What CrowdFunding Is, and Isn’t

Question

Joel Block, the CEO of one of the hedge funds I am a partner in put out this piece today that is worth reading by anyone interested in crowdfunding investments:

What CrowdFunding Is, and Isn't

After chasing crowdfunding for over a year now I can attest to the fact that this article is spot-on.  Don't outsource your capital raising to others.  We're in the process of setting up a new company to truly democratize crowdfunding for people like the good folks on BP.  I'll be able to share more details as they firm up.

Mark Robertson · Answer

Realty Mogul  is using the dealer/broker model and they fund a lot of deals.

Mark Robertson · Answer

Realty Mogul has raised almost $10 million in VC funding, so I think their chances of going belly up in the short term are pretty slim.  For the long term, I still feel comfortable with their model.  They have set up contingency plans for 3rd party's to manage distributions and K1's for the LLC investment vehicles.  The reason they can do this is they charge a 1 to 2% annual fee on the investments which is more than enough to compensate a 3rd party to handle this.  While the annual fee is my main gripe with Realty Mogul, it does insure that we will get paid if they go under.   I personally think 1% or less fee is more reasonable than a 2% annual fee.

Bryan Hancock · Answer

Do you know what you're buying on Realty Mogul?  They used to sell shares in their company instead of individual deals.  That seems pretty risky to me if they go belly-up.

Any thoughts on that?

Bryan Hancock · Answer

Which platforms are using the broker-dealer route that have any real traffic?

Title III is going to be neutered from the start based on what I have seen.  Title IV may be of more utility depending on how it shakes out, but Title III is going to be very burdensome on issuers under the current proposed rules.

Robert Reardon · Answer

I have to disagree with the author on a couple points. I think it's too early to claim that crowdfunding being the democratization of investing/access to capital is a myth. Equity crowdfunding under Title II of the JOBS Act was enacted and lifted the ban on general solicitation but Title III (soliciting investments on-line to non-accredited investors) has not yet been promulgated. I believe the most exciting piece to equity crowdfunding is providing every day investors the opportunity to gain access to private investments without the need to write a prohibitively large check.

Also, not every platform leverages the 2 and 20 VC model. Platforms that go the broker-dealer route charge any where from 3-8% of the funds raised for a completed offering.

Robert

Bryan Hancock · Answer

I have crowdfunded a few deals with iFunding too.  There is a dearth of the ability to fund things in the industry in general though.

David Oldenburg · Answer

@Bryan Hancock I crowdfund some of my deals and have helped others crowdfund their deals.  I haven't had any real issues, have experienced fast fundings, the ability to structure more than 100% of the cost and very traditional rates.  I do know that some people have problems.

What CrowdFunding Is, and Isn’t

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