The Truth Behind Crowdfunding

Equityroots, Equityroots Inc., Blog, The Truth Behind Crowdfunding

What is Crowdfunding?

Just recently, it seems like there has been vibrant excitement surrounding the concept of “crowdfunding” in the real estate market. Crowdfunding is on its way to upset the status quo in real estate finance, allowing savvy investors of all sizes to pool capital and participate in the investment marketplace alongside institutional investors. Crowdfunding is considered to be an advantageous, innovative, and cutting-edge practice amongst real estate professionals. However, crowdfunding has yet to stamp its footprint in mainstream America, or for that matter towards the crème de la crème of the real estate community.

Crowdfunding is the window into democratizing the investment marketplace, allowing everyday-people a chance to invest into larger assets that are thriving like franchised hotels and resorts. Let’s face it, middle class America doesn’t have a $2-3 million equity check to write. Should they be denied from earning the same returns that wealthy individuals earn in highly rewarding real estate assets? What if smaller investors were allowed to put their beans into a deal right next to the big guys and take a fractional interest in the project?

Crowdfunding aims to level the playing field, allowing people to invest that would otherwise not be able to. Critics still question whether both, the real estate market and crowdfunding market, can create a new and prosperous path for investors, both domestically and internationally, by leveraging profits from U.S. real estate investments. Well, the truth is “crowdfunding” has answered all the uncertainties and silenced the critics. Crowdfunding takes advantage of and continues to make use of the accessibility of the Internet, and the vast networks that stay connected through the technology medium. With tools like social media, it’s quite easy to discuss a new business plan while simultaneously building support and attracting investors.

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Where Does the Law Stand on Crowdfunding?

The Jumpstart Our Business Startups (JOBS) Act of 2012 remains the catalyst for allowing “crowdfunding” to prosper via the Internet. Absent this recent legislation, there was neither the ability to promote nor the ability to solicit investors to make investments for real estate assets. Specifically, Regulation D, Rule 506 placed heavy restrictions on fundraising efforts—namely preventing third parties from advertising private investment opportunities. However, an exemption to securities registration, Rule 506(c) allows real estate developers to raise money and to advertise private investment opportunities to accredited investors (those with a net-worth of at least $1 million USD) under certain circumstances. As a result, the JOBS Act (a.k.a. Title II) gave crowdfunding platforms access to large pools of potential investors via the Internet. Today investors have direct access to a private selection of real estate offerings, where they can browse deals and make informed decisions from the comfort of their living room.

What is the Potential of Crowdfunding?

Even though “crowdfunding” has been around for a couple years, it has just scratched the surface in terms of reaching its full potential. Currently, crowdfunding platforms tend to target mostly wealthy accredited investors. However, there is endless potential to increase entrepreneurship by expanding the pool of investors beyond the traditional circle of owners and venture capitalists with newer legislation like Regulation A+ in place. Ideally, there should be a platform where all private offerings are open to the general public, including non-accredited investors.

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