Sherwood Neiss, is a Principal at Crowdfund Capital Advisors and a Partner at Crowd Capital Ventures. He is an expert at building successful businesses.
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
By Navroop Sahdev
Centre for Blockchain Technologies, University College London, UK
Centre d’Économie de l’Université Paris-Nord, France
Table of Contents
2. The Advent of Crowdfunding
3. Market design and Liquidity Considerations for CFE Trading on the
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
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
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.
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.
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.
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.
CF USA AGENDA’s SNAPSHOT
SEC – JOBS ACT – Early Investing
Family Offices – IRA Trust
Rules and Regulations Consideration
Rule 506(c) – Title II Tittle III REG D REG CF
Definition of accredited investor?
Liquidity for the private securities space
Redefining Securities Distribution through Crowdfunding
Real Estate Crowdfunding
Why Hot Real Estate CrowdFunding Is The Next New Frontier?
Impact of crowdfunding on real estate finance and deal-making
Is Real Estate Crowdfunding Offers An Attractive Alternative For Secure Investments?
The Impact of Technology and Internet on Real Estate Crowdfunding
Trump to Lift Community Bank Regulations (and what that means for house flippers)
Dodd-Frank: A Republican Congress
will likely be looking for ways to scale back time and money on business regulation.
Real Estate Crowdfunding and Community Development
Pros & Cons of Internet finance and lending
2017 State of CrowdFunding
Business of Crowdfunding & Reaching the Goal – How to Make It Happen
Multiple Faces of Crowdfunding on Equity
Future of EB-5 Business Finance & Crowdfunding
Disruption of Equity Crowdfunding on VC’s – Angel Investors
Is Online Lending & Fintech industry here to stay?
Exploring Title II
Why it dominates and will continue to dominate crowdfunding
What initiatives are being pursued to create secondary markets or other means
Effect of IPO window
Regulation A+ Mini IPO
Many of the Reg A deals got pulled this last year.
Is this offering type holding up to investor interest.
Need research on Reg CF, Reg A+ and other offerings.
How much was raised, and how have they performed.
Aftermarket performance of Reg A+ deals
After hours Networking
Round table discussion
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?
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.
The impact of crowdfunding on real estate finance and deal-making has been one of the hottest topics of the past year. With the advent of crowdfunding, real estate developers and investors have multiple pathways to finance their projects and even to plot their exits. But in many ways the impact of crowdfunding has not yet arrived. Crowdfunding for real estate is still in the early stages and may take several detours along the way to its final destination.
What is Crowdfunding?
The idea of “crowdfunding” has been in the news a great deal but investors have only just begun to realize its potential for the industry. Crowdfunding is the idea that a large number of people, with no particular expertise, can accurately predict the likely success or failure of a venture by combining their own observations and communicating with each other. James Surowiecki, in his book, The Wisdom of Crowds, recounts dozens of examples where a large group of people who were able to collect and share information were able to make more accurate guesses about the success of a project than the best guess of any individual expert in the topic. The Internet, with its ability to collect a large number of people quickly and easily, makes it possible to collect a “crowd” to evaluate an idea better than was ever possible before.
Crowdfunding applies this idea to the process of evaluating investment opportunities, allowing members of the crowd to put money behind their predictions and preferences. Proponents believe that by allowing a crowd of potential investors to share their opinions about the investment and the information they collect that crowd will be better able to predict the success of the investment than individual investment experts. Sydney Armani, the publisher of CrowdFundBeat, says, “People get excited when they engage with a new product that arouses their passions. Those passions take on even greater intensity when they can invest in that new product.” 
Crowdfunding can take several forms. Popular crowdfunding sites like Kickstarter and Indiegogo let project sponsors describe their projects to the public and ask for donations. In an “affinity” campaign, supports of a project pledge funds for a project because they like it and support it. Their affinity for the project is their only reward. In a “rewards-based” campaign, project sponsors offer rewards for cash contributions. Rewards may range from recognition on a website or on a wall, to t-shirts, products samples and more.
Securities-based crowdfunding is possible through several recent changes in U.S. securities laws, most of which are derived from the 2012 Jumpstart Our Business Startups Act (or “JOBS Act”). In particular, the JOBS Act created three types of crowdfunding: (a) crowdfunding to “accredited investors” under Rule 506(c), (b) crowdfunding for up to $50 million each year under new Regulation A+ and (c) crowdfunding to both accredited and non-accredited investors in small offerings under Title III.
Investing Under Rule 506(c)
First, a sponsor could offer debt or equity securities to “accredited investors” under Rule 506(c). The JOBS Act changed some of the rules affecting private offerings under Rule 506 so that sponsors could publicly-advertise their offerings. Before this change in the law, public solicitations of private offerings were strictly prohibited. Under new Rule 506(c) however a promoter that wants to advertise publicly must take various steps to ensure that every investor who participates in the offering is “accredited”, which is defined as having a net worth of over $1 million (excluding the investor’s principal residence) or having an income of more than $200,000 for two consecutive years ($300,000 is the investor is married and files tax returns jointly with a spouse).
Crowdfunding under Rule 506(c) has been feasible for more than a year and several websites, have had some success hosting real estate crowdfunding campaigns that have included securities under Rule 506(c). Most of the popular real estate crowdfunding sites included in our survey, however, require accredited investors to create a membership on the site before they can view any live offerings. As a result, the offerings made available to members are intended as a private offering, and not a general solicitation. Because there is no general solicitation, those websites take the position that their offerings are private offerings under Rule 506(b) rather than publicized general solicitations under Rule 506(c).
Investing Under Regulation A
Another legal change that came from the JOBS Act was a change to Regulation A, an SEC rule that allows a private company to qualify its securities (which may be equity or debt) through filing a formal prospectus with the SEC. The SEC reviews the prospectus to ensure that it adequately describes all of the risks of the business and the risks to investors. Once the issuer’s prospectus is approved by the SEC (at which point it is said to be “effective”) the sponsor may sell the securities to both accredited and non-accredited investors.
Before the JOBS Act, offerings under Regulation A were limited to not more than $5 million. Under the new provisions of Regulation A (sometimes called “Regulation A+”) an issuer of securities may raise up to $50 million in any 12-month period.
One of the advantages of a Regulation A offering is that the company will be able to solicit investments from both accredited and non-accredited investors, thereby widening the scope of interest in the project. The SEC’s rules, implementing these changes to Regulation A, however, have only been effective since October 2015. As a result, there have been relatively few offerings that have completed the new process and it is harder to tell how these new offerings will be accepted by investors.
The third possible route for crowdfunding is often called “Title III” because it arises under Title III of the JOBS Act. Although the JOBS Act became law in 2012, the SEC only released its rules implementing this new law in October 2015 and those rules didn’t take effect until May 2016. Under those roles, a promoter may issue securities, in an amount up to $1 million in any 12-month period, to both accredited and non-accredited investors. But, soliciting for investors may only take place through licensed crowdfunding portals that have received a license from the Financial Institutions Regulation Authority (“FINRA”).
Under Regulation CF (the name used for the SEC’s Title III regulations), issuers do not file a prospectus with the SEC but do need to include certain disclosures about the company in their offering memorandum. The funding portal will also be liable for making sure that all of the prospective investors receive certain notices about the process and for ensuring that each investor does not invest more than a certain maximum that is derived from the investor’s taxable income. While a Regulation CF offering can “go national” by accepting investments from people across the country (whether they are accredited or not) the $1 million limit and the requirement that all solicitations take place online through the licensed portal make this approach a challenge for many new ventures.
Because of the $1 million annual cap on fundraising under Regulation CF, however, this approach is usually not a good fit for real estate projects that often require more than this maximum amount.
Surveying the Landscape
The following websites have used one or more of these regulatory pathways to create a marketplace for crowdfunding real estate projects. By surveying some of the more popular websites I have tried to provide an overview for how industry players are using these now crowdfunding regulations to make deal flow and investment opportunities possible. This list is not an endorsement of any of these sites and a site’s omission from this list is not intended as a criticism or a suggestion that the site is not worthwhile or valuable.
PeerStreet specializes mostly in residential debt investments (with a smattering of multifamily and commercial). PeerStreet utilizes Rule 506(b) to solicit accredited investors to participate in loans that are secured by real estate. They have one of the lowest minimums in the top 10 ($1K versus $10K average), and a healthy volume of new transactions.
Virtually every site in the industry claims that they have superior due diligence. PeerStreet, however, supports its claim with concrete proof. PeerStreet allows investors to review the performance of every past investment. PeerStreet’s site claims that, since 2014, the site has offered more than 200 notes but without any foreclosures or unremedied defaults.
Unlike many other real estate crowdfunding sites, however, PeerStreet does not originate its loans. Rather, project sponsors introduce opportunities to the site and then earn a fee based on successfully closing the investments. As a consequence, investors that participate in deals on PeerStreet pay slightly higher total fees than some other sites. Because of the relatively high performance that PeerStreet’s deals have produced, however, these fees so far have not kept investors away.
Real Crowd acts as a syndication platform for real estate development companies and real estate funds. The development companies and funds pay a fee to Real Crowd to have their offerings listed on the site. Viewing the offerings is possible only for accredited investors who have created a free membership account on the site. Most of the opportunities on Real Crowd involve commercial real properties or multi-family properties. Some of the investments are funds in which the fund manager will be investing in the proceeds in a targeted type of property while others are syndicating take-out financing for existing properties.
From the investor’s point of view, Real Crowd has successfully recruited a large number of property developers and fund managers, so there are many investment opportunities to consider. Most investments, however, require a minimum investment of at least $25 to $50,000, so the platform is not friendly to small retail investors who want to dip their toes in the water. In addition, most of the investment opportunities are equity securities, so there is a higher risk of principal loss than is generally the case with debt-oriented platforms.
Realty Mogul is one of the largest real estate crowdfunding sites and it uses several different approaches based upon the needs of the project sponsor and the class of investor involved. Accredited investors may invest in either debt or equity securities. Accredited equity investors invest in syndicated private placements of special purpose limited liability companies that exist to finance equity investments in particular properties. The equity investment has the higher potential return associated with equity as well as the potential downside risk of loss.
Accredited investors may also invest in debt securities called “Platform Notes”. Each Platform Note is a debt security issued by a Realty Mogul special purpose vehicle which uses the proceeds of the Platform Notes to make a loan to particular sponsored investment. By issuing the note from its special purpose vehicle, Realty Mogul is able to take on the management function of managing the underlying loan (reviewing financials, monitoring loan covenants, working out any defaults, and so on) without involving the passive investors who have purchased the Platform Notes.
For non-accredited investors, Realty Mogul has sponsored its own non-traded real estate investment trust. Although the REIT (called Mogul REIT I) is not traded on any stock exchanges, its shares were qualified with the SEC through a Regulation A prospectus. According to the prospectus (which went effective in August, 2016) the REIT plans to hold:
“(1) at least 55% of the total value of our assets in commercial mortgage-related instruments that are closely tied to one or more underlying commercial real estate projects, such as mortgage loans, subordinated mortgage loans, mezzanine debt and participations (also referred to as B-Notes) that meet certain criteria set by the staff of the SEC; and (2) at least 80% of the total value of our assets in the types of assets described above plus in “real estate-related assets” that are related to one or more underlying commercial real estate projects, these “real estate-related assets” may include assets such as equity or preferred equity interests in companies whose primary business is to own and operate one or more specified commercial real estate projects, debt securities whose payments are tied to a pool of commercial real estate projects (such as commercial mortgage-backed securities, or CMBS, and collateralized debt obligations, or CDOs), or interests in publicly traded REITs. We intend to qualify as a real estate investment trust, or REIT, for U.S. federal income tax purposes beginning with our taxable year ending December 31, 2016.”
Because Realty Mogul facilitates both equity and debt investments for accredited investors as well as equity investments for non-accredited investors through MogulREIT I, Realty Mogul is ideally-situated to generate substantial deal flow and relatively rapid underwriting for projects that apply for funding. As a platform for providing funding for sponsored-projects as well as a platform for creating investment opportunities, Realty Mogul has one of the best head starts of all the available real estate websites.
Those advantages, however, come at a cost. Realty Mogul has a large staff operation (which is required for its extensive underwriting duties) and that cost is borne by investors through the 1-2% fees they pay to participate in investments on the site. While the site has tremendous deal flow, however, a student of the industry might ask, “is this really crowdfunding?” Because Realty Mogul takes such an active role in performing due diligence on its projects and in structuring the investment opportunities on its site, the overall experience is more structured than most crowdfunding sites and there is less opportunity for the collectively give-and-take than crowdfunding was originally thought to represent.
Realty Shares facilitates both debt and equity investments into both commercial and residential real estate. The site claims that it has funded over $300 million to 550 projects that have returned more than $59 million to the site’s more than 92,000 registered accredited investors. Project sponsors must submit to underwriting through Realty Shares and only projects that have exceeded the site’s standards can be offered to the site’s members. Fees range from 1 to 2% of the investment amount, but investment minimums are as low as $5,000.
As with most of the other real estate crowdfunding sites, investments are made through private placements under rule 506(b).
Residential Real Property Sites
There are several websites that focus primarily on residential real estate. Because of the similarity of their focus and approach, they can be surveyed as a group:
Lending Home describes itself as the “largest hard money lender” [providing] “fix and flip loans up to 90% LTC and 80% LTV.” Unlike many of the other sites that aim their value proposition at investors, Lending Home addresses itself primarily to homeowners how are looking for loans and are willing to pay “hard money” rates of interest to get cash. Accredited investors can participate in Lending Home in increments as low as $5,000.
Roofstock’s tagline is “Property Investing Like the Pros.” Like Lending Home, Roofstock focuses only on single family residential properties. Differently, however, Roofstock allows accredited investors to invest directly through loan participations as well as through small funds that focus on particular regions or particular rates of return. Roofstock also emphasizes, through its underwriting and its messaging, the underlying quality of the properties and their surrounding communities, school systems and the like. Browsing through loan opportunities on Roofstock feels more like browsing through listings on Zillow than looking for investments.
Patch of Land
Patch of Land is one of the largest and most heavily-trafficked real estate crowdfunding sites. The site claims to have originated more than 400 loans for over $245 million in loans, returning over $61 million to investors. Although Patch of Land has made investments in multi-family and commercial real estate, more than 70% by value of its investments have been made in single family real estate.
Fund That Flip
Fund that Flip is a site that proudly advertises its role in financing single family residential rehab and resale projects. The site claims that the sponsors underwrite individual deals, requiring borrowers to put at least ten percent in the property’s value in equity. The site also tries to entice investors, claiming average returns between 10 and 14%.
The Future of Real Estate Crowdfunding
Real estate crowdfunding has definitely arrived. Through the dozens of existing sites claiming to offer some kind of real estate crowdfunding, investors have invested more than a billion dollars through thousands of investments in just a few short years. While this method of investing is still very small (in contrast to retail investments in mutual funds and the stock market) it fills a market need that shows no sign of disappearing.
For real estate crowdfunding to achieve a wider degree of acceptance, platform owners will need to continue to facilitate high quality investment opportunities while improving transparency. Wider acceptance will require a level of information sharing that does not yet exist in the industry. Even the most popular sites today have varying levels of information available to potential investors. These inconsistent levels of disclosure can undermine the trust that is necessary to grow crowdfunding as a method of investing. Real estate crowdfunding sites that facilitate exempt transactions under Rule 506(b) are not regulated, and that is probably a good thing. But the lack of regulation also permits a wide diversity in style and approach that can make comparing the platforms difficult.
If the leading crowdfunding platforms could collaborate on a standardized “scorecard” that pulled together standard metrics on transactions, investment amounts and rates of return, the result would make it possible for both investors and project sponsors to compare platforms on a level playing field. The investor confidence that might come from such a development would encourage new investors to come into the market. Platforms that did not adopt the scorecard at first would experience market pressure to begin reporting results in the scorecard format. Adopting a standardized scorecard for recording would, in a sense, demonstrate the power that crowdfunding was supposed to represent, by making it possible for the market to adjust itself to the information needs of the investing community.
 Surowiecki, James, The Wisdom of Crowds, Anchor Books (2005).
 Wilson, Jonathan B., Follow the Crowd: What the Future of Crowdfunding Holds for Startup Restaurant Owners, Restaurant Owner Startup & Growth Magazine, 18 (Feb. 2016).
 PeerStreet claims that its loans have generally yielded between 6 and 12%. See PeerStreet FAQs, available at https://info.peerstreet.com/faqs/how-do-peerstreet-returns-compare-to-other-debt-investments/ (last visited January 29, 2017).
 MogulREIT I, LLC SEC File, available at https://www.sec.gov/cgi-bin/browse-edgar?action=getcompany&CIK=0001669664&owner=exclude&count=40&hidefilings=0 (last visited January 29, 2017).