Saturday, November 1, 2014

Crowdfunding: Wave of the Future is now, Part 1 of 3

by Matt Reynolds & Spencer Marona

Crowdfunding, Part 1

In this three part series, we will be covering crowdfunding in the investment real estate sector: (a) what is crowdfunding and the impact we are beginning to see; (b) the process involved for accredited investors; (c) the current debate and potential implications looking forward.

What is crowdfunding?
In an industry that has produced and taken away millions for private investors during CRE cycles, a new wave of investing is gaining momentum. According to Wikipedia, 'Crowdfunding is the practice of funding a project or venture by raising monetary contributions from a large number of people, typically via the internet.'

Crowdfunding has been around since the late 90's, being used to raise money for everything from non-profits, startups and small businesses. Kickstarter, one of the more popular crowdfunding platforms, was launched in 2009 and purchased this year by Facebook for $2 billion. Since its inception, Kickstarter reports 7.3 million people have 'pledged' or invested $1 billion in approximately 72,000 creative projects on their platform.

Technically, “equity crowdfunding” — the sale of corporate equity stakes through online platforms — wasn’t legal until Congress passed the JOBS Act in 2012. This made equity crowdfunding legal, but only for accredited investors. The U.S. Securities and Exchange Commission defines an accredited investor as one who has a net worth of $1 million, excluding their primary residence, or an annual income of at least $200,000.

Is crowdfunding impacting investment real estate? 

This year, investment real estate is the hot topic with crowdfunding. Some experts expect crowdfunding to be a game changer for commercial real estate primarily due to online social media. In addition, a number of developers and landlords have turned to crowdfunding because banks or other conventional resources have turned them away.

Nav Athwal, co-founder and CEO of RealtyShares, stated in a 2013 Forbes article that $5 billion in capital was invested in 2013 via crowdfunding, including donations, debt, rewards, and equity. In addition, $100 million was invested in real estate with hundreds of properties.

We may be at the tip of the iceberg with this investment strategy and it is catching on across the world. With the passage of the JOBS Act, entrepreneurs and small business have been given the opportunity to grow with capital that they would not have had access to otherwise.

This activity is taking shape right now with a CrowdStreet, a Portland based crowdfunding platform connecting accredited investors with investment grade real estate. You can read more about Crowd Street in a recently published Portland Tribune article

In the next series we will cover some examples of how crowdfunding works.  

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