Until the regulatory framework is established firmly in US and Asia, it would seem real estate crowdfunding may take some time to make huge inroads in the investment world.
On April 5 2012, President Obama signed the bipartisan “Jumpstart Our Business Start-ups Act” (JOBS Act). The watershed bill made several sweeping changes to securities law and modernized many aspects of the way start-ups were treated by the law. One of the biggest changes was the legalization of investment crowdfunding.
The JOBS Act had two main promises. First, it aimed to make it easier for new companies to get off the ground by making it easier to get access to capital. Many felt that investment crowdfunding would bring an explosion of high growth, agile, new start-ups that would boost the entire U.S. economy.
The second major promise of the JOBS Act is that it would democratize investment gains. For as long as stocks have existed, they benefited the elite. Accredited investor rules may be for the safety of the common man or woman, but they also have the effect of shutting many Americans out of some of the most lucrative investments, that also happen to be taxed at a much lower capital gains tax rate. Once “regular” people are allowed to access some of these investments through crowdfunding, many people hope that the economic gains will be spread across a greater number of people, and not just the elite.
The big advantage of crowdfunding over traditional real estate syndication is the ease of finding investors for a given project. But, the United States Securities and Exchange Commission (SEC) has traditionally only allowed advertising and marketing, also known as solicitation, under very narrow circumstances for investment projects. But, crowdfunding will not work without the ability to advertise offerings to investors. The purpose of the ban against general solicitation in private offerings is to prevent fraud and protect investors, especially the non-accredited investors that had access to private offerings.
When the JOBS Act was passed, the rules of the Act meant that real estate crowdfunding companies couldn’t exist because being on the web in any way that attracted investors would be general solicitation.
The SEC finally made significant changes to the regulations that made investment crowdfunding possible. The biggest change was the formulation of the rule which among many other things, allowed for private offerings to begin general solicitation.
However, the SEC remained concerned about possible fraud on the part of start-ups and the ability of bad actors to gain control of weak or unsuspecting companies and use them to commit fraud or other kinds of bad acts. As a result, when the SEC created an exemption from the general solicitation ban, it also increased other fraud safeguards, which made it more challenging to recruit investors to a private offering.
While many investors were unhappy that the SEC didn’t make it even easier for private offerings to attract investors, the investment crowdfunding sector began setting up shop. Platforms, including many real estate investment crowdfunding start-ups, began to raise capital to start operations now that they could qualify for the exemption to the general solicitation ban.
Currently, there are no regulations for investment crowdfunding. The SEC needs to setup a framework that will govern everything; from how the crowdfunding offerings will be registered, announced, marketed and who will be able to participate and at what levels in these new ventures. This is likely to be enacted soon and the full effect of crowdfunding laws for real estate can come into effect in the USA.
But what has this to do with crowdfunding of real estate in Malaysia?
On 10 February, 2015, the Securities Commission Malaysia released Guidelines on Regulation of Markets under Section 34 of the Capital Markets and Services Act 2007. These Guidelines provided new requirements for the registration of equity crowdfunding (ECF) platforms and governance arrangements for the operator of this platform. This has put Malaysia much ahead of the Asian financial powerhouse, Singapore and the sophisticated crowdfunding market of Australia.
Currently, the Australian crowd-sourced equity funding is available only to the wholesale investors with more than AUD2.5 million in assets to be invested or annual earnings of around AUD250,000. Australia has, potentially, put off the legislation that will allow small businesses and start-ups raise funds through crowdfunding, to the year 2016.
Singapore, which has a huge Venture Capital (VC) population, still does not have any clear law or specific regulatory framework to govern equity crowdfunding.
The key restriction is that the rules only allow for equity crowdfunding at the moment.
What is Equity Crowdfunding?
Equity crowdfunding describes the process where individual investors can pool money with other investors online to invest in an unlisted company in exchange for shares. Equity crowdfunding will be a game changer for start-ups and high-growth businesses which are underserved by traditional financing methods.
Who can invest?
Anyone can invest in equity crowdfunding, whether you are a retail investor or a high net worth investor.
The Securities Commission of Malaysia has proposed the following investment limits:
Retail investors may invest up to RM50,000 within a 12-month period.
Angel investors recognized by the Malaysian Business Angels Network but who do not qualify as a sophisticated investor according to Malaysian securities laws may invest up to RM500,000 in a 12-month period.
Sophisticated investors do not have investment limits.
Disclaimer: This does not constitute financial or legal advice. The final Equity Crowdfunding framework will be subject to confirmation by the Securities Commission of Malaysia
What are the Benefits to Investors?
Exclusive access to proprietary deals.
Access to high growth investment opportunities, pre-qualified by professionals.
Opportunity to invest alongside A-class investors.
Quick online investment process.
Restrictions on Crowdfunding Real Estate
Under the framework, an eligible issuer can raise up to RM3 million within a 12-month period (irrespective of the number of projects an issuer may seek funding for during the 12-month period); and an issuer can only utilise the ECF platform to raise a maximum amount of RM5 million excluding the issuer’s own capital contribution or any funding obtained through a private placement exercise (clause 11.17).
Investment limit
Issuers will be able to receive investments from retail, sophisticated as well as angel investors, subject to the investment limits provided in clause 11.21 of the Guidelines:
1. Sophisticated investors – no restrictions;
2. Angel investors – a maximum of RM500,000 within a 12-month period; and
3. Retail investors – a maximum of RM5,000 per issuer with a total amount of not more than RM50,000 within a 12-month period.
IN SUMMARY
As most real estate transactions are large and illiquid, the current regulatory restrictions means that it is unsuitable for equity-based crowdfunding real estate platforms to be established. Only when the US gets its regulatory framework for crowdfunding real estate finalised; will Malaysia consider raising the investment limit of the amounts that can be raised through crowdfunding locally.
Dato’ Stewart Labrooy, Chairman of Malaysian REIT Managers Association, is also a leading speaker and columnist on the topic