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Crowdfunding: The good, the bad and the ugly

Zach Fuller Caliber CompaniesI believe the investment world will look completely different within the next five years.  We’re at a perfect storm between technology and changes in government regulation.

In April of 2012, the JOBS Act went into effect.  Title II of the JOBS Act allows for public solicitation of private equity funds.

So, what does this mean and why should a real estate investor care?

Some of the most lucrative (and biggest failing) real estate investment transactions in history were completed through Regulation D private placement offerings.  Until recently, this category of investment was only available to people within select circles of influence.  These investments were predominantly used by ultra high net-worth investors.  In other words, you had to know someone connected to this type of investment in order to invest in a private placement offering.

CrowdfundingLast September, this ban on public solicitation was lifted.  Now these investment vehicles can be advertised the the general public.  This  means that if you are an “accredited investor” ($1M net worth or meet specific income requirements), you now have a lot more investment options available.  For example, you might buy a portion of a 290 guest room Crowne Plaza Hotel, an office complex near a major hospital, a group of apartment communities, a pool of private loans yielding 10+%, and the list goes on …

It’s great news that accredited investors have more investment options available, but what about everyone else?

Crowdfunding is about to bring real estate investment to the masses.  Crowdfunding is simply the act of gathering money from multiple people with no prior relationship, and is typically done with an online platform.  Kickstarter is perhaps the most well known form and one of the early pioneers of internet crowdfunding.  With sites like Kickstarter, people contribute money to a cause, company, or venture, but do not gain any equity ownership.

Per the SEC guidelines, equity crowdfunding is still illegal.  However, many expect Title III of the JOBS Act to go into effect this year, which makes equity crowdfunding available to the general public.

Equity crowdfunding will allow investors to have ownership in larger commercial real estate projects (or any business venture for that matter) for small investment amounts.  All individuals regardless of income can invest in projects that catch their interest, with as little as a few hundred dollars.  This means that just about anyone can be a real estate investor!

An absolute game changer!   Equity crowdfunding creates an entirely new way to fund real estate transactions and opens up a whole new investment class for the masses.  I look forward to a world where alternative investments are no longer “alternative”, but just as common as investing in stocks and bonds.

Want to own a part of the new movie theater that is going in down the street?  No problem, you can with crowdfunding !  Want to own a portion of a remodeled mixed use building downtown?  Crowdfunding is your method!

BUT, this new method of investment may have a rough road ahead.  Any new combination of technology and finance tends to lead toward turbulent times.

I believe the equity crowdfunding world will go through a time similar to what Ebay experienced early on.

Remember when Ebay first started?  People were excited at the convenience and efficiency.  Then it happened … People started losing money from fraudulent transactions.  The general media stirred up a storm and Ebay became “risky” in the eyes of the general public.  Ebay transformed themselves through this rough spot.  They put new policies in place, modified their platform, and made it much more secure for the users.  Now people rarely lose money using Ebay.  The public considers it safe and it is now a perfectly acceptable way to buy and sell almost anything.

Both crowdfunding and the ban on public solicitation of private equity funds are getting a lot of excitement in the press right now.  However, when it turns ugly just remember Ebay.  While a new technology and way of doing business will have turbulent times, it doesn’t mean that these will go away.  They’ll completely change the investment world in the long-run.

What do you see coming as it relates to crowdfunding and the public solicitation of private equity funds?  Let us know in the comment section below.


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