By Ruth Simon and Eliot Brown Why is there a lot of new buzz around crowdfunding?
For years, entrepreneurs have been using the Internet’s power to reach out to people for contributions to back new projects and companies. But until recently, they have offered rewards such as T-shirts or coffee mugs.
What’s different now?
In 2012, Congress and President Obama approved the Jumpstart Our Business Startups Act, which reduced the restrictions on online fundraising. Parts of that law are being implemented now, sparking the creation of numerous “equity” crowdfunding sites aimed at investors.
How do crowdfunding real-estate sites make money?
It varies. Many sites make money on fees by providing a marketplace where investors and property owners meet. Some sites take an ownership stake in properties, meaning they receive a share of the profits.
What kinds of properties can I find on these sites?
The offerings vary widely from distressed mortgages to ground-up development.
What are the risks?
Sites vary when it comes to how much due diligence they do before listing a project. Investors can lose some or even all of their money if the property runs into problems. There also is a chance that the site itself could fail, without ample protections.
Does this mean I can invest in a wide range of properties with the click of a mouse?
It is more complicated than that. Many restrictions still apply to entrepreneurs trying to raise money online. And different firms mean different things when they say they are engaging in crowdfunding.
So who are crowdfunding sites targeting?
Many of the sites are seeking investments from wealthy individuals known as “accredited investors,” generally those with an annual income exceeding $200,000 or a net worth, excluding their primary residence, above $1 million.
Can ordinary investors participate in these types of deals as well?
It depends. Twelve states have passed legislation or adopted rules allowing entrepreneurs who live in the state to raise funds from local residents. The Securities and Exchange Commission currently is working on rules required by the JOBS Act aimed at small firms and startups that would allow private firms to raise money from everyday investors.
Are there other ways these firms are raising money?
Some of them also are taking advantage of long-standing rules that allow firms to raise up to $5 million over a 12-month period from ordinary investors, provided they meet certain requirements.
—Ruth Simon and Eliot Brown