Tag Archives: Crowdfunding

Parallels between ICO’s and the early days of Equity Crowdfunding

 Founder Raiseworth.

(Here is a post from 2015 when I started pushing for Crowdfunding to be moved to the Blockchain)

If I go back to 2008, in the very early days of Equity Crowdfunding, the ASSOB platform has already been operating for around four years. This meant there were plenty of learnings in place even before any other equity platforms had started.

There are parallels here with ICO’s as in the early days many people that approached us to raise capital on ASSOB had not much more than an idea or a sketch on paper. We learnt as the years went by that the existing regulatory structure was not detailed enough to protect investors so we put in place the ASSOB compliance framework. This stood the test of time as 300 odd raises later no evidence of fraud has emerged. This included an “offer document” not dissimilar to the “White Papers” that set out all aspects of the raise including:

  • OPPORTUNITY KEY DETAILS
  • KEY INVESTOR HIGHLIGHTS
  • EXECUTIVE SUMMARY
  • ABOUT THE COMPANY
  • CORPORATE OBJECTIVES
  • COMPETITION & RISK
  • ABOUT THIS OFFER
  • HOW TO APPLY FOR SHARES
  • OWNERSHIP STRUCTURE
  • STRATEGIC GROWTH PLAN
  • USE OF FUNDS
  • DIRECTORS DECLARATION
  • DISCLAIMER
  • GLOSSARY OF TERMS

This was not prescribed anywhere in regulations for documents that weren’t disclosure documents but over a period of time things like quarterly reporting, annual accounts and other things were added to the mix to strengthen the self-regulated compliance framework.

With ICO’s I see the same effort by early adopters in their documents. There is an eagerness to be transparent and provide valuable and essential information for prospective funding providers. However as these are early days there is a widely disparate level of transparency and disclosure by ICO promoters. This is to be expected but just as equity crowdfunding evolved around the world as players engaged with regulators, so will the ICO area.

The main difficulty at ASSOB from 2004 to 2010 was that entities often had no turnover, maybe not a product and no track record. The question was how do you assess these companies as potential investments. This same question is front and centre for ICO’s.

We solved this at ASSOB by using “Fundability Circles” to assess opportunities. Since 2015 a lot has changed, including the emergence of ICO’s so I thought it would be good to update this and do an ICO version.

Here it is!

Here is how you use it!

When you look at an ICO opportunity the three circles equal the main areas to assess a raise. I’ve listed some factors to assist you but basically each of the areas should have a total of 10 points with the total being 30. Obviously if you get 30 out of 30 for an ICO raise you are good to go. What happens though is usually one area is much lower than the other two. Often you can have a great idea with a very technical team but nobody in marketing or legitimisation. Or at other times the marketing team is great but the people are not around to build it.

Most ICO “White Papers” usually include Story, Team and Legitimisation but often they are weighted differently in each white paper. If you are involved in an ICO, or you are promoting one, you should yearn to get balance in the document so the three areas are equally reflected. (Note the intersecting areas between each circle)

  1. The Team must be capable of implementing the story
  2. The Team must appear credible to the potential partners and investors
  3. The Story must be relevant to potential partners and investors

Trust this assists you with your ICO. After seeing 300 odd raises go through this process it is indeed a great way to get an early grip on the possibility of success or as it says in the middle … the “Fundability Potential”.

Interact with FactRight’s Reg A+ Database

According to FactRight’s tracking, the SEC qualified 21 Reg A+ Tier 2 offerings in the second quarter of 2017, maintaining a brisk pace by the standards of Reg A+’s relatively short history. Approximately 45% of the 96 Tier 2 offerings qualified since late 2015 (not later withdrawn or used for merger purposes) have been qualified in just the first half of this year.

 

Three issuers made headlines in June 2017, when each listed common equity (that had been previously issued under Regulation A offerings) on a national securities exchange: Myomo, Inc. (NYSE: MYO), Adomani, Inc. (Nasdaq: ADOM), and ShiftPixy, Inc. (Nasdaq: PIXY). In the wake of successful public listings, it will be interesting to see whether a growing proportion of issuers will seek to use Regulation A as a stepping stone to becoming a fully public company.

Interact with FactRight’s database through the charts below to glean additional insights about the state of the Regulation A space through the second quarter of 2017. The charts below are dynamic; if you click on a single data point in any chart, it will filter the data displayed on the sidebar at left and in the remaining charts. (For instance, if you click on the bar for Tier 2 offerings qualified in the second quarter of 2017, all of the refreshed data in the sidebar and throughout the charts will only pertain to offerings qualified in the second quarter.) Hover your cursor over a chart for additional information.

 

Is the Party Over? SEC Concludes Cryptocurrency Offering Required Registration

By Trudy-Anne McLeary, Associate, Corporate and Finance | Benjamin T. Brickner, Associate, Corporate and Finance

In an investigative report and investor bulletin, the SEC concludes that offers and sales of cryptocurrency coins and tokens may be subject to federal securities laws.

On July 25, 2017, the Securities and Exchange Commission (the Commission) released an investigative report with important implications for issuers and sponsors of initial coin offerings (ICOs) that raise funds for cryptocurrency ventures. The report, prompted by the recent proliferation of such activity, concluded that coins offered to purchasers in ICOs constitute securities regulated by the Securities Act of 1933 (Securities Act) and the Securities Exchange Act of 1934 (Exchange Act). As a result, absent an exemption, such offerings must be registered with the Commission, similar to other public offerings.

The press release accompanying the report notably quotes the new Commission chairman and the new heads of the Corporation Finance and Enforcement divisions. This combined statement gives the report unusual weight and makes clear to Commission Staff that its contents describe senior officials’ current thinking on cryptocurrency regulation.

Background

In early 2015, The DAO, an unincorporated association, organized an IPO-style offering in which investors were offered DAO Tokens in exchange for Ether, a cryptocurrency similar to Bitcoin. The proceeds of the offering were intended to finance projects approved by a vote of DAO Token holders. Projects were to consist of investments in “smart contracts,” multiparty agreements encoded on a blockchain (a transaction ledger stored on a diffuse computing network). This arrangement enables transactions contemplated by such contracts to be self-executing by facilitating their verification and enforcement.

The offering presented investors with the opportunity to share in the earnings from these projects and, importantly, was marketed as such. In June 2016, however, hackers gained control over one-third of the Ether raised through the offering, then valued at about $50 million. Only by fundamentally altering the computing platform on which Ether is based was The DAO able to regain control of most of the stolen assets. Following this attack, the Commission launched an investigation into the applicability of the federal securities laws to DAO Tokens and similar offerings.

Securities Regulation of DAO Tokens and Implications for ICOs

In its investigation, the Commission sought to determine whether DAO Tokens and similar instruments constitute securities for purposes of the Securities Act and the Exchange Act. A security is broadly defined to include investment contracts.1 The Commission found that DAO Tokens met all three prongs of the 70-year-old Howey test for identifying investment contracts and, therefore, constituted a security. Specifically, the Commission’s analysis concluded that The DAO’s investors (1) invested money (2) with a reasonable expectation of gaining profits (3) that were derived from the efforts of The DAO.

The investment-of-money prong was met by investors’ exchange of the digital currency Ether. The expectation-of-profits prong was satisfied by how the offer was marketed. Statements made by promoters and on The DAO website marketed the offering as an investment. The Commission discussed at greater length whether the offering depended on the efforts of others. Here the Commission framed the “central issue” as whether the efforts made by those other than the investors were “undeniably significant” and “essential managerial efforts which affect the failure or success of the enterprise.” The Commission noted that the creators of The DAO “held themselves out to investors as experts in Ethereum,” the blockchain protocol on which The DAO operates. Moreover, they informed investors that they had selected key personnel to manage the enterprise “based on their expertise and credentials.”

The Commission provided extensive additional analysis of this prong of the Howey test, examining marketing factors specific to The DAO, suggesting that other platforms could be structured to avoid the inference that the profits were derived from the efforts of others, thereby avoiding the conclusion that securities were involved. For example, the Commission noted that DAO Token holders’ voting rights “did not provide them with meaningful control over the enterprise.” The Commission observed that the ability to vote for contracts was “largely perfunctory” and that token holders were “widely dispersed and limited in their ability to communicate with each other.”

The Commission proceeded to describe and examine these features at length. This emphasis is notable and suggests that technological innovation could provide token holders with voting rights and communication abilities sufficient to reach a different conclusion under the Howey test’s third prong. Implementing such a platform could be very difficult, especially where holders are numerous, because effective voting control may not be practical. However, the Commission’s detailed discussion on these points, and the issues it identified in The DAO’s offering, raise intriguing questions about how a different approach might ultimately be successful.

The report also noted that The DAO offering would not fall under the JOBS Act’s crowdfunding exemption because The DAO did not meet certain threshold criteria, such as being registered with the Commission and the Financial Industry Regulatory Authority as a broker-dealer or a funding portal. The DAO also raised more than the $1 million annual cap applicable to exempt issuers under Regulation CF.

The Commission’s report does not assert that all coins and tokens necessarily constitute securities, nor that all ICOs are “offerings,” but does emphasize the broad application of securities laws “regardless [of] whether the issuing entity is a traditional company or a decentralized autonomous organization” and “regardless [of] whether those securities are purchased using U.S. dollars or virtual currencies.” The Commission’s simultaneous issuance of an investor bulletin on ICOs explains that “depending on the facts and circumstances of each individual ICO, the virtual coins or tokens that are offered or sold may be securities,” such that their offer and sale would be subject to securities regulation.

Until now ICOs have been organized on the theory that the coins and tokens being issued are currency and therefore exempt from securities regulation. The Commission rejected this argument, likely because purchasers of coins and tokens do so with intent to invest and for value appreciation, not to hold legal tender currency. Likely due to the novelty of the transactions involved and apparent good faith intentions of the participants, the Commission decided not to pursue an enforcement action against The DAO. Future ICO sponsors are unlikely to receive a similar free pass.

Important Takeaways

  • Although the Commission’s report is directly applicable only to DAO Tokens, it effectively puts other ICO issuers on notice that all cryptocurrency coin and token offerings are potentially subject to securities regulation. In particular, coins or tokens that meet the Howey test as applied in the Commission’s analysis are particularly likely to be regulated, as the offering of such tokens likely constitutes an investment contract and therefore will be subject to securities regulation. In addition, ICO platforms should be aware of the circumstances under which they might constitute an exchange, requiring registration as a broker-dealer, national securities exchange or alternative trading system in the absence of an exemption.
  • The Commission’s report raises the question of whether alternative approaches, with robust managerial control in the hands of holders, could be developed to avoid the third prong of the Howey test. Although significant caution is in order, the Commission’s analysis may offer hope to market participants who innovate in ways that carefully address the concerns articulated in the report. As the Commission itself noted, “[w]hether or not a particular transaction involves the offer and sale of a security—regardless of the terminology used—will depend on the facts and circumstances, including the economic realities of the transaction.” Nonetheless, we believe the Commission and Staff will be highly skeptical of conclusions that the federal securities laws do not apply to coin and token offerings.
  • The Commission’s report does not consider whether The DAO’s activities render it an “investment company” for purposes of the Investment Company Act of 1940, which generally requires investment companies to register with the Commission. Given the broad definition of “securities” under this act, and the Commission’s conclusion that cryptocurrency coins and tokens may constitute securities, ICO issuers should carefully consider the applicability of this act to their offerings, and the obligations this would entail.
  • The Commission’s message is clear: ICO issuers and brokers must tread carefully and fully consider the regulatory implications of offerings prior to launch. If the coins or tokens being offered are securities, registration with the Commission will be required, unless an exemption is available, such as in private placements and foreign offerings to accredited and overseas investors, respectively.

Final Thoughts

The Commission’s detailed legal and factual analysis of the DAO Token offering suggests the Commission is closely monitoring cryptocurrency and ICO activities. The Commission observes that “virtual organizations and associated individuals and entities increasingly are using distributed ledger technology to offer and sell instruments such as DAO Tokens to raise capital.”

We expect the Commission will continue to examine the applicability of securities law to each iteration of ICO as this form of fund-raising evolves. Issuers considering an ICO should consult securities law and digital finance experts, including competent legal counsel, before undertaking such activities.

Related Links

Securities and Exchange Commission, “Report of Investigation Pursuant to Section 21(a) of the Securities Exchange Act of 1934: The DAO” (July 25, 2017), available at https://www.sec.gov/litigation/investreport/34-81207.pdf

Securities and Exchange Commission, Press Release, SEC Issues Investigative Report Concluding DAO Tokens, a Digital Asset, Were Securities (July 25, 2017), available at https://www.sec.gov/news/press-release/2017-131

Securities and Exchange Commission, “Investor Bulletin: Initial Coin Offerings” (July 25, 2017), available athttps://www.investor.gov/additional-resources/news-alerts/alerts-bulletins/investor-bulletin-initial-coin-offerings

Delaware Blockchain Initiative?

Crowdfund Beat News Wire,

Delaware Blockchain Initiative: Transforming the Foundational Infrastructure of Corporate Finance

or much of American corporate finance is Delaware corporate law. Later this year, a small change to Delaware corporate law, if enacted, could facilitate a major simplification of the plumbing of the financial system built on top of that foundation. The change is part of the Delaware Blockchain Initiative (DBI), which then-Governor Jack Markell introduced in May 2016. The initiative will allow for the application of distributed ledger technology to many of the private sector’s most basic and critical legal documents, which companies currently file with the Delaware Division of Corporations.

What Is Blockchain Technology?

Blockchain technology, also known as distributed ledger technology, is a new type of information technology that combines two components: distributed ledgers and smart contracts.

Distributed ledgers are mutual, shared ledgers. They create a single record of transactions among multiple parties, providing one immutable, “golden copy” of data that all parties see at the same time and can trust as valid. Consequently, parties do not need to maintain their own copies and reconcile with each other. Distributed ledgers are append-only databases that maintain a perfect, immutable audit trail of who did what and when they did it.

Smart contracts are automated “if/then” software programs that self-execute when a specific trigger occurs. Online bill payment is a widely-used example of a smart contract. On the due date of your bill, the software springs into life and automatically pays your bill by executing the instructions you previously provided. Smart contracts automate workflow.

When smart contracts run on top of distributed ledgers, the combination is so powerful that it can automate wide swathes of financial services. Software can fulfill the functions of clearing and settlement intermediaries, thereby streamlining today’s labyrinthine workflows and eliminating today’s unnecessary counterparty risk and latency in transaction settlement. The transition may take 20 years to complete, but it has already begun.

The Delaware Blockchain Initiative

When then-Governor Markell launched the DBI, he committed State government to use the technology and asked the Delaware State Bar Association’s Corporation Law Council to consider clarifying Delaware corporate law to expressly authorize tracking of share issuances and transfers on a distributed ledger.

The first milestone on DBI’s roadmap has been reached. It is the rollout of distributed ledger technology at the Delaware Public Archives, which has been the “beta” test for the technology within State government. New “smart records” technology automates compliance with laws pertaining to retention and destruction of archival documents, among other features.

The second milestone will be “smart UCC” filings, which will be rolled out later this year. Many attorneys are familiar with the UCC filing process, which is still surprisingly paper-based, slow and error-prone. UCC filings on a distributed ledger will (1) automate the release or renewal of UCC filings and related collateral, (2) increase the speed of searching UCC records, (3) reduce mistakes and fraud and (4) cut cost. Banks have already told us they welcome this upgraded technology for UCCs, and we believe lawyers will as well. We anticipate banks will ultimately link their “smart UCCs” into software that values their collateral, so that the “smart UCC” can automatically call for additional collateral from a borrower when the value of collateral covered by a UCC financing statement drops below a threshold loan value. The new technology will permit UCC filings to become critical tools through which lenders actively manage credit risk, rather than mere “check the box” documents.

The third milestone—distributed ledger shares—will be next on the roadmap.

Why Distributed Ledger Shares Would Transform the Foundational Infrastructure

If shares are registered on a distributed ledger, investors and issuers would be able to interact directly. Property rights would be crystal clear. Capitalization table management would become easy. Proxy voting would be transparent and always accurate. Dividends and other corporate actions (such as stock splits) would be automated and always accurate. Certificates of good standing would never again require a prerequisite forensic audit. Securities lending records would always be accurate, so accidental over-issue of securities would never happen.

None of the above is necessarily true of the status quo.

Delaware’s move to authorize distributed ledger shares would be much more significant than simply an upgrade to shareholder recordkeeping tools. When a company chooses to incorporate in Delaware using distributed ledger shares, the Division of Corporations could validate and file the incorporation plus transfer the authorized shares to the new company. Only shares that are cryptographically “signed” and transferred by the Division of Corporations, in that genesis transaction for the new company, would be considered validly-authorized distributed ledger shares (and a similar procedure would apply to converted corporations). By doing this, the Division of Corporations establishes a perfect record of authorized shares, and the distributed ledger can then track shares that are issued and outstanding.

Gone would be the days of discovering that a company’s capitalization table is wrong before a material corporate transaction, which today requires a scramble to perfect the capitalization table through a Section 204 filing that, in turn, requires a forensic audit and payment of overdue franchise taxes. Furthermore, even after a capitalization table has been perfected, errors still occur today that would simply not be possible with distributed ledger shares. Examples include cases in which a company’s SEC filings report that more shares are issued and outstanding than were actually authorized in Delaware filings, or in which the securities industry counts more shares in omnibus accounts than are authorized in Delaware filings. Distributed ledger technology solves all of these problems, and more, automatically.

Importantly, distributed ledger shares would also solve an inconsistency between corporate and securities laws that has created real-world consequences. Delaware corporate law generally confers rights on the direct, record owners of shares. By contrast, certain federal securities laws pertaining to listed securities require that securities be “depository eligible,” which, in practice, means investors own them indirectly. When investors own securities indirectly, what they own is not legally a security but instead is a pro rata share of fungible “security entitlements” under UCC Article 8—which are IOUs issued by a broker/dealer (a “securities intermediary”), which in turn holds a pro rata share of security entitlements from other securities intermediaries, which in turn hold a pro rata share of the actual securities that are legally owned by a nominee called Cede & Co. (itself a nominee of The Depository Trust Company). At each of these layers above the broker/dealer, intermediaries account for security entitlements on an omnibus basis. This means they track owners only on an aggregate basis, not by tracking the true beneficial owner.

This ownership inconsistency between corporate and securities laws, direct vs. indirect, sometimes creates bizarre and unintended outcomes.

For example, the Bank Holding Company Act restricts a single shareholder’s ownership of a bank holding company to 24.99% of any voting class of shares. Consequently, is it consistent with the Bank Holding Company Act that the DTC’s Cede & Co. owns nearly 100% of the shares of every U.S. bank holding company whose shares are publicly-traded? Other ownership restriction laws, including those restricting foreign ownership of airlines, nuclear facilities, mining interests, communications companies and other critical infrastructure, similarly were drafted to restrict ownership without acknowledging that beneficial owners are frequently not the same as record owners. Another example is the SEC’s Regulation AB, which requires trustees of asset-backed securities to facilitate communications between investors. Yet, how can trustees comply when the simple fact is trustees have no right to access the list of beneficial owners and therefore cannot verify ownership?

The system is also a recipe for mistakes. While it works fairly well, mistakes happen surprisingly frequently. And they can be costly.

Delaware Chancery Court Vice Chancellor J. Travis Laster, in a speech to the Council of Institutional Investors in September 2016, provides several examples. He encouraged investors to adopt blockchain technology as the plunger that can unclog the plumbing of capital markets for the benefit of investors. Pointing to conflicts with federal securities law, he said: “Delaware corporate law is not built to accommodate the nominee system. It assumes that stockholders own shares directly…”

Prominent judges do not often call their own legal opinions “absurd,” but Vice Chancellor Laster did just that in a case involving T. Rowe Price (In re Appraisal of Dell Inc. (Dell Continuous Ownership), 2015 WL 4313206 (Del. Ch. July 30, 2015)). This is one of many examples he shared in which Delaware corporate law conflicts with federal securities law regarding direct vs. indirect ownership. T. Rowe Price paid $194 million to compensate its clients for actions for loss of appraisal rights and a proxy voting mistake that were, at root, caused by the indirect system of share ownership. Vice Chancellor Laster said, “Personally, I think that [decision] is absurd. This was an example of people doing what they should do and then getting caught up by the system…The upshot for present purposes is that the complexities of the nominee system harmed stockholders.”

Another recent example is the Dole Food Company class action litigation, in which Vice Chancellor Laster revealed a curious fact in his decision of February 15, 2017. Investors filed claims to 49.2 million Dole shares that were “facially eligible,” but only 36.8 million Dole shares were outstanding.

Most of the difference was caused by unsettled trades during the final three trading days (“T+3”) before Dole’s buyout closed, because “DTC’s centralized ledger did not reflect all of the trades in Dole common stock on the day of the merger or during the two days preceding it.” The rest of the difference resulted from uncovered short sales of Dole stock. As Vice Chancellor Laster wrote,

The shorting resulted in additional beneficial owners who received the merger consideration, who fell within the technical language of the class definition, and who could claim the settlement consideration. Meanwhile, the lenders of the shares, not knowing that the shares were lent, also could claim the settlement consideration. This is another means by which two different claimants could submit facially valid claims for the same underlying shares.

In a footnote to the opinion, Vice Chancellor Laster wrote,

…despite laudable and largely successful efforts by the incumbent intermediaries to keep the system working, the problems have grown…Distributed ledger technology offers a potential technological solution…

Proxy voting is yet another area in which the nominee, or indirect, ownership system can breed inaccuracy. In the 2008 proxy contest for control of the board of Yahoo, a recount demanded by a shareholder revealed that almost 20% of the vote was miscounted. As Vice Chancellor Laster explained in his September 2016 speech, the default voting option is sometimes set to vote for management’s proposals, which adds to the difficulty of success in proxy contests because quirks in the system can cause votes to default back to vote in favor of management. This happened to T. Rowe Price in the Dell case, as T. Rowe Price checked three times to ensure its vote was against Dell’s management but the system actually recorded its vote in favor of management’s proposal by default. Vice Chancellor Laster continued,

Aside from overvoting, the complexity in the voting system creates opacity and the opportunity for miscalculated votes…As the SEC has explained, ‘Because the ownership of individual shares held beneficially is not tracked in the U.S. clearance and settlement system…imbalances occur.’ When those imbalances occur, ‘broker-dealers must decide which of their customers will be permitted to vote and how many shares each customer will be permitted to vote.’

In other words, one share does not equal one vote. Vice Chancellor Laster concluded,

The plumbing needs to be fixed. A plunger exists…With distributed ledgers, a central accountant like DTC becomes unnecessary. Custodians become unnecessary. Ownership lies only with beneficial owners. A single distributed ledger would allow straight-through accounting. It is a utopian vision of a share ownership system where there is only one type of owner: record owners.

The indirect system of share ownership evolved historically around the basic fact that most corporations in existence today were incorporated on paper and issued their shares on paper. In the case of public companies, Cede & Co., holds in its custody a single piece of paper—a “global security”—representing all (or nearly all) of the company’s issued shares.

Some of these paper documents have been digitized in recent years. But doing so merely digitized the labyrinthine workflows of the status quo, which trace their origins to the Wall Street paperwork crisis of the early 1970s. The technology limitations of 40 years ago that gave rise to the status quo are long gone, but status quo business processes remain. The true benefits of digitization will only reach the securities industry when its layers of settlement processes are finally streamlined, so that securities issuers and investors can again interact directly. The DBI may spark that change.

Benefits to Delaware

Why has Delaware been so forward-thinking to enable such an important change to the foundational infrastructure of corporate finance? Two reasons: leadership and value-added services.

When distributed ledger technology hit their radar screen in 2015, State officials immediately understood the ramifications for companies that register in the State. By being the first to adopt the technology, the State will maintain its leadership in corporate registry services. In addition to the State offering the most developed body of corporate and trust law, the Delaware Court of Chancery is widely recognized as the nation’s preeminent forum for dispute resolution for corporations. The Court of Chancery also has subject matter jurisdiction for technology disputes in the amount of $1 million, which makes it an ideal forum for disputes pertaining to blockchain technology. In addition, Delaware’s Rapid Arbitration Act fits well with the ethos of blockchain technology—namely, fast settlement of transactions—by providing an ideal regime for the speedy, efficient and relatively inexpensive resolution of disputes.

And Delaware’s registry services provide true value to businesses. State officials saw the opportunity to create even more value for businesses that choose Delaware for registry services if the State were to offer registries on a distributed ledger. Such registries include not just incorporation services, but also UCCs, land titles, personal property titles, birth/death certificates, professional licenses and many other new types of registries that the State may introduce as part of the DBI (for example, diamonds and other luxury goods). A certification from Delaware that something has been properly registered carries significant value in the business world. And if companies choose to access the imprimatur of Delaware on a distributed ledger instead of a piece of paper, it will carry even more value because companies can integrate it with other upstream technologies to streamline workflows. Potential users of Delaware’s distributed ledger service have already confirmed their willingness to pay more because it will save companies costs. It is win-win.

We look forward to engaging with the corporate law bar as the DBI reaches more milestones, and to providing these new services to Delaware’s business constituents. Stay tuned for many developments!

 

Happy Birthday Regulation CF (shame about the compliance failures)

So, one year ago today, Regulation CF went into effect. Small companies can make offerings up to $1 million (recently increased to $1.07 million) and roughly 325 companies have made Reg CF offerings so far. Roughly 80 companies have filed Form C-U to notify the SEC of the conclusion of their offering (they can also use Form C-U to report progress of the deal, so the raw numbers need refining). Another 50 or so companies have taken advantage of the fact that the SEC tells us that multiple closings are permitted once a company reaches its target offering amount, and so have received funds but have ongoing offerings.

We’re talking about modest success so far. Companies are finding it takes a while to raise the funds they are seeking and many offerings are still in progress, so overall success rates are going to go up in time. And several companies have had million-dollar raises.

The less-encouraging story in in the area of compliance. By our calculation, by May 1 perhaps 100 companies should have filed annual reports under Form C-AR (all the companies which had filed C-Us by that date and all companies which had sold some securities but not finished their raise). Again by our calculations, only two-thirds of the companies that should have filed did so. Not too impressive.

And that’s just measuring whether those companies filed, not looking at the content of their filings. We’ve been reviewing all the filings made on Form C, and evaluating their compliance with the disclosure requirement of Rule 201. Later this summer we’ll publish more detailed findings. But in the meantime, we are sad to report that compliance is not particularly good. It seems to be improving, which is the good news. But there are a number of areas where the disclosure requested by the SEC is not being made:

  •          Only one in four companies is providing a discussion of the company’s financial performance since the end of the financial statements included in the Form C, which can be as old as sixteen months.
  •           Four out of five companies include no discussion at all about how the proceeds of the offering will affect their liquidity and how long the proceeds will last.
  •           One quarter of the companies filing don’t include a description of all the securities they have issued.

The list goes on. I don’t think disclosure failure is an insurmountable problem; as discussed above there does seem to be some improvement. However, at a time when we are looking for more flexibility from the SEC, “please change the rules because we aren’t complying with the ones currently in effect” is not generally a winning argument. The answer to the issue of disclosure deficiency is clearly one is clearly education; the biggest areas of deficiency are where the SEC’s requirements may not be totally clear to issuers, and it’s an area where the intermediaries (funding platforms and brokers) can help. Filing deficiency may be a harder issue to address; often filing requirement only kick in when the intermediary is not longer involved.

But if we don’t solve both problems, as an industry it will be harder to get the regulatory flexibility we still need.

Source:

https://crowdcheck.com/blog/happy-birthday-regulation-cf-shame-about-compliance-failures?utm_campaign=buffer&utm_content=buffer3ae14&utm_medium=social&utm_source=linkedin.com

 

Open Letter to Real Estate Sponsors : Investors Deserve Better Quarterly Reports

By Mark Robertson CrowdFundBeat  Sr. Contributing Editor. President at CrowdDD, LLC,

This is an open letter to all real estate sponsors.  Investors want better reporting.  Concise, short, informative, and easy to read reports.  Unfortunately, most sponsors do poor job of communicating results with investors. I have over 50 equity crowdfunding investments and the quality of the quarterly reports varies wildly.

The poster child for good reporting is Praxis Capital lead by Brian Burke.  They have a one page report with graphs, relevant statistics, and a short write up of the past quarter’s results and commentary. They key features of their report are they inform the investor of the only 3 things investors truly care about.

  1. How much is MY distribution? What is the cash on cash return? What is it as a percentage of my investment? How does it compare to your projections for this quarter?
  2. The properties performance. Most importantly is the NOI. What is this quarters NOI compared to the projections made by the sponsor at the time of my investment?  What is occupancy compared to both last year’s quarter and compared to projections?
  3. If actual distributions are below projections or if NOI is below projections, we want to know why.  What we really want to know is how you plan to correct the shortfall and WHEN do you expect to get back on track.

Including the full income and balance sheet is great, but what we really want to know is the investment performing as you promised and where is MY DISTRIBUTION? In the end those two factors are all that really matter. Again, so it will sink in. How much money am I getting and are you meeting projections? We should know these 2 factors within 30 seconds of looking at the report.  The last thing we want to do is to dig and dig and hope to find this information.  

At the start of every update it should say: The project, life to date, is running xx% over/under to proforma.” and “For the last quarter the project was xx% over/under to proforma”. Unfortunately, I usually pull up the original offering materials and try to determine if the actual results are as projected.  Investors should not have to do this. That is the sponsors responsibility. Investors also appreciate guidance for the upcoming quarter or year based on market conditions. Be proactive and manage expectations.

Other Pet Peeves:

  1. It should never take longer than 45 days after a quarter to prepare the report
  2. Reporting that distributions for the quarter were $x00,000 with no context. I want to know what I am getting and if it’s what you projected. Don’t make me dig around to see if $x00,000 is good or not.
  3. Sending out the ach distribution without a clearly identifiable notation of who the ach is from. Email the report before the ach so we can expect the distribution.
  4. Justifying a quarters miss because of seasonality. Your projections should have accounted for seasonality. You knew the seasons were coming when you asked for my investment.
  5. Comparing results to budget and budget is not the proforma numbers or the projections at the time of the investment. Wrong on so many levels.

In informal poll of the 240 accredited members of the 506 Investor Group concur that inadequate reporting is one of the most vexing problems with investing in syndicated and crowdfunding real estate deals.  An industry standard like Praxis quarterly reports would go a long way to solving this issue. CrowdDD already has ratings reviews from actual investor.  We would be more than happy to host a sponsor template for investors to see how cash flow and NOI is tracking versus proforma projections.

Source:

https://www.crowddd.com/blog/view?id=Nzc=&ct=Open+Letter+to+Real+Esate+Sponsors++Investors+Deserve+Better+Quarterly+Reports

Crowdfunding and Cryptocurrencies

By Mark Roderick CrowdFunding Beat  Sr. contributing editor and crowdfunding attorney with Flaster/Greenberg PC.

Cryptocurrencies are hot. And often the sale of cryptocurrencies is referred to as Crowdfunding. Unfortunately, the use of “cryptocurrencies” and “Crowdfunding” together creates confusion about both, along with some pretty serious legal risks.

We use “Crowdfunding” to mean raising money for a business or other venture online. We say “donation-based Crowdfunding” when we’re talking about Kickstarter, where people ask for donations. We say “equity-based Crowdfunding” when we’re talking about raising money from investors, who receive a stock certificate or some other security.

A cryptocurrency is, well, hard to pin down. It’s a transaction registered in a distributed, secure database. Because it exists in limited quantities and is secure, it has value. Like anything of value, it can be used as a currency. For purposes of this post, the key feature of a true cryptocurrency is that is has value of itself, like a nugget of gold.

You use Crowdfunding to sell shares of stock. Obviously, the paper certificates representing the shares of stock have no value by themselves, they have value only to evidence ownership in the business that issued the certificates or, more exactly, in the cash flow the business is expected to generate. So it wouldn’t make sense to say “I’m selling nuggets of gold using Crowdfunding.” The nuggets of gold have an intrinsic value without reference to the cash flow of anything else, or at least you hope they do. I can go shopping with a cryptocurrency like Bitcoin or Ethereum, just as I can shop with US dollars or, historically, with gold.

This is where things get tricky and words matter. The blockchain – the technology underlying all cryptocurrencies – can be used for a lot of things other than cryptocurrencies. As it happens, one of the things the blockchain can be used for is to keep track of stock certificates. In fact, the blockchain works so well keeping track of stock certificates that it will undoubtedly be used by (or replace) all public stock transfer agents within the next five years.

What’s happening today is that companies are selling what they call “cryptocurrencies” that are really just interests in the future operations of a business, i.e., really just hi-tech stock certificates. Cool, they’re using blockchain technology to keep track of who owns the company! But that doesn’t mean what you’re buying is really a cryptocurrency and that you’re going to get rich like the early buyers of Ethereum.

Words are powerful, and the confusion around cryptocurrencies is deepened by the nomenclature. Sales of cryptocurrencies are often referred to as “initial coin offerings,” or ICOs, which implies a similarity to “initial public offerings,” or IPOs. Yet if we’re being careful, the two have nothing in common. In an IPO a company sells its own securities, which have value only based on the success of the company. In an ICO somebody sells a product that has intrinsic value of itself.

Ignoring the difference is going to land someone in hot water, probably sooner rather than later. A company that sells something it calls a cryptocurrency but is really just a share of stock is selling a security, even if that company has an address near Palo Alto. And a company that sells a security is subject to all those pesky laws from the 1930s. If you sell a cryptocurrency that is really just a hi-tech stock certificate, then not only do you risk penalties from the SEC and state securities regulators, you’ll also face lawsuits from your investors if things don’t go as planned.

How to know whether you’re selling a true cryptocurrency or a hi-tech stock certificate? Here are some tips:

  • If the value of the cryptocurrency depends on the success of the business, it’s a security.
  • If the value of the cryptocurrency depends on, or is backed by, real estate or other property, it’s a security.
  • If the cryptocurrency is marketed as an investment, it’s probably a security.
  • If the value of the cryptocurrency depends what the buyer does with it, rather than the success of the business, it’s probably not a security.
  • If the cryptocurrency merely gives the holder the right to participate in a group effort (g., the development of software), it’s probably not a security.
  • If you’re selling the cryptocurrency in lieu of issuing stock, it’s probably a security.

Crowdfunding to Meet Energy Demands

By Anum Yoon Crowdfund Beat Guest Editor, 

The idea of crowdfunding has gained popularity in the past few years. Individuals contributed approximately $880 million in 2010, when the concept was still new and innovative. Today, the practice of crowdfunding generates tens of billions for startup enterprises, budding entrepreneurs and motivated professionals on an annual basis.

But the concept behind this relatively new phenomenon isn’t limited to financial investments. Some of the more tech-savvy and energy-conscious leaders of today are now exploring the value of crowdfunding to meet our nation’s growing energy needs. The results are showing tremendous potential to revolutionize the way we look at our utility bills from this point forward.

Embracing the Shared Economy

Crowdfunding is paving the way for what many experts refer to as a “sharing economy.” Expected to be worth over $300 billion by 2025, the sharing economy provides new opportunities around the world. When applied to energy production and consumption, this amounts to newly built, sustainable energy sources and the establishment of new facilities in remote regions of the world.

The Africa Regional Climate Change Programme, a part of the United Nations Environment Programme, or UNEP, points out that more than 60% of Africans do not have access to a standardized power grid. Crowdfunding and the sharing economy are poised to help these communities by developing energy sources that are clean, renewable and sustainable.

Mosaic, which recently launched in the U.S., serves as a go-between on behalf of clean energy investors and solar projects that need funding. Investments start at the low price of $25 for annual returns of 4.5%. Like with all investments, those who put in more money will have a greater chance of receiving significant profits in the long run.  

Crowdfunding Energy Around the World

According to recent studies, the United States currently leads the world in active energy crowdfunding projects with eight different initiatives. Germany boasts six, the United Kingdom has five and Netherlands has four of their own.

There has been a strong push toward eco-friendly and sustainable energy around the globe. In 2014, nearly 10% of all the energy consumed in the U.S. was drawn from renewable sources. This number has remained consistent and will likely increase even further as more crowdfunding campaigns pop up.

Europe is making huge strides in the effort to curb fossil fuels. Approximately 90% of new energy generators installed in 2016 utilized renewable sources. The majority of this new power is coming from large-scale windfarms in countries like Germany, France, Finland, Ireland and Lithuania.

Some of the most popular energy crowdfunding platforms are based in the United Kingdom. GenCommunity and Abundance Generation, two of the most popular options to date, are both based in the U.K.

Overcoming the Obstacles

As bright as the future of crowdfunded energy seems, there are some roadblocks to overcome. Given the large scale of many projects in the energy sector as well as the high costs and extended timeframes needed to complete such jobs, the industry doesn’t lend itself to the idea of crowdfunding.

In an economy where investors want to see instant results, there simply aren’t many projects in renewable energy that match the format.

Proof of these challenges can be seen in current projects. Although Europe is on the forefront of energy crowdfunding, most of the campaigns to date were focused on small or medium-sized jobs. This is great for hobbyists and those who want to participate in a community-oriented effort, but it does little to address the growing issue of worldwide energy consumption — at least for now.

One of the primary points of crowdfunding energy is to make it possible for smaller investors to raise the capital needed for bigger and better projects. This opens up the industry to a far greater number of investors and even more minds trying to solve such challenges.

Larger Investments Will Lead to Greater Advancements

Although the number of renewable energy projects to benefit from crowdfunding has been limited thus far, proponents of the platform are optimistic about the future. With more investors starting to consider crowdfunding as a viable means of financing projects, and as more investment groups begin to target the renewable energy sector, we’re bound to see even larger investments and greater advancements across the board.

NextGen Announces Finalists for Crowdfunding Video Awards

Crowdfund Beat News Wire,

NextGen Announces Finalists for Crowdfunding Video Awards Season Finale, Recognizing the Year’s Most Creative Campaign Videos

NextGen Crowdfunding® – the leading company that helps people explore new types of crowdfunding – announces the finalists for the season finale of the Crowdfunding Video Awards (CVAs). The CVAs is a new online series from NextGen showcasing videos from both rewards-based and investment crowdfunding campaigns featured on Indiegogo, Kickstarter and other leading rewards-based and investment crowdfunding platforms. This innovative show provides entrepreneurs with new ways to promote their companies to supporters and investors.

 

 

The first season of the CVAs included six preliminary awards shows and will culminate in a final seasonal awards showon Wednesday highlighting the first-place winners from all six rounds of voting. These six campaigns will go head to head to be recognized as one of the top three campaigns from this season and win:

  • First place: $10,000
  • Second place: $5,000
  • Third place: $2,500

 

The finalists include:

  • Limitless Phone Case by Mous (Round One): Will protect your phone from breaking
  • Noria by Noria Home (Round Two): First window air conditioner designed with you in mind
  • FireFlies Audio (Round Three): Truly wireless earbuds
  • Farm from a Box (Round Four): Complete off-grid toolkit for tech-powered agriculture
  • Purple Pillow (Round Five): World’s first no-pressure pillow
  • MuConnect (Round Six): World’s first fast charging magnetic adapter

 

Viewers can log on to NextGenCrowdfunding.com to watch the season finale on Wednesday, May 3 at 3 PM PT / 6 PM ET.

 

2017 Real Estate Crowdfunding: Surveying the Landscape

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“Copyright” By Jonathan B. Wilson CrowdFund Beat Sr. Guest Editor, Partner, Taylor English Duma LLP

The impact of crowdfunding on real estate finance and deal-making has been one of the hottest topics of the past year.[1]  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[2], 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.” [3]

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

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.

Regulation CF

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.

Peer Street

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.[4]  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,[5] however, these fees so far have not kept investors away.

Real Crowd

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

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.[6]  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

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.[7]   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:

LendingHome

Lending Home describes itself as the “largest hard money lender” [providing] “fix and flip loans up to 90% LTC and 80% LTV.”[8]  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.[9]

Roofstock

Roofstock’s tagline is “Property Investing Like the Pros.”[10]  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.[11]  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.[12]  The site claims that the sponsors underwrite individual deals, requiring borrowers to put at least ten percent in the property’s value in equity.[13]  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.

[1]           http://www.jdsupra.com/legalnews/the-evolution-of-real-estate-15259/

 

[2]           Surowiecki, James, The Wisdom of Crowds, Anchor Books (2005).

 

[3]           Wilson, Jonathan B., Follow the Crowd: What the Future of Crowdfunding Holds for Startup Restaurant Owners, Restaurant Owner Startup & Growth Magazine, 18 (Feb. 2016).

 

[4]           www.peerstreet.com.

 

[5]           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).

 

[6]           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).

 

[7]           Realty Shares website available at https://www.realtyshares.com/  (last visited January 29, 2017)

 

[8]           Lending Home website available at www.lendinghome.com (last visited January 29, 2017).

 

[9]           https://www.lendinghome.com/how-it-works/#individual-investors.

 

[10]          Roofstock website available at www.roofstock.com (last visited January 29, 2017).

 

[11]          Path of Land website available at https://patchofland.com/statistics/ (last visited January 29, 2017).

 

[12]          Fund that Flip website available at www.fundthatflip.com (last visited January 29, 2017).

 

[13]          Fund that Flip website available at https://www.fundthatflip.com/lender (last visited January 29, 2017).