Real estate investors locked out of crowdfunding craze over fear home flippers will move in

Financial Post | Allison Lampert | June 24, 2014

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Buying a stake in a rental building shouldn’t be more worrisome for a securities regulator than say, investing in a tech start-up, says Craig Asano.

But the executive director of the National Crowdfunding Association of Canada says provincial securities commissions are currently planning to exclude the “tried and true asset class” of real estate from using equity crowdfunding to raise money online and through other electronic means.

“It’s an area of growth,” he said. “We believe at the association that it shouldn’t be excluded.”

Regulators are considering making it easier for small and medium-sized enterprises (SME’s) to raise capital from ordinary investors online. Those regulators say they “have concerns” with the prospect of real estate companies – apart from reporting issuers such as a REIT — using Internet crowdfunding portals to sell real estate securities.

The Ontario Securities Commission, for one, has questioned whether simply acquiring real estate assets would fall within equity crowdfunding’s objective of raising capital for small businesses.

Related:  The draw of real estate equity crowdfunding

Alixe Cormick, founder of Venture Law Corp, a boutique securities law firm in Vancouver, suspects regulators fear giving non-reporting real estate issuers easy access to equity crowdfunding might trigger a wave of interest from developers who simply want to flip homes. What’s more, observers say regulators fear the potential for abuse by non-reporting real estate companies, following several high-profile cases of alleged fraud under existing securities rules.

“I could go on and on about the abuses,” added Ms. Cormick, an attorney.

Aimed at small, innovative businesses, a proposed crowdfunding exemption would allow companies to raise a limited amount of capital without providing a prospectus or regularly audited financial statements. It will also open the doors to companies soliciting ordinary investors as opposed to high net worth individuals.

In the U.S., real estate has emerged as one of the most popular sectors for crowdfunding, raising more than $135-million in debt and equity, according to a report published this month by the Wall Street Journal.

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These crowdfunding Internet portals, many of which opened following the U.S. Jumpstart Our Business Starts Act (JOBS) of 2012, target so-called accredited investors, who have an individual income of $200,000, or own financial assets worth more than $1-million. In Canada, these high net worth individuals are said to make up 4% of the Canadian population based on income or assets. The new crowdfunding rules would give these companies a far broader reach.

U.S. regulators, like those in several Canadian provinces including Quebec, Ontario and Manitoba, are now mulling new rules that would allow ordinary investors to buy small stakes in these companies.

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