Real Estate crowdfunding as a fundraising alternative

Real Estate crowdfunding is a fundraising modality regulated by the Brazilian Securities and Exchange Commission (CVM) under the terms of CVM Resolution 88 to finance specific real estate projects, such as the development, construction and acquisition of residential, commercial or industrial properties. Thus, depending on the amount, a developer with a real estate project needing capital to invest in the construction can, for instance, access electronic platforms duly approved and regulated by the CVM to publicize the project. Consequently, legal entities or natural individuals of various profiles can invest resources in this project or others in the real estate sector in exchange for participation in the results at the end.

How does it work?

The purpose of real estate crowdfunding is to raise funds through a public offering of securities, which can be carried out by small-sized business companies under the terms of CVM Resolution 88, using electronic participatory investment platforms. This allows such companies to access this market as an alternative to raising smaller amounts of funds, and a pool of various investors (legal entities or individuals) can each invest in such a project in order to obtain the amount necessary for its development.

What regulation applies to this type of Crowdfunding?

The CVM is the body responsible for regulating the platforms that offer securities via crowdfunding in Brazil. Thus, through CVM Resolution No. 88 of April 27, 2022 (“CVM Resolution 88“), the CVM supervises and establishes rules and guidelines to protect the market, participants and investors, ensuring transparency in these operations.

What are the main points of CVM Resolution 88 that should be observed?

• Small-sized Business Company (the “Issuer” raising funds): CVM Resolution 88 has a specific definition for the Issuer intending to raise funds through crowdfunding – e., it must be a company incorporated in Brazil, not registered as a securities issuer with the CVM, with annual gross revenue of up to R$ 40 million in the fiscal year ended the year before the offer. If the Issuer is part of an economic group, the combined revenue of all entities under common control cannot exceed R$ 80 million.
• Fundraising Limits: The Resolution allows fundraising per project of up to R$15 million per year.
• Investment Limits: The total amount invested per investor in securities offered through crowdfunding platforms is limited to R$20,000 per calendar year, with a few exceptions, such as for qualified investors or those with either annual gross income or financial investments above R$200,000, where the limit is 10% of income or financial investments.
• Fundraising Period: The maximum period for raising funds in each offer is 180 days. If the project fails to raise the minimum target amount, which must be equal to or greater than 2/3 (two-thirds) of the maximum target amount, the platform must take the necessary steps to transfer the final invested amount back to the investors in the offer.

Are there any risks?

Like any investment, there are risks associated with project development, such as fluctuations in the real estate market, construction delays, unexpected costs, and risks associated with the success of the project. Moreover, there is the risk of insolvency of the Issuer raising the funds or even the crowdfunding platform itself during the intermediation process.

How does Real Estate Crowdfunding differ from Real Estate Funds?

Real Estate Crowdfunding and Real Estate Funds have significant differences in terms of the profile of the projects and the Issuer, the responsibilities of those involved in the process, the amount raised, the form of investment return, and the level of control over invested resources. In real estate funds, assets are managed by a manager who analyzes each project according to the fund’s regulations, invests in diversified properties or projects, and distributes the earnings to investors periodically in case of profit. Investors acquire shares of this fund, aligned with the type of assets in the fund, as well as the manager’s expertise in choosing the assets and managing the resources. In real estate crowdfunding, the investor himself analyzes the one in which wants to place its resources, and the financial return is paid according to what is provided in the explanatory material of the offer, which aims to guide interested parties in this investment modality to make the best decision.

What are the main advantages?

• Access to Investors: Investors in general can participate in real estate projects offered via crowdfunding platforms and the Issuer can seek funds without exclusively depending on financial institutions or private investors.
• Diversification: With the participation of a diverse range of investors who can enter with smaller amounts, companies can raise with widespread participation of investors, and investors themselves can enter offers and participate in projects that might not fit the profile of certain real estate funds in some cases.
• Democratization of Investment: Real Estate Crowdfunding democratizes real estate investment by allowing more companies to access the capital markets, and more investors to participate by investing smaller amounts within a regulated and accessible environment.

Real estate crowdfunding represents an alternative for fundraising while also democratizing access to opportunities previously unavailable. Furthermore, the monitoring and oversight by the CVM bring greater transparency and security, making this modality an option to be considered by companies in the real estate sector that are looking for funds.

If you would like to know more about this or other topics related to real estate and capital markets, CGM Advogados has professionals specialized in these areas, as well as in other areas of law, who will be ready to advise you at all stages of the process.

This bulletin is for information purposes only and should not be relied upon to obtain legal advice on any of the topics dealt with here. For additional information, please contact the leaders of the Capital Markets and Real Estate teams.
CGM Advogados.

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Authors:

Carolina Penteado Galvão – partner in the Real Estate practice group (carolina.galvao@cgmlaw.com.br)

Luiz Rafael de Vargas Maluf – partner in the Capital Markets practice group (rafael.maluf@cgmlaw.com.br)

Karina Alencar Pereira – senior associate in the Real Estate practice group (karina.alencar@cgmlaw.com.br)

Luiz Gustavo Panizza Brandão Britts – associate in the Capital Markets practice group (gustavo.brandao@cgmlaw.com.br)