The high-tech practice of crowdfunding represents the latest incarnation of the centuries-old practice of real estate syndication. To understand why crowdfunding for real estate investing is such a big deal, it is helpful to have a firm grasp of what syndication is all about. The modernization of syndication through crowdfunding has leveled the playing field in many ways, allowing investors to engage in high-level commercial real estate deals that once would have been largely inaccessible to them. The concept behind syndication has existed for hundreds of years, and crowdfunding has breathed new life into the practice and is poised to change the face of real estate investing.
Put simply, a real estate syndicate is a group of investors who pool together capital to purchase or build property. Pooling resources in this way gives investors a lot more buying power, enabling them to get in on deals that they otherwise wouldn’t have access to. Most of the time, syndicates are put together as special-purpose entities that are used to buy real estate. For example, a group of investors who belong to a real estate syndicate might establish a limited liability company, or LLC, or a limited partnership, or LP.
Despite the fact that real estate syndicates have been in use for centuries, they became a lot less visible during the 20th century. Throughout most of the history of real estate syndication, real estate entrepreneurs, who are today known as sponsors, could put forth investment ideas to anyone who they chose. This is known as public solicitation. Unfortunately, this practice laid the perfect groundwork for fraud, with shady real estate syndicates advancing bogus deals to unsuspecting, inexperienced investors. Needless to say, it became apparent that regulations had to be adjusted to curb the rising tide of fraud that was taking place.
Help finally arrived with the Securities Act of 1933. While many investors balked at the new regulations that were established through the act, it was a necessary evil. The act required all new securities offerings to be registered with the Securities and Exchange Commission, or SEC. The SEC is responsible for providing oversight over such deals and for preventing fraudulent activities. The registration requirement changed the face of syndication, making it far more complicated. Not surprisingly, many investors were unhappy with the new regulations, but exceptions were established to make things more balanced and fair.
Indeed, the SEC established “safe harbor” rules that allowed entrepreneurs, or sponsors, to avoid having to register under certain circumstances. Public solicitation was prohibited within these safe harbors, however, creating a new wrinkle of trouble for syndicates. They now had two options. They would either avoid registering and try to raise capital without relying on public solicitation, or they could register their securities with the SEC, wait for their registration to be approved, and then engage in public solicitation. There are downsides to both options of course, and the correct course of action depends on the specific circumstances of the transaction in question.
It comes as no surprise that most syndicates opt for private solicitation, as it allows them to avoid what is often a lengthy registration process with the SEC. Therefore, when the Securities Act of 1933 was established, public solicitation among real estate syndicates took a huge nosedive. However, private solicitation continued. In fact, the new regulations forced syndicates to gather funds from moneyed sources with whom they had personal or business connections. As a result, these syndicates were typically put together under the radar. For example, a syndicate group acquired the Empire State Building in the 1960s by selling around 3,300 ownership shares for $10,000 each.
If public solicitation is a no-no, why is crowdfunding allowed? If you are at all familiar with crowdfunding, you know that it is often handled via online platforms that are heavily marketed around the internet. This was made possible by the Jumpstart Our Business Startups Act, or JOBS Act, of 2012. The act requires the SEC to permit public solicitations without registration as long as all buyers are properly accredited. Rule 506(c) made this the official law of the land, and the modern crowdfunding era was born.
Today’s crowdfunding platforms use online technology to produce better, more efficient environments for real estate syndication. They help to connect syndicates to much larger pools of investors, allowing them to cast much wider nets, and in many cases to more quickly amass the capital that they need. At the same time, these crowdfunding platforms make it easier to forge new connections and relationships with key players. Indeed, crowdfunding is a powerful networking tool, as it allows a diverse array of potential investors to become aware of securities that interest them and to interact with real estate syndicates around the country as opposed to strictly in their local area.
Thanks to the JOBS Act, everyday people can now easily find and invest in real estate opportunities all over the United States. This can be accomplished simply by navigating through streamlined, easy-to-use crowdfunding marketplaces. Rather than being shrouded in secrecy then, modern real estate syndicates are becoming more transparent, open, and available than ever. Most investors and syndicators can agree that this is a positive development for both sides of the equation, as investors can more easily find opportunities that suit their portfolios, and syndicators can more quickly gather the capital that they need to acquire commercial real estate.
For the first time ever, syndication in the world of real estate has become scalable, transparent, and efficient. Crowdfunding platforms are versatile and easy to manage, allowing people with common goals to come together to accomplish them. Those who have been in the industry long enough still remember the old days and undoubtedly marvel at how far things have come. There is little doubt that as time goes by, crowdfunding will become that go-to form of syndication for real estate transactions. The process is sure to evolve and improve more as well, allowing for greater still transparency and efficiency for syndicators and investors alike.
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