In this article, we’re going to answer several key questions about the JOBS Act, including:
What is the JOBS Act?
Why was the JOBS Act necessary?
How Did the JOBS Act change real estate investing?
How can today’s real estate investors capitalize on this legislative change?
The JOBS Act of 2012
The JOBS Act was intended to stimulate the economy following the crash of the stock market and the collapse of the housing market in 2008, which became known as the Great Recession.
Recovery from the recession was still slow years after the initial fall in the markets. The Federal Reserve had already reduced interest rates below 5% (an unprecedented low at the time) in an effort to encourage large-scale borrowing and spending. But more dramatic measures were needed. So Congress passed the wide-sweeping JOBS Act of 2012 to encourage rapid economic growth.
The many legislative changes made by the JOBS Act include:
Simpler reporting requirements. The Sarbanes-Oxley Act of 2002 had imposed (arguably overly restrictive) reporting requirements, and the JOBS Act helped to ease some of the burden this put on companies.
Easier access to capital for job creators. To increase the number of jobs available, Congress wanted job-creating business owners to be able to get the funding needed to expand their operations.
More flexible means of raising funds for small-to-medium enterprises. Before the JOBS Act, companies could either raise business funds from a complicated, highly competitive venture capital system or “go public” by offering stocks on the market. Many small to medium-sized are simply not equipped to undertake either method. The JOBS Act allowed for alternative methods of raising capital.
Expanded investment options for everyday investors. Prior to the JOBS Act, there was a “know your client” rule that limited certain investment opportunities to an exclusive circle of well-connected investors. The JOBS Act allowed for these investments to be made available to the public, giving everyday investors a greater chance to build wealth. This became known as “crowdfunding.”
The JOBS Act and Equity Crowdfunding
Title III of the JOBS Act is known as the “Crowdfunding Act.” This is the section of the act that legally permits businesses and investment companies to raise funds from the general public in exchange for modified securities.
Modified securities are not stocks, but they are shares that convey some type of benefit for the holder. The benefit of the shares will depend on the issuer, but they could include ownership rights of an asset, revenue sharing rights, or ownership of the debt used to finance an asset.
Equity Crowdfunding and Real Estate Investing
The equity crowdfunding opportunities established by Title III of the JOBS Act affected many different industries, including real estate. This legislation paved the way for real estate crowdfunding.
Suddenly, real estate investment companies were able to offer shares in real estate developments to the general public, instead of reserving these opportunities for only the wealthiest, best-connected investors.
This change has been beneficial for real estate investment firms that need to raise capital to finance their holdings and developments.
But, more importantly, it’s been beneficial for private real estate investors in several ways, quickly becoming a favorite real estate investing strategy among experienced investors. Here are the advantages investors can gain from equity crowdfunding in real estate.
Accessibility: No prior relationship or brokerage is necessary.
Affordability: Since syndicates can reach a wider range of investors, they can allow more investors into a deal, which lowers the upfront capital investment from each individual investor.
Diversification opportunities: Because of the lower investment minimums available to investors, investors can choose to spread their funding across multiple projects to create an instantly diversified portfolio.
Passivity. In most cases, the project is managed by the project’s sponsor. This means that investors don’t have to spend any time actively managing the asset.
No skill or experience is required. Because the project’s sponsor will manage the details, individual investors don’t need to know anything about construction, property management, or local markets to see returns.
Location is no longer a factor. Since you don’t have to be involved in the day-to-day management of the property, you’re not limited to markets that you’re physically nearby. Investing out-of-state has become commonplace.
As noted in our crowdfunding pros and cons article, there are a few things to be aware of before investing in real estate crowdfunding. For example, since crowdfunding is so new, there isn’t a long history of proven results (although data is available for the long-term success of real estate investments in general).
Gatsby Investment is a real estate investment company, specializing in a special type of real estate crowdfunding called real estate syndication. Syndication with Gatsby offers a stable ownership structure for accredited investors in which each investor in a given project becomes a member of the LLC that purchases the real estate. This means you get a joint ownership stake in the property (as opposed to simply owning the debt that finances the property).
Empowered by the JOBS Act, Gatsby was founded in 2016, after the founder, Dan Gatsby, had invested $60 million of his own capital in building and testing real estate investment models to ensure the greatest return potential for investors. From 2017-2022, the average annualized return for Gatsby’s investors was 24.22%!
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