The impact of crowdfunding on real estate finance and deal-making has been one of the hottest topics of the past year. With the advent of crowdfunding, real estate developers and investors have multiple pathways to finance their projects and even to plot their exits. But in many ways the impact of crowdfunding has not yet arrived. Crowdfunding for real estate is still in the early stages and may take several detours along the way to its final destination.
What is Crowdfunding?
The idea of “crowdfunding” has been in the news a great deal but investors have only just begun to realize its potential for the industry. Crowdfunding is the idea that a large number of people, with no particular expertise, can accurately predict the likely success or failure of a venture by combining their own observations and communicating with each other. James Surowiecki, in his book, The Wisdom of Crowds, recounts dozens of examples where a large group of people who were able to collect and share information were able to make more accurate guesses about the success of a project than the best guess of any individual expert in the topic. The Internet, with its ability to collect a large number of people quickly and easily, makes it possible to collect a “crowd” to evaluate an idea better than was ever possible before.
Crowdfunding applies this idea to the process of evaluating investment opportunities, allowing members of the crowd to put money behind their predictions and preferences. Proponents believe that by allowing a crowd of potential investors to share their opinions about the investment and the information they collect that crowd will be better able to predict the success of the investment than individual investment experts. Sydney Armani, the publisher of CrowdFundBeat, says, “People get excited when they engage with a new product that arouses their passions. Those passions take on even greater intensity when they can invest in that new product.” 
Crowdfunding can take several forms. Popular crowdfunding sites like Kickstarter and Indiegogo let project sponsors describe their projects to the public and ask for donations. In an “affinity” campaign, supports of a project pledge funds for a project because they like it and support it. Their affinity for the project is their only reward. In a “rewards-based” campaign, project sponsors offer rewards for cash contributions. Rewards may range from recognition on a website or on a wall, to t-shirts, products samples and more.
Securities-based crowdfunding is possible through several recent changes in U.S. securities laws, most of which are derived from the 2012 Jumpstart Our Business Startups Act (or “JOBS Act”). In particular, the JOBS Act created three types of crowdfunding: (a) crowdfunding to “accredited investors” under Rule 506(c), (b) crowdfunding for up to $50 million each year under new Regulation A+ and (c) crowdfunding to both accredited and non-accredited investors in small offerings under Title III.
Investing Under Rule 506(c)
First, a sponsor could offer debt or equity securities to “accredited investors” under Rule 506(c). The JOBS Act changed some of the rules affecting private offerings under Rule 506 so that sponsors could publicly-advertise their offerings. Before this change in the law, public solicitations of private offerings were strictly prohibited. Under new Rule 506(c) however a promoter that wants to advertise publicly must take various steps to ensure that every investor who participates in the offering is “accredited”, which is defined as having a net worth of over $1 million (excluding the investor’s principal residence) or having an income of more than $200,000 for two consecutive years ($300,000 is the investor is married and files tax returns jointly with a spouse).
Crowdfunding under Rule 506(c) has been feasible for more than a year and several websites, have had some success hosting real estate crowdfunding campaigns that have included securities under Rule 506(c). Most of the popular real estate crowdfunding sites included in our survey, however, require accredited investors to create a membership on the site before they can view any live offerings. As a result, the offerings made available to members are intended as a private offering, and not a general solicitation. Because there is no general solicitation, those websites take the position that their offerings are private offerings under Rule 506(b) rather than publicized general solicitations under Rule 506(c).
Investing Under Regulation A
Another legal change that came from the JOBS Act was a change to Regulation A, an SEC rule that allows a private company to qualify its securities (which may be equity or debt) through filing a formal prospectus with the SEC. The SEC reviews the prospectus to ensure that it adequately describes all of the risks of the business and the risks to investors. Once the issuer’s prospectus is approved by the SEC (at which point it is said to be “effective”) the sponsor may sell the securities to both accredited and non-accredited investors.
Before the JOBS Act, offerings under Regulation A were limited to not more than $5 million. Under the new provisions of Regulation A (sometimes called “Regulation A+”) an issuer of securities may raise up to $50 million in any 12-month period.
One of the advantages of a Regulation A offering is that the company will be able to solicit investments from both accredited and non-accredited investors, thereby widening the scope of interest in the project. The SEC’s rules, implementing these changes to Regulation A, however, have only been effective since October 2015. As a result, there have been relatively few offerings that have completed the new process and it is harder to tell how these new offerings will be accepted by investors.
The third possible route for crowdfunding is often called “Title III” because it arises under Title III of the JOBS Act. Although the JOBS Act became law in 2012, the SEC only released its rules implementing this new law in October 2015 and those rules didn’t take effect until May 2016. Under those roles, a promoter may issue securities, in an amount up to $1 million in any 12-month period, to both accredited and non-accredited investors. But, soliciting for investors may only take place through licensed crowdfunding portals that have received a license from the Financial Institutions Regulation Authority (“FINRA”).
Under Regulation CF (the name used for the SEC’s Title III regulations), issuers do not file a prospectus with the SEC but do need to include certain disclosures about the company in their offering memorandum. The funding portal will also be liable for making sure that all of the prospective investors receive certain notices about the process and for ensuring that each investor does not invest more than a certain maximum that is derived from the investor’s taxable income. While a Regulation CF offering can “go national” by accepting investments from people across the country (whether they are accredited or not) the $1 million limit and the requirement that all solicitations take place online through the licensed portal make this approach a challenge for many new ventures.
Because of the $1 million annual cap on fundraising under Regulation CF, however, this approach is usually not a good fit for real estate projects that often require more than this maximum amount.
Surveying the Landscape
The following websites have used one or more of these regulatory pathways to create a marketplace for crowdfunding real estate projects. By surveying some of the more popular websites I have tried to provide an overview for how industry players are using these now crowdfunding regulations to make deal flow and investment opportunities possible. This list is not an endorsement of any of these sites and a site’s omission from this list is not intended as a criticism or a suggestion that the site is not worthwhile or valuable.
PeerStreet specializes mostly in residential debt investments (with a smattering of multifamily and commercial). PeerStreet utilizes Rule 506(b) to solicit accredited investors to participate in loans that are secured by real estate. They have one of the lowest minimums in the top 10 ($1K versus $10K average), and a healthy volume of new transactions.
Virtually every site in the industry claims that they have superior due diligence. PeerStreet, however, supports its claim with concrete proof. PeerStreet allows investors to review the performance of every past investment. PeerStreet’s site claims that, since 2014, the site has offered more than 200 notes but without any foreclosures or unremedied defaults.
Unlike many other real estate crowdfunding sites, however, PeerStreet does not originate its loans. Rather, project sponsors introduce opportunities to the site and then earn a fee based on successfully closing the investments. As a consequence, investors that participate in deals on PeerStreet pay slightly higher total fees than some other sites. Because of the relatively high performance that PeerStreet’s deals have produced, however, these fees so far have not kept investors away.
Real Crowd acts as a syndication platform for real estate development companies and real estate funds. The development companies and funds pay a fee to Real Crowd to have their offerings listed on the site. Viewing the offerings is possible only for accredited investors who have created a free membership account on the site. Most of the opportunities on Real Crowd involve commercial real properties or multi-family properties. Some of the investments are funds in which the fund manager will be investing in the proceeds in a targeted type of property while others are syndicating take-out financing for existing properties.
From the investor’s point of view, Real Crowd has successfully recruited a large number of property developers and fund managers, so there are many investment opportunities to consider. Most investments, however, require a minimum investment of at least $25 to $50,000, so the platform is not friendly to small retail investors who want to dip their toes in the water. In addition, most of the investment opportunities are equity securities, so there is a higher risk of principal loss than is generally the case with debt-oriented platforms.
Realty Mogul is one of the largest real estate crowdfunding sites and it uses several different approaches based upon the needs of the project sponsor and the class of investor involved. Accredited investors may invest in either debt or equity securities. Accredited equity investors invest in syndicated private placements of special purpose limited liability companies that exist to finance equity investments in particular properties. The equity investment has the higher potential return associated with equity as well as the potential downside risk of loss.
Accredited investors may also invest in debt securities called “Platform Notes”. Each Platform Note is a debt security issued by a Realty Mogul special purpose vehicle which uses the proceeds of the Platform Notes to make a loan to particular sponsored investment. By issuing the note from its special purpose vehicle, Realty Mogul is able to take on the management function of managing the underlying loan (reviewing financials, monitoring loan covenants, working out any defaults, and so on) without involving the passive investors who have purchased the Platform Notes.
For non-accredited investors, Realty Mogul has sponsored its own non-traded real estate investment trust. Although the REIT (called Mogul REIT I) is not traded on any stock exchanges, its shares were qualified with the SEC through a Regulation A prospectus. According to the prospectus (which went effective in August, 2016) the REIT plans to hold:
“(1) at least 55% of the total value of our assets in commercial mortgage-related instruments that are closely tied to one or more underlying commercial real estate projects, such as mortgage loans, subordinated mortgage loans, mezzanine debt and participations (also referred to as B-Notes) that meet certain criteria set by the staff of the SEC; and (2) at least 80% of the total value of our assets in the types of assets described above plus in “real estate-related assets” that are related to one or more underlying commercial real estate projects, these “real estate-related assets” may include assets such as equity or preferred equity interests in companies whose primary business is to own and operate one or more specified commercial real estate projects, debt securities whose payments are tied to a pool of commercial real estate projects (such as commercial mortgage-backed securities, or CMBS, and collateralized debt obligations, or CDOs), or interests in publicly traded REITs. We intend to qualify as a real estate investment trust, or REIT, for U.S. federal income tax purposes beginning with our taxable year ending December 31, 2016.”
Because Realty Mogul facilitates both equity and debt investments for accredited investors as well as equity investments for non-accredited investors through MogulREIT I, Realty Mogul is ideally-situated to generate substantial deal flow and relatively rapid underwriting for projects that apply for funding. As a platform for providing funding for sponsored-projects as well as a platform for creating investment opportunities, Realty Mogul has one of the best head starts of all the available real estate websites.
Those advantages, however, come at a cost. Realty Mogul has a large staff operation (which is required for its extensive underwriting duties) and that cost is borne by investors through the 1-2% fees they pay to participate in investments on the site. While the site has tremendous deal flow, however, a student of the industry might ask, “is this really crowdfunding?” Because Realty Mogul takes such an active role in performing due diligence on its projects and in structuring the investment opportunities on its site, the overall experience is more structured than most crowdfunding sites and there is less opportunity for the collectively give-and-take than crowdfunding was originally thought to represent.
Realty Shares facilitates both debt and equity investments into both commercial and residential real estate. The site claims that it has funded over $300 million to 550 projects that have returned more than $59 million to the site’s more than 92,000 registered accredited investors. Project sponsors must submit to underwriting through Realty Shares and only projects that have exceeded the site’s standards can be offered to the site’s members. Fees range from 1 to 2% of the investment amount, but investment minimums are as low as $5,000.
As with most of the other real estate crowdfunding sites, investments are made through private placements under rule 506(b).
Residential Real Property Sites
There are several websites that focus primarily on residential real estate. Because of the similarity of their focus and approach, they can be surveyed as a group:
Lending Home describes itself as the “largest hard money lender” [providing] “fix and flip loans up to 90% LTC and 80% LTV.” Unlike many of the other sites that aim their value proposition at investors, Lending Home addresses itself primarily to homeowners how are looking for loans and are willing to pay “hard money” rates of interest to get cash. Accredited investors can participate in Lending Home in increments as low as $5,000.
Roofstock’s tagline is “Property Investing Like the Pros.” Like Lending Home, Roofstock focuses only on single family residential properties. Differently, however, Roofstock allows accredited investors to invest directly through loan participations as well as through small funds that focus on particular regions or particular rates of return. Roofstock also emphasizes, through its underwriting and its messaging, the underlying quality of the properties and their surrounding communities, school systems and the like. Browsing through loan opportunities on Roofstock feels more like browsing through listings on Zillow than looking for investments.
Patch of Land
Patch of Land is one of the largest and most heavily-trafficked real estate crowdfunding sites. The site claims to have originated more than 400 loans for over $245 million in loans, returning over $61 million to investors. Although Patch of Land has made investments in multi-family and commercial real estate, more than 70% by value of its investments have been made in single family real estate.
Fund That Flip
Fund that Flip is a site that proudly advertises its role in financing single family residential rehab and resale projects. The site claims that the sponsors underwrite individual deals, requiring borrowers to put at least ten percent in the property’s value in equity. The site also tries to entice investors, claiming average returns between 10 and 14%.
The Future of Real Estate Crowdfunding
Real estate crowdfunding has definitely arrived. Through the dozens of existing sites claiming to offer some kind of real estate crowdfunding, investors have invested more than a billion dollars through thousands of investments in just a few short years. While this method of investing is still very small (in contrast to retail investments in mutual funds and the stock market) it fills a market need that shows no sign of disappearing.
For real estate crowdfunding to achieve a wider degree of acceptance, platform owners will need to continue to facilitate high quality investment opportunities while improving transparency. Wider acceptance will require a level of information sharing that does not yet exist in the industry. Even the most popular sites today have varying levels of information available to potential investors. These inconsistent levels of disclosure can undermine the trust that is necessary to grow crowdfunding as a method of investing. Real estate crowdfunding sites that facilitate exempt transactions under Rule 506(b) are not regulated, and that is probably a good thing. But the lack of regulation also permits a wide diversity in style and approach that can make comparing the platforms difficult.
If the leading crowdfunding platforms could collaborate on a standardized “scorecard” that pulled together standard metrics on transactions, investment amounts and rates of return, the result would make it possible for both investors and project sponsors to compare platforms on a level playing field. The investor confidence that might come from such a development would encourage new investors to come into the market. Platforms that did not adopt the scorecard at first would experience market pressure to begin reporting results in the scorecard format. Adopting a standardized scorecard for recording would, in a sense, demonstrate the power that crowdfunding was supposed to represent, by making it possible for the market to adjust itself to the information needs of the investing community.
 Surowiecki, James, The Wisdom of Crowds, Anchor Books (2005).
 Wilson, Jonathan B., Follow the Crowd: What the Future of Crowdfunding Holds for Startup Restaurant Owners, Restaurant Owner Startup & Growth Magazine, 18 (Feb. 2016).
 PeerStreet claims that its loans have generally yielded between 6 and 12%. See PeerStreet FAQs, available at https://info.peerstreet.com/faqs/how-do-peerstreet-returns-compare-to-other-debt-investments/ (last visited January 29, 2017).
 MogulREIT I, LLC SEC File, available at https://www.sec.gov/cgi-bin/browse-edgar?action=getcompany&CIK=0001669664&owner=exclude&count=40&hidefilings=0 (last visited January 29, 2017).
BY Rachael Everly ,CrowdFund Beat Guest Post,
Crowdfunding platforms are a product of technological advancement. However at the end of the day they are a financial solution and their success is dependent on the economic situation at a given time. Many businesses prosper when the economy is booming and all is good. Crowdfunding on the other hand has always prospered when the economy is not doing well, and even during the worst recessions.
During the last recession of 2008, there was a great lack of confidence among banks. This led to a drying up of sources of finance for the small business owner and for individuals who were just starting out. Either their loan applications were outright rejected or they were given such high interest rate offers that they were forced to decline. But with the advent of digitalization came the much flexible option of crowdfunding that led smaller business achieving the necessary finances much cheaply and much easily.
Setting up a crowdfunding platform is an excellent business idea for it is something that the entrepreneurs need. However to be successful it has to meet the finance needs of people successfully.
- Initial set-up
Crowdfunding platforms are a place where investors and people looking for finance gather. So you need to be sure about how you are going to attract investors in your starting days. Your whole business is dependent on them.
You also have to ensure that you offer a “deal” that is both acceptable to investors and the people looking to borrow. The system has to be set up in a transparent way in order to induce trust from all the involved parties. In order to achieve this you will have to focus on a marketing strategy that delivers the maximum information. Information about how you operate, the charges for the borrowers and how are you going to handle the funds at your disposal. You will especially have to convince people that your platform is a secure place to invest. You will need to figure out your marketing channels. The most basic will be your own company blog and possibly even your own in-house developed app (which could be done via crowdfunding).
- Developing a brand
Once the crowdfunding concept was new and there were hardly any platforms on the scene. Now competition is arriving and the first mover advantage is long gone. You will have to differentiate yourself from your competition. In the simplest way, it could be by the way of focusing on the aesthetics on your website that is the logo and theme and the usability.
Secondly you should match the features being offered by the competition and where possible streamline your processes even more. You will have to communicate your “differences” via email marketing and company blog. The best way to do this is to provide content that is actually useful for the reader and yet brings your platform to attention.
- The technical expertise
At the end of the day customers prefer businesses that provide them with a superb quality service or product. Crowdfunding is essentially a fintech product and thus technology is its backbone. Your crowdfunding platform must not only be user friendly, but it also must be secure and have features that help you make better decisions. For example, Zopa has its own algorithm for deciding which borrowers are more likely to stick to repayment schedules.
In order to succeed it is very important that you analyze your existing competition and see what features you have to match in order to attract customers and what you can do better than them.
In the Fall of 2016, I penned an article entitled, “Modernizing the Self-direct IRA – The Trillion Dollar FinTech Opportunity” – the first in a new series of articles that focuses on next-generation retirement planning. The piece underscored how FinTech will mend America’s flawed retirement system and foster the growth of “digital” investing.
This initial report drew attention to the growing necessity for a low-cost, high speed, autonomous retirement solution that would meet the demands of today’s alternative micro-investor. Most significantly, the piece summarized the two distinct individual retirement account prototypes – the Brokerage IRA and the Trust Company IRA – which are vying to become the self-directed IRA exemplar and dominate the $14 trillion retail retirement market.
Sometimes I feel like I am the only one sensing a war brewing in the retail retirement market. But then again, I am somewhat clairvoyant.
Perhaps the majority of America’s retail investors are too busy reluctantly allocating their retirement dollars to sanctioned bond funds – many of which yield more clout than performance – to even notice the race to create a next-generation retail retirement product that will economically custody coveted micro-sized alternative investment products and, in doing so, ensure that a greater number of Americans maintain more properly diversified retirement portfolios.
Maybe most old-school financial professionals are just too preoccupied chasing the “whale” to realize the imminent colossal impact of the rising micro-alternative investor.
No matter the rationale, the fact is that this battle to produce a next-generation retail retirement vehicle is likely to go down as the largest industry duel in the history of commerce – dwarfing the cola and software wars by trillions.
The victorious retirement product stands to inherit the power to redirect $14 trillion dollars of mutual fund assets and disrupt long-standing retirement asset monopolies – thus paving the way for a superior breed of investment products to emerge (download: http://www.slideshare.net/smox2011/the-trillion-dollar-fintech-opportunity).
Unlike previous corporate clashes, the winning IRA model is easy to predict. The frontrunner will be the one possessing the most optimum technological and regulatory framework to accommodate the needs of the modern retail investor. Today’s retail investor is not looking for another mutual fund. He is not begging for ETFs. Nor is he interested in day-trading stocks. Instead, he is craving yield, and he is demanding access to the same level of returns that institutions have been enjoying for years through alternative asset diversification. Simply put, modern investors are looking for a self-directed retirement vehicle that enables them to readily, easily and affordably spread tiny increments of retirement capital across a broad range of asset classes.
Except for the possibility of a sudden legislative change, hands down, the trust company based model will emerge as the clear victor. The Brokerage IRA is bound by too many compliance constraints to enable it to efficiently and cost-effectively facilitate micro investments into alternative asset classes such as P2P notes or crowdfinanced offerings.
The Trust Company IRA, by contrast, operates under a much more favorable regulatory scheme, and any technological shortcomings are presently being addressed and conquered (see: http://www.prnewswire.com/news-releases/ira-services-launches-p2p-lendings-first-cloud-based-api-driven-retirement-investment-solution-at-lendit-2016-300247413.html).
Because it is faster and easier to overcome a technological deficiency than it is to amend regulations, the Trust Company IRA will continue to amass a significant advantage. This is especially true as technology becomes less and less of a commodity and the political climate becomes more and more contentious
There are simply too many compliance-related obstacles that FINRA-regulated BDs would need to surmount in order to formidably compete with the trust company based model. Perhaps one of the most pressing is the Department of Labor’s fiduciary rule which is scheduled to take effect in April.
Under the new DOL rule – which expands the definition of a fiduciary to include commission-based brokers – brokerage firms that handle retail retirement accounts will find themselves facing additional and unwelcomed liability.
In the wake of the DOL rule, retail brokerages have already been seen scrambling to adjust their existing retail retirement product lines. Merrill Lynch has announced that it will be closing its commission-based retirement business altogether, and Edward Jones pronounced that it will simply stop offering mutual funds and ETFs as options in commission-based retirement accounts.
Yes, you read that correctly. Retail brokerages would prefer to limit access to investment products or exit the retail retirement business altogether than to deal with the regulatory headaches of helping small investors prepare for retirement.
Instead of being able to access “prepackaged” diversified investment products, Edward Jones’ retail clientele will either have to self-diversify across stocks, bonds, annuities and CDs, or move to a managed account that charges an asset-based management fee. Since the typical retail investor’s account is too small to properly self-diversify using individual investment products such as stocks and bonds, and since asset-based management fees tend to be much more expensive than one-time commissions, once again retail investors are getting the shaft.
According to CEI finance expert John Berlau, “The DOL fiduciary rule will restrict access to financial advice and reduce choices for lower and middle-income savers. The restrictions can deter companies from serving middle-class savers, creating a “guidance gap” that could cost an estimated $80 billion in lost savings.”
As the DOL Fiduciary Rule succeeds in eliminating both financial advisors and investment choices from the traditional retirement planning equation, smaller investors will be forced into taking a more autonomous stance to retirement prep – leading to a seismic shift in both retail assets and retirement vehicles.
This will have widespread implications on the financial services industry that will include a mass exodus from brokerage IRAs into Trust Company IRAs as well as a flock to robo-advisors, marketplace finance and well as P2P and digital investing – a trend in retail investing that is already well underway.
As the battle for the retail retirement account unfolds, I am going to be reveling in the irony of how once again needless regulatory oversight is helping fuel the FinTech revolution.
Originally published on Dara Albright Media.
Recognized authority, thought provoker and frequent speaker on topics relating to market structure, private secondary transactions and crowdfinance. Welcome to my new personal blog where you can glean unique insight into the rapid transformation of global capital markets.
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Report: Real Estate Crowdfunding Set to Be $5.5 Billion Industry in 2017
Crowdfund Beat Media, “2020 Prospect Report”the leading research and advisory and firm specializing in crowdfunding solutions for private, public and social enterprises, has announced the release of its comprehensive 2017 CF-RE Crowdfunding for Real Estate report, which will provide the first ever detailed look at the intersection of real estate and crowdfunding. The 120-page report features data on the exponential growth of real estate crowdfunding, the emergence of specialized real estate crowdfunding platforms and how this revolutionary new method of real estate finance and investment is disrupting this asset class.
Interesting to note that some platforms are purely providing additive capital to sponsored deals, earning a fee for intermedition, while some are a bit more compensatory, with the inclusion of management fees and a carried interest. As of now, all are focused on accredited investors, though one has included DPOs in their mix. Here is the lists:
2017 Real Estate Crowdfunding Sites. Alphabetically
- Acquire Real Estate
- American Colonial Capital
- American Homeowner Preservation
- Blackhawk Investments Corp
- Carlton Accredited Equity Crowdfunding
- Creative Equity Group
- Crowd Venture
- Funding Hamptons
- Funding Roots
- Global GroupFund
- High Income Real Estate
- Hotel Innvestor
- Inner 10 Capital
- KB Holdings
- KC iFund
- Open Source Capital
- Patch of Land
- Peloton Street
- Property Pool
- Razr Ventures
- Real Circle
- Real Liquidity
- Realty Mogul
- Realty XE
- Silver Capital Portal
- Terra Funda
- The NNN Crowd
- Tycoon Real Estate
- Yield CrowdWe Are Crowdfunding
- 1031 Crowdfunding
Not in the list? News@crowdfundbeat.com
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LOS ANGELES–(BUSINESS WIRE)–NextGen Crowdfunding®, the leading company that helps people explore new types of crowdfunding, announces the season one premiere of the Crowdfunding Video Awards (CVAs). This new, six-part series of online awards shows will showcase videos from both rewards-based crowdfunding campaigns featured on Indiegogo, Kickstarter and other platforms, as well as equity crowdfunding campaigns.
“The campaign videos we’ll be showing viewers over the course of this season showcase creativity, passion and the entrepreneurial spirit.”
Season one kicks off on Wednesday, January 25 with a live-online show at 3:00pm PT/ 6:00pm ET. Viewers will log on to NextGenCrowdfunding.com to watch and vote on their favorite crowdfunding campaign videos. The first season of the CVAs will include five preliminary awards shows, and will culminate in a final seasonal awards show highlighting the best videos of the season as voted on by the public.
“We received a wide variety of submissions from crowdfunding campaigns — spanning industries from technology to pets to wellness — to participate in the first season of the Crowdfunding Video Awards,” said NextGen founder Aubrey Chernick. “The campaign videos we’ll be showing viewers over the course of this season showcase creativity, passion and the entrepreneurial spirit.”
The contestants that will be showcased during the first round of the Crowdfunding Video Awards include:
- Codeybot by Makeblock: Makeblock is an open-source Arduino robot building platform to turn ideas into success.
- Cowin Ark by Cowin Music: Innovative audio company pioneering revolutionary Bluetooth speaker design.
- Flash Porter by DFiGear: Flash Porter lets you quickly and easily backup your precious digital photos and videos from any device – smartphones and digital cameras.
- FlowMotion by FlowMotion: FlowMotion ONE – Capture smooth cinematic videos with your smartphone. Auto-follow tracking, motion time-lapse, and so much more.
- High-End Theater by XGIMI H1: High-end Theater with 5 minute setup | 1080p LED Projects Up To 300″, Transform 2D Film Into 3D, Android OS.
- Limitless Phone Case by Mous: Whether you drop your iPhone from your pocket or from 45ft, Limitless cases will protect your phone from breaking.
- Modobag by Modobag: Modobag is the World’s First Motorized, Rideable Luggage and is changing the way people travel.
- Piqapoo by Piqapoo: A team of dog lovers that love their dogs but not picking up after them.
- PowerFilm: The revolutionary solar panel with an integrated battery to charge your devices anywhere, anytime.
- ZEEQ Smart Pillow by REM-Fit: REM-Fit is a team of dedicated individuals who believe in a restful night’s sleep. We all know that sleep is often put to the wayside in our busy lives.
Supporters of NextGen’s CVAs include the Crowdfunding Professional Association (CFPA), an organization supporting the growth of the crowdfunding industry, as well as the crowdfunding portals OurCrowd, SeedInvest, StartEngine, Republic and WeFunder and media companies Crowdfund Beat and Crowdfund Insider.
To learn more about the contestants participating in the first CVAs show, please click here.
About NextGen Crowdfunding
NextGen Crowdfunding helps people explore the new era of equity crowdfunding. With unique in-person events and live streaming video content, NextGen enables individuals to discover, research and support specific companies launching crowdfunding campaigns. NextGen’s unique Ignition Events showcase the companies and emerging businesses presenting equity crowdfunding campaigns. NextGen also provides educational content, including online webinars, boot camps and videos, to inform the public about equity crowdfunding. NextGen also provides education to, and visibility for, companies with crowdfunding campaigns. As a purpose-driven company, NextGen aims to encourage entrepreneurship and help spark a new economy. Visit http://www.nextgencrowdfunding.com.
For NextGen Crowdfunding
Jason Feldman, 212-319-3451, ext. 644
By Dara Albright,CrowdFunding BeatGuest Editor, FinTechREVOLUTION.tv , Dara Albright Media,
The year began with the renaissance of the retail investor and it ended with a massive crowdfinance conference which centered – for the first time – around the actual crowd (“retail”) investor.2016 will be etched in time as one of the most unpredictable and metamorphic years in our planet’s history. While every fragment of civilization will feel the effects of 2016, the year will leave an indelible imprint on financial services, global political landscapes and mass media for generations to come.
In between was the successful completion of the Elio Motors Reg A+ offering, the first phase of investment product ingenuity through JOBS Act exemptions, the launch of the first retail retirement technology, the “fix Crowdfunding bill”, the introduction of Congressman McHenry’s new FinTech legislation aimed at fostering financial innovation, the implementation of Reg CF, lots of industry turmoil, a surprising Brexit vote, and perhaps the most controversial and suspense-filled U.S. election in history.
2016 was also the year that the Cubs finally won another World Series and I discovered the video selfie.
Before I underscore how all of these events will have monumental economic implications on 2017 and beyond, let me just take a moment to boast about the accuracy of last year’s predictions.
Last December I forecasted that:
- Robo-advisors will find opportunities in crowdfinance – Just as I predicted, ETF-centric robo-advisors made an entrance into crowdfinance this year. In early 2016, robo adviser, Hedgeable, first entered the crowdfinance space by offering its retail clientele opportunities to venture invest through leading equity crowdfunding platforms such as AngelList and CircleUp. A few months later, Hedgeable announced that it will soon be rolling out a peer-to-peer lending product. Furthermore, based on conversations that I’ve had in recent months with robo-advisory firms as well as with companies that develop technology for robo-advisors, I anticipate many more robo-advisors will soon be joining the party.
- Retail Financial Product Ingenuity will Escalate – As discussed last year, GROUNDFLOOR made history in late 2015 with its Reg A+ qualification to offer micro-investors small pieces of real estate debt. In 2016, two more companies broke ground in the Reg A+ arena: StreetShares and American Homeowners Preservation – offering retail investors the ability to capture both monetary and social returns through micro-investments into private businesses as well as individual mortgages, respectively. Companies like these are helping to inspire a new generation of retail alternative products. This type of investment product ingenuity is about to spread well beyond online platforms and marketplaces. I predict that any financial services business involved in the production or sale of alternative securities will soon look to expand distribution by taking advantage of this modern regulatory framework.
- Straight Equity Title III Offerings will Fall Flat – Indeed they have. According to NextGen Crowdfunding, a leading provider of crowdfunding deal data, investors have committed to invest slightly more than $15 million into Title III equity crowdfunding campaigns during 2016. $15 million equates to approximately 60 Hillary Clinton speeches or the amount that the U.S. national debt grew since you started reading this article. $15 million won’t even begin to scratch the surface of fixing our economic woes. To put it bluntly, $15 million is not an industry – it’s barely even a house in the Hamptons! Unless and until more creative hybrid financing structures are employed for Reg CF offerings, the market for Title III Offerings will remain insignificant.
- Reg A+ “Testing The Waters” will Call Attention to Serious Title II Crowdfunding Flaws – While no one really cared much about this issue in 2016, I do believe that the considerable disparity between total “indications of interest” and the amount of funding actually raised will eventually lead to regulatory amendments. It is completely misleading for a company to “advertise” that it has garnered sizeable funding interest without ever having to notify the public that it failed to raise even a fraction of the amount.
- The Crowdfinance Playing Field will Undergo Leadership Change – Wow, was I right about this one! Industry leadership has begun to undergo significant change in 2016 – particularly in marketplace lending. I stand by my statement that, “New leaders will rise. Some unexpected frontrunners will fall. The businesses that will best be able to oblige the retail customer, adapt to regulatory changes, and penetrate retail’s $14+ trillion retirement capital will prevail.”
- Hoverboards will Disappear from Toy Store Shelves – Uh, I meant to say Galaxy Note 7’s will disappear from the shelves. Yeah, yeah, that’s the ticket. (In the era of “fake news” this totally passé catchphrase deserves to make a comeback).
While some of my last year’s prognostications have yet to fully reach fruition, I’m still standing by all of my 2016 predictions. I’ve come to realize that predictions, much like karma, operate on their own timetable. Even some of the prophecies of the great Nostradamus were a year or two off. And, let’s not forget that Robert Zemeckis was just one year too early in forecasting the Cubs World Series victory.
Speaking of which, you are probably wondering what the Cubbies winning the World Series and video-selfies have to do with the future of personal finance anyway.
A lot. Maybe even everything.
The Cubs World Series win and video selfies are empowering underdogs everywhere. If the most mocked team in the history of professional baseball can win a World Series and amateur videographers can become universally recognized broadcast journalists, then long shots everywhere can achieve astonishing victories. Non-politicians can win presidential elections. Non-lawyers can prevail in litigation. Small businesses can access capital as freely as large corporations. And primarily due to crucial advancements in micro-investing technology, even investing novices will be able to outperform financial experts. At long last, the little guy can have just as much of an opportunity to create wealth as the George Soros and Warren Buffet ilk.
This brings me to my bold 2017 predictions (or as Ron Suber would likely call them “Big Hairy Audacious” predictions).
- Underdogs across the land will triumph in 2017 – The Chinese predict that 2017 will be the year of the rooster. I disagree. I believe that 2017 will be the year of the Rudy.
- The broader markets will correct – I foresee the broader markets headed for a crash – triggered primarily by manipulators, speculators and years of unsustainable monetary policy. Our public equity markets have been artificially propped up by policy for far too long. America simply can’t keep lowering rates and printing its way to prosperity. Interest rates have nowhere left to go but up, particularly if Trump makes good on his economic plan and we see some real economic growth. I foresee rate hikes leading to a stock market correction. Although it may be a short-lived correction, those who are well-diversified and have allocated some capital to less volatile, less correlated asset classes, will be better able to weather the storm.
- The face of financial media will Become Unrecognizable – In 2016 the established media awoke to the revelation that it no longer holds the relevancy that it did in previous generations – something housewives on Facebook have known since about 2008. Although it tried hard not to accept it, traditional media has been hemorrhaging influence for quite some time now. Just like how the video killed the radio star, how Napster crushed the CD, how Netflix annihilated Blockbuster and how Amazon overtook Barnes & Noble, communications technology is on an unstoppable path to demolish mainstream media. While bloggers have been gaining prominence for years at the expense of print media, it will be the video-selfie that delivers mainstream media its final blow. Financial media is no exception. The 2016 U.S. presidential election established social media – not television – as the dominant medium. Clearly, more people tuned into Infowars than to Rachel Maddow. If the video selfie can help influence a U.S. election, its impact on financial services will be colossal. Expect financial content to become edgier as well as more engaging, encompassing and interactive. Expect new financial voices to emerge and gain prominence. Most significantly, expect these new financial media players to forever transform the way people invest, where people invest and how people invest.
- FinTech will Expand into Older Demographics – I see countless FinTech business plans. Most of them are loaded with statistics on millennials, ideas for targeting millennials and even pictures of millennials. Yes, many of us industry folks are well-aware that millennials prefer having a root-canal than going to a bank. However, FinTech is not a millennial-centric market. I predict that 2017 will be the year that FinTech crosses demographical thresholds. I expect that older demographics will start incorporating FinTech into their daily routines. As a result, I envision more FinTech innovation being directed towards developing products for other generations, particularly retirees.
- The U.S. retirement infrastructure will begin to undergo monumental transformation in 2017 – The $14 trillion retail retirement industry is on the cusp of great transformation. Thanks to the progression of FinTech, RegTech and AltTech, the retirement industry is about to become fairer, simpler and more inclusive. Expect regulatory and technological innovations to be introduced that will unwind a broken and unjust retirement system. Expect retirement plans to become more consumption driven than employment-based. You can also look forward to seeing the mass adoption of game-changing financial products that will give everyone – including present retirees – a fighting chance to prosper throughout their senior years.
The story of financial services is unfolding and it is growing more fascinating by the minute. And I am truly grateful to be alive at this particular moment in time to witness it firsthand.
Anyone who has read my previous year-end articles knows how reflective I tend to get as I approach my Christmas Eve birthday. And this year I am especially pensive given the fact that I am turning 29 (again) and that mercury is in retrograde and that Uranus (pronounced: “Your Ron Issss”) is, well it is somewhere in the universe doing something to affect my mood. Whenever that happens, I tend to seek inspiration in a poem, a lyric or even in just one simple word.
It is for this very reason that I subscribe to dictionary.com’s word of the day. On December 16th, dictionary.com’s word of the day was “hotsy-totsy” and it means, “about as right as can be”. Because I vowed to find a way to incorporate this quirky “makes-you-feel-like-skipping” word into an article, I would like to simply conclude by wishing everyone a joyous holiday season and a very hotsy-totsy 2017!
Originally published on Dara Albright Media.
Recognized authority, thought provoker and frequent speaker on topics relating to market structure, private secondary transactions and crowdfinance. Welcome to my new personal blog where you can glean unique insight into the rapid transformation of global capital markets.
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In Part 1 I covered all of the good things that we have seen as crowdfunding continuously gathers momentum across the world. The future looks bright indeed!
However, as with any new industry forging ahead and desperate for acceptance, the surrounding hype that comes with it often blurs reality, with any form of negativity simply ‘brushed under the carpet’ so to speak. Naturally, those fully vested in the industry (including yours truly) have a lot on the line, as everyone charges ahead in full promotion mode. The ‘painted picture’ is a rosy one and for a very good reason, but there is a dark and sometimes sinister side to the industry as well.
Part 2-The Bad
The Industry Evolves
Let’s rewind a little. In an interview with Film Threat back in October 2010, Indiegogo co-founder, Slava Rubin said “… what we are now and what we are for the future is we’re all about allowing anybody to raise money for any idea” Although this may have been true at the time, it’s certainly not applicable today. Reality is that not ‘anybody ’can raise money through crowdfunding unless they are a) extremely lucky, or b) have a substantial amount of money to begin with. Let me explain a little further.
My own entry into the crowdfunding space happened by default during June of 2012 when confronted with a desperate plea for funding from a lady by the name of Louise Joubert of the Sanwild Wildlife Sanctuary. Louise put out a post on the Sanwild Facebook page saying that sponsors had pulled up to 70% of the funding for Sanwild due to the recession, so she was unable to feed the 16 lions she rescued from the ‘canned hunting’ industry, and she was getting to the point of desperation and was seriously considering euthanizing them. Louise saw this as the kind way to put an end to any potential suffering. This sad story really pulled at my heartstrings and after a phone call or two to South Africa, I volunteered to see if I could help by using this new fundraising method called Crowdfunding. To cut a long story short, we did manage to raise over $20,000 through an Indiegogo campaign and in turn bring a happy ending to this story with the 16 lions being saved. It was an exhausting process, especially with little to no budget to market the campaign; but through teamwork, perseverance and leveraging off of our social contacts, we made it. The point here is that with almost no campaign budget (but instead 100’s of hours invested) we were able to do what we set out to achieve – Save Our Lions.
During 2012 we saw on average 30-50 campaigns launching on the Indiegogo platform each week and probably around 60-70 per week on Kickstarter. These low numbers made things much easier for anyone crowdfunding their ideas, as competition for ‘eyeballs’ was almost non-existent, the media was receptive to any crowdfunding news at all, and the public was in a state of confusion as to what they were really doing when contributing to these campaigns, with many thinking they were simply making an online purchase just as they would do on Amazon.
How things have changed.
Fast forward to 2016 and with approximately 300-400 campaigns launching per week on the Indiegogo platform and up to 600 per week launching on Kickstarter, the competition is fierce. Add to this that there are now well over 1000 (and counting) crowdfunding platforms globally and you’ll begin to see the real picture.
The corporate world is now waking up to this new, low cost way of validating and funding projects and products. Big names such as Sony and GE’s entry into crowdfunding gives the small guy very little chance of competing with them.
In a recent article published by The Verge earlier this year titled “Indiegogo wants huge companies to crowdfund their next big products” and a sub heading which reads “Indiegogo wants big brands to start crowdfunding” we see how they have changed for the worse. Their “Enterprise Crowdfunding” clearly showing that they are not in any way ‘democratizing access to funding’ but instead are an entity solely in the business of making a profit at all costs (more on this particular story in Part 3 –The Ugly).
I guess the most disturbing words I read in that article are these:
“Large companies can also pay for special placement on Indiegogo’s site, making them more discoverable than other campaigns.”
So, Indiegogo now earns revenue from advertising placements only available to corporates? Shocking to say the least!
This whole scenario stinks and reminds me of a certain politician, who now as president elect, has already made several ‘about turns’, continuously going against the words he used to gain popularity.
I hope you all now realize why the small guy has little to no chance of success, especially now that the heavyweights enter with the resources to squeeze them out. In fact, a well know marketing agency recommends a campaign budget today of a whopping $40,000. I don’t know too many ‘little guys’ with that kind of cash to spend on an upcoming crowdfunding attempt, do you? Wasn’t the whole point of crowdfunding to raise money and not spend it?
Although crowdfunding was originally pitched as democratizing access to funding for the small guys, this is no longer true. Without a good chunk of capital to start with, their campaigns are doomed before they begin.
Equity Crowdfunding – The SEC (Securities and Exchange Commission)
On April 5th 2012 president Obama signed the Jump Start Our Business Act (commonly referred to as “The JOBS Act”) giving the SEC 274 days to write up the necessary rules and regulations. The main purpose in the implementation of the JOBS Act was to stimulate the creation of jobs through small business access to capital.
The JOBS Act substantially changed a number of laws and regulations making it easier for companies to both go public and to raise capital privately and stay private longer. Changes include exemptions for crowdfunding, a more useful version of Regulation A, generally solicited Regulation D Rule 506 offerings, and an easier path to registration of an initial public offering (IPO) for emerging growth companies.
The titles of the bill that make equity crowdfunding work are:
- TITLE II – Access to capital for job creators (REG D)
- TITLE III – Crowdfunding (REG CF)
- TITLE IV – Small company capital formation (REG A+ or mini IPO)
What’s with all this jargon you may ask? Good question, and the answer is one which I hope many academics will learn to answer in their writings. Effective communication is always better crafted to suit a broader audience. Within crowdfunding, I feel it is important for all – lawyers, accountants, broker dealers etc. – to understand that in our attempt to educate the market, we need to simplify the language used so as to be better understood by the majority.
Back in the 70’s the KISS acronym and methodology – “Keep It Simple Stupid” was very popular for good reason. The simplicity of this methodology should be more applicable today than it ever has been.
REG D allows the issuer to raise funds from accredited investors only meaning in essence from a select few rich people.
REG CF allows issuers to raise funds from both accredited investors and non-accredited investors (the general public) but is subject to limitations.
REG A+ allows the raising of up to $20M through Tier 1 and up to $50M through Tier 2.
Titles I, V, and VI of the JOBS Act became effective immediately upon enactment. Understanding these within the context of this article is not really important so I won’t bother explaining.
The SEC approved the lifting of the general solicitation ban on July 10, 2013, paving the way for the adoption of REG D which went into effect in September 2013. Following this was REG A+ which went live during June 2014 – 2 years after the signing of the Jobs Act – and finally the long anticipated (and most beneficial to small business) REG CF on May 16th 2016 – more than 4 years since the signing of the Jobs Act!
Yes, you read that right – 4 years later. A whole 4 years of lost opportunity. Why 4 years you may ask? Well, through a series of meetings, mountains of paperwork, a change of chair, commenting periods, rewriting this and rewriting that and a whole heap of other hurdles to jump through in between, a whopping 685 pages of regulations was created. Certainly no KISS methodology involved there!
During this period, how many small businesses have folded because they had no access to much needed capital? How many could have been saved from collapse? How many precious jobs were lost during this lengthy and tedious process? The answers should be fairly obvious to fathom.
Based on current information from successfully funded campaigns, we see that so far around $175M has been raised under REG A+ crowdfunding and about $15M over the past 6 months through REG CF. Imagine what these numbers would look like had the SEC been more efficient in the role they played during the entire rulemaking process.
On the other hand, the United Kingdom took a fairly relaxed approach to rulemaking which has led to the creation of the most dynamic alternative finance market in the world. In real terms they are 5 years ahead in the game and are seen as the leaders in this space. The United States is seen as a failure.
Were the SEC attempting to break records as the slowest crowdfunding rulemakers in the world? Maybe not, but it appears they are well positioned to claim this shameful accolade!
The Pretenders – Self –Promoters and the Charlatans
Before I begin, let me just say that there are many among us who have ‘earned their stripes’ in this industry. I hold these people in the highest regard for their dedication and commitment to the cause. Far too many to mention of course, but you know who you are, so thank you for doing what you do! Through the many long days of hard work, dedication, countless hours of research, and in some cases, hands on experience with crowdfunding projects of all shapes and sizes, they stay true to their objectives of making the crowdfunding industry one to admire. These people gain respect naturally through their words and actions alone. They generally keep a fairly low profile too, with little need to go on the self-promotion bandwagon, as people naturally migrate to them anyway.
Let’s briefly return back to 2012, when crowdfunding was really still in its infancy and there were very few players involved. To put things into perspective, at the time of launching my own crowdfunding marketing agency Smart Crowdfunding under the crowdfunders.us domain, there were only four other active crowdfunding marketing agencies globally. The industry was tiny and it was very easy to know who was who.
This leads me to a telephone conversation I had one day during early 2013 with one of the other agency founders who had taken issue with the fact that I was now actively competing with him. After listening to his concerns, I politely brushed them aside and ended the call saying “If you are concerned about competition now, then wait to see what’s coming over the next few years”. He grumped and the call ended. Move on to 2016 and we see a whole load of entrants into this space.
Back to the point:
There are those who clearly try to take shortcuts in an attempt to get to the top, with integrity thrown right out the window in their pursuit of money and stardom. Many of these types have little care for the health of the industry as a whole, but instead their own greed drives them forward. They are quite easy to spot though. Lies are abundant and a little due diligence goes a long way in discovering the truth about them. The wonderful world of the Whois lookup is a great tool to confirm some claims of “we’ve been doing this for the past 5 years” as domain registration dates tell the truth. Some have woken up to hiding these details and hide behind a proxy registration service. In fact, a little while ago I had discovered exactly this with a crowdfunding marketing agency who made such claims (and still do) of having been around for the past 6 years. I did a Whois search many months ago to only find that their domain was registered in 2013 – and not 6 years ago as claimed. Further investigation confirmed this. Today their domain registration information is now hidden via a proxy.
One of the most common things I see today is those with very little industry experience becoming self-proclaimed “Experts”. Let’s elaborate on this for a moment.
During 2014 I attended a crowdfunding industry conference, and as I sat in the audience while the proceeding began, the moderator allowed the panel give a brief introduction of themselves. There were 4 on this particular panel, 3 of whom I knew of. To my amazement, one particular character was introduced as a crowdfunding marketing expert. I listened intently to this persons ‘pitch’ and also the advice they gave to the audience when confronted with questions such as “What’s the single most important tool to use when crowdfunding? Their answer? PPC (Pay per click). Wrong! In disbelief, there were a few shaking heads in the audience, mine included. Had this person’s earlier claim of “I’ve worked on 80 Kickstarter and Indiegogo campaigns” during their introductory pitch been true, they would clearly know this was incorrect information. Following up from this and after checking out the real facts it turns out that today, this person has run a single Indiegogo campaign of which struggled to get to $10,000 funded. I suspect a fair share of self-funding activity there too. This example is one of many we see as the industry powers forward. Being able to spot these “experts” is fairly easy when you know what to look for.
You see, I have followed Indiegogo campaigns in particular like a hawk. My early career in crowdfunding was built around this platform so it’s rare that even a single campaign that’s raised more than $5,000 gets by me without notice.
The biggest telltale sign of those who attempt to take shortcuts to stardom is the lack of consistency in their pitch. Many appear to have short memories! The character I reference above has since spoken at numerous industry events and their pitch varies from “I have 8 staff and have worked on over 100 Kickstarter and Indiegogo campaigns” to “I have 25 staff and have worked on 80 Kickstarter and Indiegogo campaigns” In reality, as of today they’ve worked on a handful at most and only 1 on the Indiegogo platform can be confirmed under deeper investigation.
I have major concerns! Besides ‘the blind leading the blind”, the entire industry is at stake here, and addressing the real issues now can only bode well for a healthy and prosperous industry for all.
As a colleague recently said “….the integrity of the entire industry is on the line, and if the charlatans are allowed to run roughshod it’ll soon turn into a house of cards.” No truer words have ever been spoken.
Scampaigns – Yes and No
Now this section will be fairly short.
Let me start by saying that intentional scams are really very rare. During my time in the industry I have seen no more than 3 or 4 which were clearly scams from the very beginning ( I’ll elaborate more on this in Part 3 – The Ugly).
What I have seen, however, even from some of my earlier clients may surprise you. They begin the crowdfunding process with good intentions but unrealistic expectations (a common trait among those crowdfunding today).This is their real downfall.
Many are young, inexperienced men and women whose entire focus is on how great their product is. They are emotionally invested and in some cases spend lengthy periods developing their concept or prototype. When the time comes to go crowdfunding, in many cases they lay everything on the line. Some win. Some lose.
Even after running a successful campaign, for many the process of handling large amounts of cash and developing their idea into a real manufactured product, leads to failure due to lack of experience. A weak team adds to their woes and they burn through cash at an alarming rate. In time, they sit in disbelief that they no longer have enough cash to actually finish the product. At other times their concept was flawed from the very beginning but they only discover this when attempting to go to the prototype stage. Facing the inevitable truth is hard for them, and with the angry abuse from their supporters awaiting, they are stuck between a rock and a hard place. Many come to the conclusion that their only route of escape is a disappearing act.
What do the backers, journalist and millions of other disgruntled people call these people? Scammers. Many of their backers didn’t know at the time they were backing a concept in the first place and shout to the high heavens in disgust when they don’t get what they thought they “ordered’ a year prior.
A very recent case of the scam label being attached to something that was not a crowdfunding scam from the very beginning is Healbe GoBe – “the first and only wearable device that automatically measures the calories you consume and burn, through your skin” which raised over $1M. Despite being slammed by all and sundry – including backers, engineers, scientists, and journalists – they eventually brought their product to market, albeit with many ‘teething problems’ still to be ironed out.
My biggest challenge when writing part 2 of my article, was in trying to condense as much as possible, but to still get the message(s) across. I hope I have achieved this even though we still ended up with over 3,000 words. I promise a much shorter part 3. Thank you for reading and I hope this has been helpful.
Look out for Part 3 – The (really) Ugly, where I delve deeper into the real scams of the crowdfunding world, as well as extortion and blackmail attempts and the platforms that seemingly turn a blind eye to it all.
About The Author
Shane Liddell is the CEO and chief Crowdfundologist at Smart Crowdfunding LLC, the crowdfunding marketing agency. He became active within the crowdfunding industry early in 2012, seizing the opportunity to offer help to crowdfunders from all corners of the world. He has delivered successful campaigns for entrepreneurs, startups, corporations and filmmakers and has assisted over 500 crowdfunders with campaign development, consulting, marketing and promotion services, some of whom have raised millions of dollars in the process. He has attended numerous equity crowdfunding industry events, including the SEC Small Business Forum and the CfPA Summit in Washington DC. Shane holds the position of Executive Director of the Crowdfunding Professional Association (CfPA).
ByCrowdfund Beat Guest post,
On November 2, 2016, FINRA terminated the FINRA registration for UFP, LLC (“UFP”), making UFP the first crowdfunding portal to be expelled from FINRA. UFP ran an online funding portal, uFundingPortal.com, where it acted as an intermediary in debt and equity crowdfunding offerings conducted in reliance on SEC Regulation Crowdfunding rules. FINRA’s investigation into UFP alleged that from May through September 2016, UFP violated various SEC Regulation Crowdfunding rules and FINRA Funding Portal Rules. As a result of FINRA’s investigation, UFP pulled its website and submitted a Letter of Acceptance, Waiver and Consent (the “AWC”) in order to settle these alleged rule violations with FINRA. The AWC is available at: http://disciplinaryactions.finra.org/Search/ViewDocument/67004.
FINRA alleged that UFP violated Rule 301(a) and Rule 301(c)(2) under SEC Regulation Crowdfunding. Rule 301(a) requires funding-portal intermediaries like UFP to have a reasonable basis for believing that issuers using its crowdfunding portal comply with applicable regulatory requirements, and Rule 301(c)(2) requires that access to funding portals be denied to issuers that present the potential for fraud or otherwise raise investor protection concerns. FINRA found UFP to be in violation of Rule 301(a) because 16 of the issuers on UFP’s portal had failed to file certain requisite disclosures with the SEC and, in each case, UFP had reviewed these issuers’ SEC filings and therefore had reason to know that these filings were incomplete.
In addition, FINRA found UFP to be in violation of Rule 301(c)(2) by failing to deny access to its portal when it had a reasonable basis to believe these issuers and/or their offerings presented the potential for fraud. For example, FINRA found that these 16 issuers all had impracticable business models and oversimplified and unrealistic financial forecasts; 13 of these issuers disclosed identical amounts for their funding targets, maximum funding requests, price per share of stock, number of shares to be sold, total number of shares and equity valuation; three of these issuers had identical language in the “Risk Factors” sections of their websites; and two issuers listed identical officers and directors even though they had vastly different business plans. Additionally, UFP had reason to know that four of these issuers either had officers or directors who owed back taxes or had not filed an annual tax return for 2015. FINRA also alleged that UFP violated Funding Portal Rule 200(c)(3), which prohibits funding portals from including any issuer communication on its website that it knows or has reason to know contains any untrue statement of material fact or is otherwise false or misleading.
The Securities and Exchange Commission has announced that it will be meeting on October 26, 2016 to consider and adopt amendments to Rule 147, the safe harbor for the issuance of securities pursuant to the so called intrastate exemption. Rule 147 has been problematic for issuers in the past, as it restricts offers and sales of securities solely to residents within a state’s borders.
SEC informal written Staff interpretations issued in 2014 took the position that open internet solicitation by an issuer would preclude the use of this exemption for local businesses, even if sales were limited to residents of that business’s state. Many, including myself, have criticized this Staff position, simply because it was at odds with many prior, longstanding SEC rulings allowing general solicitation via radio and newspaper ads which crossed state borders.
In October 2015 the Commission issued a new proposed rule, Rule 147A, which would have broadened this exemption to allow internet solicitations, but at the same time limited the aggregate amount that could be sold in an offering to $5 million. The Commission also proposed to eliminate the existing Rule 147 in its entirety, something which many commentators pointed out would effectively nullify the majority of the existing state crowdfunding exemptions, now available in approximately 35 states. Moreover, most securities practitioners agree that the statutory intrastate exemption, without a “safe harbor” rule, would render the exemption unusable, leaving issuers with a single option: relying on the new Rule 147A – with its $5 million cap.
Though most comments on the proposed rule welcomed the modernization of the intrastate exemption, most were opposed to limiting the offering amount and eliminating the existing Rule 147 safe harbor. It is therefore highly likely that the final rules will incorporate these comments and concerns.
Stay tuned for more developments on this upcoming Commission action at www.corporatesecuritieslawyerblog.com.