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Regulations for Title III & “ICO’s”


Georgia P. Quinn is the CEO and co-founder of iDisclose, an adaptive web-based application that enables entrepreneurs to prepare customized institutional grade private placement

REPORT: Crowdfunding meets Blockchain

 

 

 

 

By Navroop Sahdev

Centre for Blockchain Technologies, University College London, UK
Centre d’Économie de l’Université Paris-Nord, France
June 2017

Table of Contents
1. Introduction
2. The Advent of Crowdfunding
3. Market design and Liquidity Considerations for CFE Trading on the
Blockchain
3.1. Liquidity and Price Discovery
3.2. A game of Information
3.3. Asset Servicing and Voting
3.4. Market Making versus Tokenization
3.5. The impact of Transparent Holdings
4. Concluding remarks
5. Endnotes
6. References

CLICK HERE FOR FULL REPORT 

Abstract

Blockchain, the technology behind Bitcoin, promises to be nothing less than Internet 2.0. The
financial services industry, in particular, is preparing for the disruption blockchain/distributed
ledger technology promises to cause. In the current business environment, the majority of
startups and small businesses have to look for alternative sources of funding given that ‘going
public’ is increasingly expensive. The crowdfunding space has seen tremendous growth as an
alternative way to raise capital by businesses. However, these crowdfunded shares cannot be
traded for 7 – 10 years on average on any given platform in the U.S. currently.
To build a trading platform on the blockchain which is completely P2P, immutable, fully
transparent and low-cost presents some key design issues. In particular, the issue of liquidity – and
price discovery – on the blockchain continues to be a puzzle. At the same time, the proposition of
removing middlemen from equities trading is a very attractive one, streamlining the process of
capital formation with higher market efficiency.

The current paper addresses the following key questions: How can a DLT trading platform ensure
adequate liquidity? What would be the process of price discovery? While some recent studies hail
blockchain technology as a boom for market liquidity, it is not immediately clear what the impact
of P2P trading would be on the prices of various stocks. There are no ‘solutions’ just yet. At the
same time, the lack of regulation around trading on the blockchain creates an environment of
uncertainty for all players.
In particular, the implementation of such a platform can revolutionize capital formation and build
robust markets in both developing and developed countries where crowdfunding has proven to
be a successful model. While my research is targeted at solving a very specific pain point for both
researchers and companies working on distributed ledger technology, ultimately, it would be a
significant step forward towards onboarding underserved communities across the world who
don’t have access to financial services.

List of Abbreviations

1. DLT: Distributed Ledger Technology
2. CFE: Crowdfunded Equity
3. EC: Equity Crowdfunding
4. CFP: Crowdfunding Platform
5. ECP: Equity Crowdfunding Platform
6. CETP: Crowdfunded Equity Trading Platform
7. MVP: Minimum Viable Product
8. POC: Proof of Concept
9. P2P: Peer to Peer

Introduction

These days, ‘blockchain’ inspires a degree of reverence in the fintech industry. Set to become the
defining technology of the current day – Internet 2.0. – The industry is aggressively testing POCs
and figuring out which processes should be moved to a blockchain architecture in the short to the
medium term. Of course, revamping the monstrous infrastructure of the financial services industry
is no easy task and unlikely to be undertaken overnight. The way forward is to test specific use cases
and find ways to integrate these as well as integrate the new blockchain infrastructure with the
old centralized infrastructure. The shift is expected to be gradual, as is the regulatory catch-up.
And yet, the activity that blockchain – along with other vertical technologies – has inspired is
unprecedented along with the regulatory participation in co-creating this brave new world.
The story of the blockchain can have many starting points. It can be a technology-driven one,
where a foundational technology can potentially provide a more secure and robust digital
infrastructure and with the current days being the early days of the technology. Alternatively, it
can a story of demand-driven factors – where small businesses need to find ways of raising capital
along with new opportunities of financial intermediation. Or we can pick an even more interesting
story – that of a crisis-driven market – desperately in need of a breakthrough technology, that can
lower costs and provide a more robust digital infrastructure. Indeed, it’s probably no coincidence
that the Bitcoin blockchain came into existence right after the 2007-08 banking crisis. Or it can be
the familiar story, of an archaic regulatory regime, that piles up-regulation designed for securities
trading from a century ago; this is the story of fragmented markets which are an outcome of such
a regulatory structure. With the advent of any new financial activity – crowdfunding, for example
– new regulation is introduced, which only seems to add to the existing regulatory burden.
Whatever the chosen entry point, we are here now.

CLICK HERE FOR FULL REPORT 

SEC Issues Investigative Report Concluding DAO Tokens, a Digital Asset, Were Securities

Crowdfund Beat News Wire,

SEC issued an investigative report stating, “tokens offered and sold by a ‘virtual’ organization known as ‘The DAO’ were securities and therefore subject to the federal securities laws.”

U.S. Securities Laws May Apply to Offers, Sales, and Trading of Interests in Virtual Organizations

FOR IMMEDIATE RELEASE
2017-131

Washington D.C., July 25, 2017—

The Securities and Exchange Commission issued an investigative report today cautioning market participants that offers and sales of digital assets by “virtual” organizations are subject to the requirements of the federal securities laws. Such offers and sales, conducted by organizations using distributed ledger or blockchain technology, have been referred to, among other things, as “Initial Coin Offerings” or “Token Sales.” Whether a particular investment transaction involves the offer or sale of a security – regardless of the terminology or technology used – will depend on the facts and circumstances, including the economic realities of the transaction.

The SEC’s Report of Investigation found that tokens offered and sold by a “virtual” organization known as “The DAO” were securities and therefore subject to the federal securities laws. The Report confirms that issues of distributed ledger or blockchain technology-based securities must register offers and sales of such securities unless a valid exemption applies. Those participating in unregistered offerings also may be liable for violations of the securities laws. Additionally, securities exchanges providing for trading in these securities must register unless they are exempt. The purpose of the registration provisions of the federal securities laws is to ensure that investors are sold investments that include all the proper disclosures and are subject to regulatory scrutiny for investors’ protection.

“The SEC is studying the effects of distributed ledger and other innovative technologies and encourages market participants to engage with us,” said SEC Chairman Jay Clayton. “We seek to foster innovative and beneficial ways to raise capital, while ensuring – first and foremost – that investors and our markets are protected.”

“Investors need the essential facts behind any investment opportunity so they can make fully informed decisions, and today’s Report confirms that sponsors of offerings conducted through the use of distributed ledger or blockchain technology must comply with the securities laws,” said William Hinman, Director of the Division of Corporation Finance.

The SEC’s Report stems from an inquiry that the agency’s Enforcement Division launched into whether The DAO and associated entities and individuals violated federal securities laws with unregistered offers and sales of DAO Tokens in exchange for “Ether,” a virtual currency. The DAO has been described as a “crowdfunding contract” but it would not have met the requirements of the Regulation Crowdfunding exemption because, among other things, it was not a broker-dealer or a funding portal registered with the SEC and the Financial Industry Regulatory Authority.

“The innovative technology behind these virtual transactions does not exempt securities offerings and trading platforms from the regulatory framework designed to protect investors and the integrity of the markets,” said Stephanie Avakian, Co-Director of the SEC’s Enforcement Division. 

Steven Peikin, Co-Director of the Enforcement Division added, “As the evolution of technology continues to influence how businesses operate and raise capital, market participants must remain cognizant of the application of the federal securities laws.”

In light of the facts and circumstances, the agency has decided not to bring charges in this instance, or make findings of violations in the Report, but rather to caution the industry and market participants:  the federal securities laws apply to those who offer and sell securities in the United States, regardless whether the issuing entity is a traditional company or a decentralized autonomous organization, regardless whether those securities are purchased using U.S. dollars or virtual currencies, and regardless whether they are distributed in certificated form or through distributed ledger technology.

The SEC’s Office of Investor Education and Advocacy today issued an investor bulletin educating investors about ICOs. As discussed in the Report, virtual coins or tokens may be securities and subject to the federal securities laws. The federal securities laws provide disclosure requirements and other important protections of which investors should be aware. In addition, the bulletin reminds investors of red flags of investment fraud, and that new technologies may be used to perpetrate investment schemes that may not comply with the federal securities laws.

The SEC’s investigation in this matter was conducted in the New York office by members of the SEC’s Distributed Ledger Technology Working Group (DLTWG) — Pamela Sawhney, Daphna A. Waxman, and Valerie A. Szczepanik, who heads the DLTWG — with assistance from others in the agency’s Divisions of Corporation Finance, Trading and Markets, and Investment Management. The investigation was supervised by Lara Shalov Mehraban.

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.

Paradise Ridge Hydrocarbons, Inc. (OTC Pink: PRGE) Jumps 50% After Acquiring Equity Crowdfunding Platform, StackCap.com

Crowdfund Beat News Wire,

Paradise Ridge Hydrocarbons, Inc. (OTC Pink: PRGE) is primarily engaged in the re-entry and re-working of existing oil & gas properties. Shares of the energy company are surging 50% on Monday, May 1, 2017. Over the past month, Paradise Ridge Hydrocarbons, Inc. saw average daily volume of 95,129 shares. However, volume of 205,639 shares or dollar volume of $129,552, has already exchanged hands on Monday.

Shares of Paradise Ridge Hydrocarbons, Inc. are jumping today, after the company announced it has diversified its business operations through the acquisition of StackCap.com, an equity crowdfunding platform. Furthermore, the company says it will utilize STACKCAP, Inc. to conduct further debt and equity financing services and platforms. Ultimately, the acquisition is scheduled to close on May 31, 2017. Here is the full press release detailing of the acquisition:

Paradise Ridge Hydrocarbons, Inc. Press Release:

AUSTIN, Texas, May 1, 2017 /PRNewswire/ –Paradise Ridge Hydrocarbons, Inc. (OTC Pink: PRGE) today announced that it has signed a definitive agreement to acquire equity crowdfunding platform stackcap.com owned by STACKCAP, INC.

Equity crowdfunding fuels innovation and growth by providing access to capital that can take businesses from ideas to viable products and real jobs. PRGE will utilize STACKCAP, INC. to provide debt and equity financing for a wide range of business opportunities which currently lack access to needed capital. “Under the Jumpstart Our Business Startups Act of 2012 the US government has helped by lowering the barrier to entry, and now we will do our part. Under the Trump administration, we believe this will continue to spur a small business revolution, empower more women and minorities and revive the American dream,” stated President Gordon Johnson.

The acquisition is scheduled to close prior to May 31, 2017. The terms of the transaction include the issuance of restricted Rule 144 PRGE common stock.

Forward Looking Statements:

This press release contains forward-looking statements that involve numerous risks and uncertainties. Actual results, performance or achievements could differ materially from those anticipated in such forward-looking statements as a result of certain factors, including those set forth in the Company’s filings with the Securities and Exchange Commission.

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.

Political Crowdfunding: Building a Community Instead of a Campaign

By Anum Yoon, Crowdfund Beat Media Guest Editor,

Throughout the past few years, crowdfunding has become a source of fundraising for charities, life-saving surgeries, new products, individual travel goals, research projects and more. With crowdfunding platforms and social media, it’s easier than ever to set up a page where friends and family can donate to whatever it is you’re passionate about or need money for. But does this new fundraising fad have a place in politics?

Election-Money

Politicians who are starting campaigns or building platforms need money, and it’s a fairly new possibility that this money could come from small individual donations from people on crowdfunding websites instead of the wealthy upper class. Here’s everything there is to know about crowdfunding in the political arena.

Traditional Political Fundraising

In the past and even currently, campaigns have been funded by the appropriate political party the candidate is running for. Additionally, wealthy donors throw large amounts of money into the politician’s bank account and, more often than not, cash in the donation for a favor later on down the road.

With this system, the upper class and politicians are completely running the show. Campaigns are based on who got money from the top dogs, and elections are based on those campaigns. So, it’s not hard to see how the average person isn’t exactly included in the political process.

Changes Being Made

In 2008, Barack Obama, who would be elected president that year, changed the game of fundraising in politics. He was the first candidate who collected funds for his campaign from the average working class family.

Obama successfully built a campaign that got American families interested and invested in him – literally. He asked for donations on his website in order to fund his campaign and raised millions of dollars from small donors who simply donated what they could afford, even if that was only a dollar.

Obama’s strategy worked, obviously. Since then, politicians at the local and federal level have used similar campaign strategies. Bernie Sanders, who ran for the Democratic nomination in the 2016 presidential race, prided himself on not accepting money from billionaires. Instead, he wanted to be funded only by the average American. It was easy for his supporters to support him because donating was just a few clicks away thanks to the ease of electronic payments.

He would often send out emails to his supporters asking for just $3 before midnight to send a message to Washington that Americans are tired of billionaires buying elections. The average campaign donation was $27.

On the surface, it seems like Sanders’ strategy did not pay off, since he did not win the nomination. However, Bernie Sanders made quite a name for himself in just a few short months and was a serious contender for the nomination, running on only small donations through crowdfunding efforts. His effort is a look into what could be the future of political fundraising.

Building a Community

The idea behind crowdfunding is to build a community. Crowdfunding started with individual stories. People who wanted to travel and do philanthropic work. Somebody who needed a surgery their family couldn’t afford. An entrepreneur with a great business idea. A young girl who wanted to go to Disney World.

The stories behind each crowdfunding page are what drives people to donate money. People tell their story in the hopes of touching others and convincing them to donate to their cause.

For this reason, crowdfunding in the political arena could be a great thing. Imagine politicians building their campaign not around the nitty gritty of politics, but around a story that touches the American people — a story of hope and resilience. Campaigns and politics in general could become so much more personalized, and Americans could really play a part in the government.

Of course, there are always some things that could go wrong. Politicians could somehow corrupt this system. There will always be billionaires to buy out politicians in their own best interest. There are holes in every system, but it’s also possible to patch up those holes. Since crowdfunding is such a new idea, there is much to be said and discovered about how the system would actually work when utilized by many politicians.

So, crowdfunding in politics could be great, it could be terrible or it could be somewhere in the middle. Only time will tell how politicians will use crowdfunding for their campaigns and how people will react to this new way of fundraising.

 

 

 

 

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).

 

Setting Up an Efficient Crowdfunding Platform

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.

crowdfunding concept. Chart with keywords and icons
crowdfunding concept. Chart with keywords and icons

 

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.

 

 

  1. 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).

  1. 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.

  1. 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.

 

 

 

News & Information for Crowdfunding People