Real estate investors seeking other people’s money (OPM) to fund deals ought to be aware of all cutting edge private money sources which now include crowdfunding. Many seasoned investors and financiers consider crowdfunding to be the future of investing. So what is crowdfunding? Crowdfunding is taking the power of the masses, the crowd, to raise capital in exchange for equity ownership. Capital is both debt and equity and raising capital through the crowd is all about getting capital into the hands of folks who cannot gain access to funds through more traditional lending avenues.
Historically, an old money brokering concept dating back to 3,000 BC, now available through sundry online funding site portals, crowdfunding is made legal through Title III of the JOBS Act. This creates the opportunity for crowd funded investment options through a concept entitled emerging growth companies (EGC’S) which allow for crowd investing sources never offered before. Before the passage of the JOBS Act, private money lending sources were often limited to accredited high net worth investors, those power players so financially situated that they could invest in private debt or equity transactions within SEC overview. With the lifting of restrictions on the solicitation of unaccredited investors, those not having enough of a high net worth or an annual income not exceeding a quarter million dollars, these unaccredited investors can get into the act and provide their invested private money through their stock purchases in these EGC’s. This allows business entities and entrepreneurs to legally raise capital from all with any net worth and income levels who are crowdfunding.
There are a few legal restrictions that must be adhered to. The maximum dollars a business or entrepreneur can seek is one million dollars or less and the maximum amount an individual can invest in crowdfunding ventures is limited to a flat $2,000.00 sum or ten percent of the investors annual income or net worth.
The crowdfunding sector has morphed into a major funding source, a new Godzilla, growing exponentially each year since it birthed in it’s modern form in 2003. It has grown more sophisticated each year since it’s inception, from less than two billion in 2009 to more than eight billion by the end of 2013.
With traditional lending sources drying up from being under more lending restrictions than ever before and becoming more skittish about lending generally, crowdfunding presents a platinum resource to tap into, particularly for business startups and real estate investors. With interest rates down near zero, these venture lenders can reap gigantic returns on their capital investment. A huge opportunity for investors to reap substantial rewards for their invested dollars.
Consider the three types of crowdfunded classes:
(1) Donation Based: Charitable, passion based investments
(2) Peer to Peer Based: Lenders give money to borrowers through a website in exchange for an interest payment arrangement. The website serves as the site platform and as the intermediary holding the obligation.
(3) The Equity Based: The cutting edge of crowdfunding, most often utilized by business startups, where investors are offered an equity interest in the business for the invested capital.
There are truly thousands of these on line portals, these business venture platforms to align with. New ones seem to be appearing every day. There are established giants in the field, titans worthy of mention, although none of these for the real estate investor. These titans include Kickstarter, Indiegogo, Angellist, Rockethub, and GoFundMe. I do not recommend for you, the investor, to seek Peer to Peer based crowdfunding.
Crowdfunding is a new cutting edge way for folks who need money to raise money from folks that have it; A primary venture capital source for the future. The restrictions for the investor are few and with some creativity, moxie, and verve, a savvy investor can maximize the use of this money source for maximum advantage. As the act’s implementation is still being tweaked by the SEC, do your due diligence to make sure you are regulatory compliant and choose well where you seek to associate. Especially by being due diligent, crowdfunding can be a great way to raise capital for investor deals. For the capital investor, crowdfunding represents a new source of prospects to add to their investment portfolio.