Securities Law for Private CRE Offerings & Crowdfunding

Under the test from SEC v. W.J. Howey Co. (1946), an investment contract -- a type of security -- exists whenever there is an investment of money in a common enterprise with an expectation of profit derived predominantly from the efforts of others. A Limited Partner contributing capital to a GP-managed real estate deal fits this test precisely: the LP invests money, alongside other LPs, expecting profit generated by the GP's efforts, not its own. That means essentially every private CRE syndication, fund, or crowdfunded deal raising capital from outside investors is conducting a securities offering under federal law, whether or not anyone involved thinks of it that way -- and a securities offering must either be registered with the SEC (an expensive, public-company-style process essentially never used for a single private deal) or fit a specific exemption from registration.

Regulation D, and specifically Rule 506, is the exemption underlying the large majority of private CRE syndications and funds, in two variants. A Rule 506(b) offering cannot use general solicitation -- no public advertising, no cold-marketing to strangers, no publicly posted deal listings open to anyone who stumbles across them -- and is limited to investors with whom the sponsor has a pre-existing substantive relationship or who came through a permitted channel; it may include up to 35 sophisticated non-accredited investors alongside an unlimited number of accredited investors, and generally allows investors to self-certify their accredited status. A Rule 506(c) offering flips this trade-off: it permits general solicitation and public advertising -- which is how many online real estate crowdfunding platforms operate -- but requires every single investor to be accredited, with no non-accredited investors permitted at all, and requires the issuer to take reasonable steps to independently verify each investor's accredited status (bank/brokerage statements, a letter from a CPA or attorney, or a third-party verification service) rather than accepting a simple self-certification checkbox.

An individual generally qualifies as an accredited investor by meeting an income test (income over $200,000 individually, or $300,000 jointly with a spouse, in each of the two most recent years, with a reasonable expectation of the same in the current year) or a net worth test (net worth over $1,000,000, excluding the value of a primary residence), or by holding certain professional licenses (such as certain FINRA-recognized securities licenses) or being a 'knowledgeable employee' of the issuing fund. Entities can also qualify, based on their own total assets or on all of their equity owners independently being accredited. This definition matters enormously in practice: it determines who a 506(b) offering can even show its 35-non-accredited-investor allowance to, and it determines the entire eligible investor pool for a 506(c) offering.

Two newer exemptions extend capital-raising further toward the general public, and are the legal basis most real estate crowdfunding platforms rely on for their broadest offerings. Regulation Crowdfunding (Reg CF) allows an issuer to raise up to a periodically-adjusted annual cap (historically set at $5,000,000) from both accredited and non-accredited investors, but requires the offering to run through an SEC-registered funding portal or broker-dealer, imposes per-investor investment limits tied to the investor's income and net worth, and requires specific ongoing disclosure. Regulation A+ (sometimes called a 'mini-IPO') allows a larger raise -- up to a periodically-adjusted cap (historically set at $75,000,000 for the larger Tier 2 offerings) -- from the general public including non-accredited investors, but involves SEC qualification of an offering circular (lighter than full registration, but a real review process) and ongoing reporting obligations more substantial than Reg D requires. Both exemptions are what make it legally possible for a real estate crowdfunding platform to advertise a deal broadly and accept investments from non-accredited retail investors, which a standard Reg D offering generally cannot do at scale.

Online real estate crowdfunding platforms -- prominent examples include Fundrise, CrowdStreet, RealtyMogul, and EquityMultiple -- did not invent a new securities-law framework; they built a retail-facing technology and marketing layer on top of the exemptions described above (most commonly Reg D 506(c) for accredited-only deal-by-deal investing, Reg CF for smaller broadly-marketed raises, and Reg A+ for some platforms' own perpetual non-traded REIT-style vehicles). A CRE professional evaluating or advising on one of these platforms should look past the marketing and identify which specific exemption a given offering relies on, since that determines investor eligibility, disclosure obligations, and liquidity -- and should independently diligence platform-specific factors that vary widely: how thoroughly the platform underwrites sponsors before listing a deal, whether an investment is deal-by-deal or pooled into a fund, and what fee layers exist on top of the sponsor's own fees (the platform itself typically earns a fee, layered on top of whatever the sponsor charges).