The use of crowdfunding has provided a welcome boost to the sluggish economy of recent years. Crowdfunding, according to Merriam-Webster, is “the practice of soliciting financial contributions from a large number of people[,] especially from the online community.”  Crowdfunding campaigns, thus, do not focus on soliciting one or two major procurements of capital; instead, they focus on scale—attracting a multitude of more modest contributions.

The use of crowdfunding continues to skyrocket.  In 2013, the online crowdfunding industry accumulated over $5 billion, a sizeable increase over 2012’s total of $2.7 billion.  According to Forbes Contributor Tanya Prive, “crowding funding is a great asset to businesses and entrepreneurs, generating much needed revenue and increasing the customer base, all the while aiding our country’s economy.”

There are two different types of crowdfunding campaigns – traditional crowdfunding campaigns and equity-based crowdfunding, or crowdinvesting, campaigns.  Traditional crowdfunding is likely what most people think about when they hear the term “crowdfunding.”  With traditional crowdfunding, those who put money in do not in return receive any equity in the venture.  Instead, the return might be in the form of a perk (i.e., receiving a role as an extra in a crowdfunded movie) or simply the intrinsic benefit of giving to a creative venture.  Some of the most popular traditional crowdfunding sites include Kickstarter, Indiegogo, and RocketHub.

With equity-based crowd funding—also known as crowdinvesting—those who put money into the venture do receive equity in the venture.  Crowdinvesting is often used by start-ups for early stage funding.  One of the more recent trends in crowdinvesting is its use within the real estate industry.  More and more websites devoted to facilitating crowdinvesting in real estate are sprouting up.  These websites offer ways for real estate developers to creatively finance new real estate ventures, while also providing an avenue for small-scale investors to get actively involved in real estate with complete control over where their money is going, as opposed to a REIT.

The real estate crowdinvesting movement was not without its early hurdles, however.  In an interview with Fast Company, Ben and Dan Miller, the founders of Fundrise, one of the most popular real estate crowdinvesting websites, said that when they began the company in 2010, “the entire securities law framework was in opposition . . . .”  Fortunately, however, things have changed.  The passing of the Jumpstart Our Business Startups (JOBS) Act of 2012 lifted a ban on general solicitation of funding for private offerings.  The Act, however, does require that if private offerings (i.e., real estate investment opportunities) are displayed publicly, the platform must verify that each investor is accredited.  Fundrise, however, gets around this by foregoing Regulation D, which is used by the majority of real estate crowdinvesting companies, in favor of Regulation A.  Regulation A allows general solicitation of private offerings even for non-accredited investors with the catch being that Regulation A investments require direct SEC approval.

However, the Regulation D’s ban on non-accredited investors might soon be a thing of the past.  The SEC has yet to issue its final rules on the JOBS Act, and it remains to be seen whether the SEC final rules will more friendly to non-accredited investors and, thus, more friendly to real estate crowdinvesting platforms.  In the meantime, the wait is on and a campaign is even underway (#VoteOnCrowdfunding) to push the SEC to issue the final rules.

 

Chris Borns

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