Listing remarks
- A non-accredited investor whose income or net worth is under $124,000 can put the greater of $2,500 or 5 percent of the greater of the two into Regulation Crowdfunding offerings in any 12 months.
- You can cancel a crowdfunding commitment up to 48 hours before the offering period ends, Investor.gov says.
- Regulation Crowdfunding investments generally cannot be resold for the first year.
Crowdfunding lets a company raise money online from many people in small amounts. In real estate, that can mean buying a slice of a single apartment building, a renovation project or a loan secured by property, often with far less money than a down payment. It sounds like the best of both worlds: direct exposure to a specific property without being the landlord. The SEC’s guidance shows why it deserves careful reading before you click invest.
The rules that apply
Several legal routes exist for selling investments online. The one open to everyone is Regulation Crowdfunding, adopted under the JOBS Act. Under it, a company can raise up to $5 million in a 12-month period, and it must sell through the online platform of an SEC-registered broker-dealer or funding portal that is a member of FINRA. Companies may not sell Regulation Crowdfunding investments to you directly.
Many real estate offerings online use other exemptions that are limited to accredited investors. If a platform asks whether you are accredited, that is why.
Accredited investor, in brief
According to Investor.gov, an individual is an accredited investor if they earned more than $200,000 (or $300,000 with a spouse or spousal equivalent) in each of the past two years and expect the same this year, or have a net worth over $1 million excluding their primary residence, or hold certain professional licenses such as the Series 7, 65 or 82.
How much you can invest
Accredited investors have no Regulation Crowdfunding limit. For everyone else, the limit across all crowdfunding offerings in any 12-month period depends on income and net worth (your home is excluded from net worth):
| Your situation | 12-month limit |
|---|---|
| Income or net worth below $124,000 | The greater of $2,500 or 5% of the greater of your income or net worth |
| Both income and net worth at least $124,000 | 10% of the greater of income or net worth, up to $124,000 |
Investor.gov’s own example: someone with $40,000 of income and less net worth can invest the greater of $2,500 or 5 percent of $40,000 ($2,000), so $2,500. The JOBS Act requires these dollar amounts to be adjusted for inflation every five years, so check the current figures.
What you get, and what you don’t
The company must disclose information about itself, its officers and directors, its business plan, the offering and how it plans to use the money. Before you invest, the platform must have you review educational material about this kind of investing. That is less than a listed company provides. Investor.gov notes that an early-stage company may be able to provide only limited information.
Two timing rules to know
- Changing your mind. You can cancel your commitment for any reason up to 48 hours before the offering period ends. Inside those last 48 hours, you cannot cancel.
- Selling later. You are generally restricted from reselling your investment for the first year, except to the company, an accredited investor, a family member or in a few other cases. After that, there may simply be no buyer.
The risks the SEC lists
- Speculative. Early-stage ventures often fail.
- Illiquid. You may need to hold the investment indefinitely.
- Hard to value. Without a market price you may overpay.
- Limited disclosure. Less information than a public company provides.
- Fraud. The ease of raising money online can attract money-losing schemes.
- No professional oversight. Small investors usually have no board seat or say in management.
Tip: Before investing, look up the platform: a broker-dealer on FINRA’s BrokerCheck, a funding portal on the SEC’s EDGAR website. Read the offering document on EDGAR, not only the platform’s summary page.
Questions to ask about a real estate deal
- Is this equity in the property, a loan secured by it, or something else?
- Who is the sponsor, and what fees do they earn at purchase, during ownership and at sale?
- How much debt is on the property, and when does it come due?
- What has to go right, such as rent increases or a sale price, for the projected return to happen?
- How and when can I get my money back?
How it compares
A publicly traded REIT spreads your money across many properties and can be sold any trading day. A crowdfunding investment is usually tied to one project and may be locked up for years. Owning a rental gives control but needs far more money and work. Compare them in REITs Explained: Owning Real Estate Without Being a Landlord and Real Estate Investing Pros and Cons: An Honest Look.
The bottom line
Real estate crowdfunding opens individual projects to small investors, under limits meant to cap the damage. Treat any amount you put in as money you may not see again for years, if at all. Read the filings, understand the fees and the debt, and be wary of projected returns that sound certain; Real Estate Investment Scams: Seminars, Coaching and Too-Good Deals lists the warning signs.