Crowdfunding – What Investors Need to Learn
by Brian Kline
This is a follow up to an article about the growth of Crowdfunding first published April 17. While still evolving, crowdfunding is almost certain to change the way many investors approach the real estate and other investment markets of the future.
Here is what the 2015 PENSCO CROWDFUNDING REPORT says about the evolution of Crowdfunding:
“Crowdfunding has grown out of its first phase, when most people were still learning the word and understanding the concept. Today, online platforms are making it much easier for more people to participate in private investments offered online. PENSCO created The PENSCO Marketplace® to help investors do just that. In the next few years, we expect the rules for unaccredited investors will change and potentially take crowdfunding through another major evolution.”
As recently as March of this year, another major change was made in SEC regulations related to Crowdfunding. All of the implications from this change are not yet known. However, Michael Howe, Director of Institutional Products, PENSCO Trust Company does reveal:
“Investment in and access to private equity are growing rapidly. Title II of the Jumpstart Our Business Startups (JOBS) Act enabled the launch of “equity crowdfunding” for accredited investors and it inspired new funding models. Late last month, the Securities and Exchange Commission acted to adopt new rules for Title IV of the JOBS Act, commonly referred to as Regulation A+, which will allow startups to raise up to $50 million in an IPO.
It’s still unclear what impact Reg A+ will have but the change attracting the most attention is that the rules allow all investors – both accredited and non-accredited investors – to participate in equity crowdfunding.
At PENSCO, we are finding that more and more self-directed IRA holders are exploring how to diversify their portfolios and use their retirement funds to invest in equity crowdfunding opportunities that meet their investment goals and risk profiles.
As Early Shares and LendZoan covered in our 2015 PENSCO Crowdfunding Report, real estate will continue to be a popular sector in 2015 for equity crowdfunding but the types of deals and investment vehicles will also expand rapidly. Also, crowdfunding is increasing the use of project portfolios that allow accredited investors to test investment ideas and “spread risk” across multiple investments.”
When banks fund startups and even expansion of successful existing businesses, they typically have two major requirements. One is that the business obtain a Small Business Administration guarantee of the loan. The other is that the business has significant skin in the game in the form of money. Often it’s at least 20 percent of the needed financing. If $500,000 in financing is needed, it means the business needs to come up with $100,000 of its own money. This can be for anything from fixing and flipping residential houses to investing in medium size apartment buildings to new small housing developments. However, the fact is that most small to medium size businesses don’t have those kinds of cash reserves. Many are profitable and ready to grow but cash flow is being spent on day-to-day operations and small incremental growth opportunities. Major growth opportunities come around but have to be passed on because these businesses are not able to raise the needed capital.
That is where crowdfunding is likely to make a difference in the future. Smaller investors will pool their funds when the right opportunity comes along. However, due diligence is always required regardless of the investment method used.
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