November 19, 2015
The concept of crowdfunding has been around for centuries. Originally called syndication, the “creator” or entrepreneur had to personally find investors to finance the project. When marketplaces like GoFundMe, Kickstarter and Indiegogo jumped on the scene, crowdfunding changed overnight. Jack Dorsey, Accel and other huge technology investors got behind these now huge companies. They have grown rapidly, hanging their hats on “charity raises.” In other words, the backers did not get any equity in the project. Instead they received prototypes, first-release products and other perks for their donations.
Crowdfunding for a percentage of one’s company or real estate project remained in the dark ages for a while longer, though. For projects that were not “Kickstarter-right,” Sponsors, entrepreneurs and fundraisers spent months or years forging connections to raise money for their project in exchange for equity. The process was extremely involved, and the rules stringent.
But today, crowdfunding is pushing boundaries and changing regulations. The Jumpstart Our Business Startups Act (JOBS Act) signed in 2012 ignited the power of using a group of individuals to raise money for everything from small business startups to commercial real estate. In 2013, when Title II of the JOBS Act was approved, crowdfunding hit the ground running. Soon, crowdfunding moved to equity raises.
AngelList, RealtyShares and other equity crowdfunding platforms democratized fundraising for a stake in the company. Participation in raises, however, was limited to Accredited Investors. Accredited Investors are high net worth individuals whose income exceeds $200k per year ($300k with a spouse) or whose net worth exceeds $1M (excluding primary residence). Accredited Investors make up 7 percent of the population.
Nearly-Democratized Crowdfunding: Title III
Title III of the Act was approved at the end of October, 2015. It will open even more doors to entrepreneurs and other fundraisers. New startups will be able to raise up to $1 million annually utilizing crowdfunding platforms. More importantly, non-accredited investors will be able to participate for the first time ever.
“There is a great deal of enthusiasm in the marketplace for crowdfunding, and I believe these rules and proposed amendments provide smaller companies with innovative ways to raise capital and give investors the protections they need,” says SEC Chair Mary Jo White. “With these rules, the Commission has completed all of the major rule-making mandated under the JOBS Act.”
Why are these Changes Important?
Real estate crowdfunding and equity crowdfunding has brought with it transformative change. In a simple sense, it has is an overdue solution to the crunch startups and real estate Sponsors face in raising money.
However, the process will still be lengthy and expensive. It’s not perfect for the fundraiser. Also, there are risks to the investors as well. Venture capitalists and private equity firms fail more than half the time in their real estate and startup investments. Opening investing to the run-of-the-mill 18 year old poses its own set of challenges with comfort and liquidity.
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