Yesterday I attended an all day Crowdfunding seminar held by Venture Hive, a Startup Incubator and Accelerator located in downtown Miami.
The main speakers were Jason Best and Woody Neiss from Crowdfunding Capital Advisors. Neiss was the founder of FlavorRX, a company that created the flavor additives that are available for a pharmacist to add to kids liquid prescription meds so your child will actually take them.
Why do these guys matter? They are the coauthors and promoters of Title III of the 2012 JOBS Act (overview of Act) that allows for equity and debt crowdfunding.
I was really surprised at the quality and depth of the presentation. Both guys were engaging speakers.
The day started off with Jason speaking about the political process and how both parties tried to pull them to “their” side. They resisted those forces and in doing so the bill received bipartisan support, changing SEC rules that dated back to 1933 and 1934. There is a lot to be learned from them on political success.
What is crowdfunded equity? I’m sure most of us are at least basically familiar with how stocks work. You pay a few hundred dollars and now own 1/1,000,000,000th of General motors or some such thing. If GM does well the value of your portion of the company goes up. If they fail and the government has to bail them out your stock value plummets or disappears completely.
Crowdfunding equity is similar but for smaller offerings with a cap of $1 million per year per business. Investors need to be “accredited” (see below) and are limited to how much each investor can invest. Those limits are 10% of their income/net worth, up to $100,000, for investors with more than $100,000 of income or assets and 5% for those with income and assets less than $100k. Everyone is permitted to invest $2000 per year regardless of income.
You are required to use an approved platform for the offering, think of something like Kickstarter, as well as a licensed broker-dealer to promote it
Regulation A+ has changed to allow for offerings up to $50 million per year. Only accredited investors may invest, but now offerings may be offered and sold publicly. There is a ton, read expensive, paperwork involved in a Regulation A+ offering.
The interesting thing is using these tools for debt. So rather than give up a portion of ownership, you can crowdfund debt, i.e. mortgage money.
Manhattan Attorney Douglas Ellenoff presented via video feed. His presentation was on the ethics requirements and how painful it is to get it wrong.
Ellenoff is a founder/principal in iDisclose.com, an online tool for creating the required SEC disclosures.
He also is a founder/principal in LexShares.com, an investment platform for commercial litigation. You can think of this in the context of the recent case where billionaire PayPal co-founder Peter Thiel took out his arch enemy Gawker media by funding Hulk Hogan’s litigation against Gawker.
The real use of a litigation equity tool is in allowing cases that would make a difference be heard despite the cost involved being too great for any individual to cover. For example, you have a case that could change our industry. There is so much at stake you realize that if you win, your opponents will appeal, perhaps all the way to the US Supreme Court. How the heck do you afford a case that will cost perhaps hundreds of thousands of dollars or more? This is where litigation investing comes in.
So what does this mean to us in rental real estate? Let’s say you found this great deal on a $4 million property. But there is that sticky wicket of the $800k downpayment. Something like this could conceivably work, although those numbers are at the outer edge and realistically would impossible to achieve, at least until you had a couple of successful offerings. But I see this as viable for smaller deals, allowing small investors to be in properties that they otherwise could not.
Heck, with Reg A+ you and your buddies could conceivably buy something really big. A $50 million down payment would go quite a ways.
If you are thinking about giving crowdfunding a go, be prepared to spend a lot of time learning the ropes and a bit of money getting the legalities correct.
A couple of mainstream articles on real estate crowdfunding
What is an accredited investor?
It is a person with a net worth of at least $1 million, excluding the value of their primary residence, or have income at least $200,000 each year for the last two years (or $300,000 combined income if married) and are expected to make the same amount this year.