LOS ANGELES-Crowdfunding, a method of raising capital from a large number of small investors in a wide variety of industries, has made its way to commercial real estate. As GlobeSt.com has reported, firms are beginning to manage investors' purchase of stakes in real estate ventures, and the trend is catching on. The question is, is crowdfunding a smart solution to help small investors gain a slice of the commercial real estate pie, or does it create more problems than it solves?

One piece of legislation that has made brought crowdfunding into the forefront is the Jumpstart Our Business Startups Act or Jobs Act, a national law intended to encourage funding of small businesses by easing various securities regulations. The law was signed into law by President Obama last spring after receiving bipartisan support, but certain regulatory questions with regard to crowdfunding are currently being debated by the SEC.

Currently, the Jobs Act permits certain investment sponsors to market and solicit securities offerings over the Internet without being subject to the prior regulations, but the investors from whom they're permitted to take money still need to be accredited investors, Seth Weissman, an attorney with Jeffer Mangels Butler & Mitchell in Los Angeles, tells GlobeSt.com. “Under the proposed changes in the law, those accredited investor requirements would be softened, and that's what would open the floodgate to potential investment by individuals who do not possess the same type of resources as typical accredited investors do.”

Until the SEC makes a ruling, it's unclear what impact the resolution of this debate will have on crowdfunding in commercial real estate. “I don't think there are going to be huge impacts in the real estate markets,” says Weissman. “There's a place for crowdfunding concepts, but we don't know what the impacts are going to be until they finalize what they're going to do from a regulatory standpoint.”

Weissman says he believes that real estate is unique in that it is a heavily leverage asset, whereas other types of investments where crowdfunding is used may not be as heavily leveraged. “Within real estate, there are so many different sub-asset classes that a crowdfunding-type investor may not fully understand or appreciate.”

Some industry reports show that crowdfunding proposals are being created to help homebuyers meet their equity or down-payment requirements in exchange for some type of deferred interest in the residence. “A deal with that sort of structure potentially has all sorts of problems that individuals making small investments may not appreciate,” says Weissman. But until the SEC makes some sort of ruling, it's difficult to say how these and other types of crowdfunding investments may be affected. “At this point, there are more questions than answers.”

Crowdfunding can have its benefits for CRE, Weissman admits. While he allows that arguably he may not be excited about the concept as a means of raising capital for real estate, “anything in a responsible and organized fashion that provides liquidity to potential investors is potentially positive. If this vehicle opens up access to additional capital, it's likely to have positive impacts in terms of property valuations and property transactions. But I'm not sure that there's a gaping hole in the availability of capital for those who rightfully receive it.”

Weissman also cautions that crowdfunding may be used as a means of helping sub-prime borrowers and others who feel they were taken advantage of in the last economic downturn. “Some types of recipients of crowdfunding proceeds are tending to be in need of money to purchase homes that they may not be able to afford. This is problematic for them in that they end up buying an asset they should not have bought, but it's also problematic for the investor not having their interests aligned.”

While crowdfunding has the purported benefit of increasing liquidity and jumpstarting the economy, it also has the potential pitfalls of bringing out the worst in those sponsors who want to raise money quickly from unsuspecting and unqualified participants, Weissman adds.

The SEC has been slow in implementing regulations to the Jobs Act, but there's speculation that these will be forthcoming sometime in the near future. “People want to be primed and ready to go once they have the right to do it,” says Weissman. He adds that now is the time to continue to debate what is appropriate legislation and regulation. “How do you appropriately oversee what is a vast investment vehicle? How does it tie in with real estate lending requirements across 50 states?”