s say you’re doing a deal that you need 2.5 million dollars, a million of it can come from this regulated crowdfunding and then the other 1.5 million can be done through our traditional raises that we’re doing today either with accredited investors only through the preexisting relationships.
Robert: All right, good stuff. We’re talking with Mauricio Rauld about the new crowdfunding rules and requirements. We’ll continue our discussion when we come back plus we’ll play real estate trivia next. You’re tuned to the Real Estate Guys Radio Program. I’m you’re host, Robert Helms.
Syndicator, Sponsor, Promoter … Issuer Requirements
Robert: We’re talking about the new crowdfunding rules, specifically Title III crowdfunding, which is the new part that we’ve just finally gotten some clarity on, which is going to non-accredited investors through a portal and raising a smaller amount towards a smaller amount but still a lot of tools here.
We use the vernacular, Mauricio of the person who is doing the deal as the syndicator, or sometimes we call that person the sponsor or the promoter. In the regulations, they’re referring to this person as an issuer?
Mauricio: Right, that’s the legal term is an issuer, the person who is issuing or the company that is issuing the security.
Robert: Let’s talk about the issuer. What requirements do they have? If I’m doing a deal and I want to go to one of these portals and say, hey put my deal up, what does that look like?
Mauricio: It also depends on how much how money they’re raising. They’re really focusing on these limitations. It depends on how much you’re raising. If you’re raising less than $100,000 in your syndication, then all you need is a statement from your chief financial officer saying here are my financials. And basically the CFO gets to provide them, and you’re good.
If you’re raising between $100,000 and $500,000, then you have to have your financials reviewed by an independent CPA. If you are raising more than $500,000, then you are going to need audited financials.
Robert: Which are also expensive to get. Getting a CPA to take a look, that’s going to cost you something. Audited financials are a whole can of worms.
Mauricio: It’s a whole new can of worms and it’s usually a little bit pricey depending on how big your company is and how much … but your CPA literally goes through every single line item and requests receipts. If you said it was a dollar, they confirm it’s a dollar. There’s some expense there.
Then there are some general annual reporting requirements that the issuer needs to make every year just letting them know how the project is going and updating their financial information.
Robert: Which is good practice anyway, right? What we tend to do when we raise money for a project is we do either a quarterly report or it could be a monthly report if it’s a very fast moving deal. It could just be an annual report if it’s like a long-term land bank. But you’re going to report anyway, so it makes sense that that’s there. Is there any scrutiny on the financials of the person involved. Not just to say my company is a company raising money to buy rental houses. But what about me, my credit, my past history, that kind of stuff?
Mauricio: This is all dependent on the company that you’re issuing. A lot of times a company already exists. If your Microsoft and you want to go raise another 10 billion dollars or something. It’s an existing company, you’re already a startup. That’s one type of issuer that would require financials.
Then there are others where you literally start a brand new company. It’s a real estate deal. It’s a deal specific thing. In those situations, there really aren’t any financials to provide because it’s a brand new company. As long as it’s not a way for you to get around the financial requirements, you don’t just create a shell company to avoid your real company. But if it’s truly a new company, then there really aren’t any financials to provide.
Finally, there’s going to be some disclosure requirements that the issuer is going to have to make about their deal, which nobody should be surprised about. That’s what we do today. The difference is that the level of disclosure is not going to be anywhere near the type of disclosures we make now through private placement memorandums.
Robert: That’s an important point. If I’m raising money through a portal, that means I don’t have to complete a full private placement memorandum?
Mauricio: Right, you still have to make disclosures but they’re not going to be to the level of the disclosures that we typically make in a PPM, which are essentially the same disclosures you make if you’re going to register your security which are very detailed.
Due Diligence For The Portals And The Investors
Robert: I think about this from the investor’s point of view. They’re going to want to know the deal. You’re going to have what we may call an executive summary. Here’s the deal, here’s the parameters, here’s the market, here’s the property, here’s our best guesses about cost, or here’s the existing cost, all that stuff. Then you’re going to have these disclosures which say, “hey, you can lose money in real estate and here are some of the risks,” and those kinds of things. Are those disclosures and that executive summary, those are reviewed by the portal too to make sure they pass muster?
Mauricio: Yeah, these are things we don’t know yet because obviously these portals haven’t even been created yet. Yes, I’m going to imagine that the portal is going to want to review and vet the deal themselves just from an exposure and liability standpoint. They’re going to want to make sure this is not a fraudulent deal. I’m not sure how in depth and detailed they’re going to review it, but they are going to have a review process and you’re going to have to convince a portal that your deal is good enough and legitimate enough to be on their site.
Robert: I guess as an investor, I’m going to choose a portal that I feel comfortable is doing that work for me, but I also am going to have my own level of due diligence. Let’s take it from that point of view. Say you have an investor who is a client and they go, Mauricio I’m looking at putting $2,000 into this particular deal. Is there a reason or a place for my counsel to review a deal before I invest like it would typically be or do you get the feeling that, hey the portals handle all that?
Mauricio: No, I wouldn’t rely on the portals. It’s not clear what level of scrutiny the portals are going to do but if a client comes to me and wants me to review the deal, I’m going to go through the disclosures and any information that’s been provided the client and point out whatever deficiencies or red flags that I see. I wouldn’t necessarily rely on the portal. I’m not sure you’re going to be entitled to rely on the portal. I would do your own due diligence if I was the investor investing the money.
Still More To Learn With Portals
Robert: Just looking forward and already talking to a couple of the folks that are putting these portals together, there’s going to be a lot more, right? If you just go and look at any possible URL name that has crowdfunding in it, it’s been taken for years. People have already been anticipating this. I’m going to guess that we’re going to start to see personalities come out of these portals. They’re going to focus on certain niches or even geographies and things like that. It’s going to be incumbent upon the investor to make sure that the kind of deals that they’re interested in are being provided. I’m going to assume that either one side or other, and it’s probably the issuer, is going to pay a fee to the portal, maybe both sides. Any idea about any of that?
Mauricio: I’ve seen some noise about concern that the amount that they’re going to be charging, the portals are going to be charging. Again, we don’t know what they’re going to be charging because they don’t exist yet but it may hinder your ability to raise small amounts. If you’re going to raise $100,000 and your portal is going to charge you 15%, that’s probably going to mess up with your numbers. Again, it’s all speculation. None of the portals exist. In fact, the registration for portal doesn’t begin until the end of January. One thing I should have mentioned at the beginning, even though the good news is that this is now law, there is still a six-month wait period before it becomes effective. This is won’t actually become effective until May 21 I think is the date. May 21 of next year is when you’re actually going to be legally allowed to do this. There is a six-month window that we’ve got to wait still.
Learn More About Regulated Crowdfunding
Robert: All right well between now and then, you’re going to be with us at the Secrets of Successful Syndication in January in Arizona, and I know we’re going to talk more about crowdfunding this time because of that.
Mauricio: We are going to focus a lot of the time this time on crowdfunding because now that it’s final we know what it is and we’ll spend quite a bit of time with it.
Robert: At the last couple of events, you’ve been talking about “hey, it’s coming, it’s coming,” so this is great on that account.
For those of you who are driving or exercising or any of that kind of stuff and you weren’t taking notes, Mauricio has prepared a report. What he’s done is gone through the 600 plus pages and distilled it down. What’s in the report?
Mauricio: The report essentially is a summary of the 685 pages. I’ve kind of tried to translate into English, number one which is very technical. Second of all, I’ve put together a report that essentially gives my top good, bad, and ugly of the new crowdfunding rules, so you can kind of get my thoughts on that. I think what I’m going to do as well because there are a lot of questions about the new rules, I’m going to be holding a Q&A for anybody who is interested, probably an hour sometime at the beginning of next year so that if you’ve got specific questions about it, you can ask me. I encourage you to get the report because that way you can get on my list and I can send you the invite.
Robert: Perfect so that’s how it’s going to work. Before we’re done today, we’ll tell you how you can get your hands on the report and that will also get you alerted when Mauricio does his live Q&A session. If you have specific questions, there’s going to be lots of questions as this thing rolls out, but exciting stuff.
Just to be clear, we’ve been talking about this new part of Title III which allows us to raise money to non-accrediteds for lesser amounts. But for a while already the regulations were out about the accredited places people go. Whether you call them portals or not, there have been some websites, we’ve actually had guests from some of those sites on the program raising money for accrediteds. That already is up and running and it’s a pretty vibrant part of crowdfunding right now.
Mauricio: There was also a lot of confusion. Everybody calls everything crowdfunding but there was a distinction. I was distinguishing it between the little C and the big C, but now I’m going to call the regulated crowdfunding. The crowdfunding that already existed was this, I’m going to get technical, it was the 506C exemption, which allows you to advertise to accredited investors. That’s been going around now for just over two years. It was September of last year. What this is, it’s a separate, completely new exemption that specifically talks about the portals and what we’ve been talking about today. But it is a brand new law that again, technically doesn’t even go into effect until May of next year.
Robert: All right, good stuff. As always, counselor thanks for your great insight and we’ll see you at the Secrets of Successful syndication in January.
Mauricio: Thanks for having me.
Robert: All right. There’s attorney Mauricio Rauld. When we come back, we’ll have more about crowdfunding and it’s potential right here on the Real Estate Guys Radio Program. I’m your host, Robert Helms.
New Crowdfunding Rules Potential, Recap & Analysis
Welcome back to the Real Estate Guys Radio Program heard every weekend on this great radio station, all the time at realestateguysradio.com or your favorite podcast venues. We’re talking today about the changes and finally the final legislation if you will, the rules that we can live by as potential crowdfunders and good stuff from Mauricio.
Russ: I think it’s easy to get lost in the weeds, but that’s why you have advisors. That’s why you engage people who pay attention to these things on a tactical level because ultimately just saying, “I can go do this”. You still need to make sure that whatever you’re planning on doing is strictly compliant. You always want to make sure you have those guys and gals on your team who can help you do that. But conceptually, it’s very exciting because the idea is now we are beginning to take down some of the barriers. You can say what you want, and everybody has an opinion. And I’m certainly one of those people with an opinion about the role of government and what they do and what they don’t do.
In this particular case, government is getting out of the way. It’s not like they’re saying, you can go do something that you weren’t able to do before. Technically, what they’re doing is they’re saying, “we erected a big barrier and now we’re going to lower the barrier so more people can get over it”. But at the end of the day, look at it from whatever perspective you will, the bottom line is it’s a good thing that at least the government is beginning to recognize that we’ve got to get capital flowing.
There are people who just absolutely want to be able to invest with a person that they know or Main Street. There are other people that want to invest with a professional advisor but there’s more and more people that are engaging and building social communities online and this is, I think, a real opportunity especially for the next generation. You and I, Robert are a couple of older guys.
Robert: Speak for yourself, my older co-host friend.
Russ: Ha ha. Yeah. You look at the way the younger generation is just growing up. I have children that were born before there was an internet. I have a couple who can remember before there was an internet. And then I have children who have no concept or memory of life before the internet. The only know a world with the internet in it. They’ve never seen an encyclopedia or a telephone book. They don’t understand what those things are. That’s not where you go to get information. A big part of their social life is online. You watch these guys, they get on Instagram or whatever and they start talking about something and the next thing you know, a month later they’ve got 5,000 people following them. I’m like, gosh it took us forever to get up to 5,000 people following us, but they understand that world.
Competition Will Drive Some Portals To The Top
It’s a natural progression in a social environment for people to share things including opportunities. When people have an opportunity and people have money, the technology, the online world, that community is a natural place for people to do that, and it’s inevitable that at some point again … You know, you could say whether it’s good or bad, but at some point the government is going to get involved beginning to try to regulate some of that. In this case, they’re trying to unleash the power of the online community, the internet, to be able to connect people and get money flowing. I think ultimately it will be a good thing. It’s just going to take some pioneering, and thank God there are people out there that are willing to go out into the wilderness and try something new. I’m really looking forward to seeing how this new innovation progresses.
Robert: Right and keep in mind as Mauricio said, that the big difference, one of the big differences here is that the only way you can, as a promoter, as a syndicator go after the non-accrediteds through crowdfunding is via an approved portal. You can’t just start your own website and raise money or go to Ebay.
Russ: Well, you can, (laughter) but it’s probably not a good idea.
Robert: Okay, you can’t legally. If you want to go to jail …
Russ: I could go out and rob a bank if I want to, but I don’t suppose that’s a good plan.
Robert: Your plan will be to vet these platforms and certain ones will appear. In fact, coming up at the Secrets of Successful Syndication, we’ll have an update on who’s in the game and what’s happening. We don’t have any horse in the race. We aren’t affiliated with any of these platforms. There’s lots of them vying for our attention right now. We thought it best at this point, rather than come up with any kind of recommendation or list, that we just alert you to the fact that this is happening so it gets on your radar. As we go through the next year, we’ll see. A lot of these folks are putting serious intellect and capital behind these platforms, expecting this will be a way that people who haven’t up until now perhaps even investing in real estate, be interested in investing in things like real estate.
Russ: Think about it, if you’re old enough to remember life before amazon.com there were many, many people … My very first internet marketing seminar was about Galaxy Mall. I went and saw the Galaxy Mall presentation. That was the first time I ever heard the word portal and began to understand that there were going to be places online, these virtual places, that people could enter into a whole world of shopping or whatever. Nobody hears about Galaxy Mall today. It’s all Amazon. All of these innovative companies are out there. Somebody is hoping to be the last one or two or three or four people standing. Amazon in online retail is by far and away the dominant force, just like Walmart and Costco are the two dominant forces in retail.
Robert: Depending upon when you’re listening to the archive, they may no longer be true.
Russ: I know, that may not longer be true. But watch the space as we’re going to be watching the space because probably over time, somebody is going to be emerging as the person who is dominant. You have to ask yourself, what is the main value proposition? One of the main value propositions is they’re going to have to be compliant. You’re going to have to make sure that they’ve done a good job vetting the people and following the regulations that they have to follow in terms of their responsibility allowing people to come in and show you what they have to offer.
The other big part of it is they’re going to have to have a crowd. If you put your offering out there and nobody’s got any eyeballs, what good is going to do?
Technology Can Help, But This Is Still A People Business
Robert: This is one of the big common misperceptions and you talked about this early in the show. But, there were a lot of folks two years ago and three years ago when crowdfunding was just starting to stick it’s head up and say, “we may be able to have equity-based crowdfunding,” who thought thank goodness. It’s the end all, be all. I’ll just throw up my property on some website, people will overbid for it and it’s be done. The reality is it’s not about the technology, it’s always about the deal. If you have a deal with a good story and it’s been vetted and it’s been inspected and all that’s been done, then finding the capital now has changed for some folks to be able to go to methodology like crowdfunding. But unless there’s a crowd, there is no deal.
A lot of what these portals have to do is develop that following, that crowd, those people that are going to be looking at, like peer-to-peer lending. There area a lot more people borrowing money than there are lending money on peer-to-peer lending. What’s it going to shape out for crowdfunding? Right now, we’ve already seen what’s happened to accredited. There are several big reputable sites that have the ability for accredited investors to register, be shown deals, and invest. And it’s working pretty well. This is very different because of the level of complexity, I’m guessing the level of deal size is going to be different, probably not as sophisticated of investors getting involved. It’s brand new territory, but it’ll be exciting to watch.
Russ: I think the other thing that you’ve got is just realizing, you know we do a lot of stuff online. Obviously, we appreciate guys … we do our radio show of course, and we put our podcast out there. And we do our email blasts and newsletter blogs and all that. People come out to our live events, and we’re able to meet them and that’s exciting. The number of people that come out to the live event is a small, small percentage of people that actually engage with us or hear our voices or read our stuff online, and that’s always going to be the case. But in terms of our business and the people who end up becoming the most valuable to us and our sponsors, if you will, are going to be the people who come to the live events. You still have to deal with the fact that this is a people business and technology is going to open up the number of people you can communicate with. But you still, on your side, we’re not talking about the crowdfunding side, but you as the individual person out there thinking, “I want to use a crowdfunding platform”, make sure you put some time and thought into how you’re going to handle the customer service side of it and all the interaction you’re going to have with those people as well.
Just getting the money in is only the beginning of the relationship, it isn’t the end. You’ve got a lot of responsibilities once you’ve got an investor into whatever it is that you’re offering to continue to build that relationship. Make sure that you’ve contemplated that and as you’re evaluating different crowdfunding platforms that you might choose to engage with, look at them through the whole thing. How are they bringing people eyeballs in? How are they vetting deals? How are they communicating? What type of added value services are they going to provide you after the fact in terms of supporting your customers and how all that works. There are still a lot of things yet to be developed. Continue to watch the space. We’re going to continue to watch the space, and we’ll bring you more news as we hear it.
Learn How To Raise Money For Bigger Deals
Robert: Crowdfunding is one of the potential ways to raise money for deals. If you’re out of your own cash and credit and want to go raise investor’s equity to do more deals and get bigger faster, come on out to the Secrets of Successful Syndication.
We’ll be in beautiful Phoenix, Arizona the last weekend of January. The only way we can do the event this time of year if it was not a football playoff weekend. It’s the weekend between the last playoffs and the Superbowl. Come on out. Ken McElroy will be there, syndicator extraordinaire and the Rich Dad advisor for real estate investing. Mauricio Rauld who was here on the program today will be out there, and we’ve got a bunch of great, great faculty members and guests. It’s always wonderful, the people that show up to the event, but it won’t be the same without you. Go to the website at realestateguysradio.com and click events to come out to the Secrets of Successful Syndication.
Big thanks to Mauricio for his time and research. If you want a copy of his report, he has basically put a synopsis together of all of this new information so you can read through it easily and he’ll give you a link to the full thing if you really want to read all of it. All you have to do is send us an email to “fund the crowd AT realestateguysradio.com.” Yup, just send an email to “fund the crowd AT realestateguysradio.com” and you’ll get Mauricio’s synopsis of everything you heard today. Until next week, go out and make some equity happen.
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