Category: Uncategorized

A Model State Crowdfunding Law

On By crowdfundattnyIn Crowdfunding, Crowdfunding Laws, JOBS Act, UncategorizedLeave a comment

Model State CFI was asked recently to draft a Crowdfunding statute for Texas, to augment the proposals made by the Texas State Securities Board. Having done that, I have turned my Texas statute into a model law that could be used by any state, including the handful that have already adopted Crowdfunding in one form or another. The model law is a PDF here.

I drafted the model statute with these goals:

  • To balance the interests of investors, entrepreneurs, and state securities regulators;
  • To reflect the lessons I’ve learned over more than 30 years in the capital formation business;
  • To capture the current best practices of states and the Federal government;
  • To introduce new concepts that will allow Crowdfunding to flourish; and
  • As a Jeffersonian believer in Federalism, to leave space for state-by-state experimentation.

These are some of the key features:

  • The statute relies on portals that will be registered with state securities regulators. The same portal could be registered in more than one state and, indeed, could male offerings at the Federal level as well.
  • The statute imposes disclosure requirements that mirror the disclosures typically made in private placement transactions.
  • The statute expands the concept of “control persons.”
  • The statute requires that state securities regulators have 24/7 real-time access to any material shown to prospective investors.
  • The statute introduces and expands the Federal “bad actor” concept.
  • The statute raises investment limits for truly local projects, to encourage local investing.
  • The statute expands the definition of “accredited investor.”
  • The statute allows issuers to raise up to $2 million per offering.
  • The statute prohibits issuers from seeking to limit their liability for fraud or misrepresentation.
  • The statute gives state regulators broad latitude to modify in accordance with local conditions.

Everything is about balance. Without overwhelming issuers with bureaucracy, the statute protects investors and creates an ecosystem where capitalism can flourish.

I’m going to be reaching out to states with the model law. I would love to hear your input and advice.

Questions? Let me know.

Where Are The Videos In Equity Crowdfunding?

On By crowdfundattnyIn Crowdfunding, Equity Crowdfunding, UncategorizedLeave a comment

On Kickstarter, everyone know you need a good video to attract funding. Why don’t we see more videos in the equity Crowdfunding world?

Take a look at some Kickstarter videos. They’re great! They convey a message. They convey enthusiasm. They convey a will to succeed. They describe the project in the developer’s – sorry, the sponsor’s – voice. They ask for money persuasively.

All of that is relevant to equity Crowdfunding. I think the only reason we don’t see it (yet) is because that’s just not the way we’ve been doing things in finance for the last 30 years. We have a thick Private Placement Memorandum that creates friction in the transaction, but we don’t have a video.

For at least some of its deals, RealtyMogul now has a short introductory video featuring an attractive young representative from Wealth Forge. A good start!

Whenever I speak about Crowdfunding, I suggest that the hard-won lessons of the donation-based world should not be lost on equity-based world. If there’s one lesson from Kickstarter, it’s that videos matter.

NOTE: Any marketing folks see an opportunity here?

Questions? Let me know.

Rebuilding America, By Jason Fritton, Founder & CEO Of Patch Of Land

On By crowdfundattnyIn Crowdfunding, Crowdfunding Portals, Guest Blog, JOBS Act, Portals, Real Estate, UncategorizedLeave a comment

Statue of Lib CF_PurchasedBy: Jason Fritton, Founder & CEO of Patch of Land

Our headquarters is in Los Angeles, but Patch of Land was really born in Chicago.

Like all American cities, Chicago is a tale of two cities: one where the streets are lined with mansions, tidy row homes, and plush high-rises; and the other where most houses, if you can call them that, have boarded up windows, loose bricks, and rotting wood.

You can’t see those neighborhoods without wanting to help, and if you’re a real estate entrepreneur, as I am, you think there must be a lot of money to be made from all those vacant and abandoned buildings.

I went to foreclosure auctions but found that the market was broken. On one hand, the same handful of ultra-wealthy individuals or companies bid on $10 million properties. On the other hand, nobody bid on the smaller properties in blighted neighborhoods even though they could be had for a pittance, $10,000 or $20,000 apiece. The problem was (and is) that banks wouldn’t touch them, even if the developer had a proven track record. So the properties stayed vacant and abandoned, basically worthless, eyesores in the community.

I had a great idea – Crowdfunding! I’d ask for money from everyone. Not just as charity, although revitalizing neighborhoods would be the goal, but also as good investments for the donors/investors. We would start in Chicago and then move across the country, helping communities along the way.

We had our motto – Building Wealth & Growing Communities – before we knew how we were going to do it.

As it turned out I was a little early. I wanted to advertise my investments to everyone but in securities law terms that would have been “general solicitation,” which was still illegal. To keep my idea alive I found myself in Washington, D.C. lobbying for the JOBS Act, where I learned how political compromise can work. Republicans liked the economic freedom the bill gave to entrepreneurs and individual investors, while Democrats liked the potential for improving neighborhoods and the boost for small business.

Both sides came together and President Obama signed the bill into law on April 5, 2012. Now, without going to jail, I could start improving those neighborhoods.

There is an old African proverb: “If you want to go quickly, go alone.  If you want to go far, go together.” I started building my team piece by piece, knowing a lot of other smart people were getting into the market at the same time. And I’m proud of the team I built, the best in the business as far as I’m concerned. We did our first deal on October 15, 2013 and within six were the leading platform in the country dedicated to real estate debt.

We pre-fund all our deals, meaning we invest our own money before asking for money from anyone else. Unlike some other platforms, we also start paying interest as soon as we take an investor’s money. We are completely transparent. We charge no fees to investors. We offer very fast turnarounds to borrowers and very competitive returns to investors. We do a great job evaluating loans, based on our credit experience to date. We’ve taken big steps toward bridging the gap between the old world of behind-closed-doors capital formation, and the new world of online transparent capital structures.

But they’re just first steps. We and the industry have a long way to go. More than anything, we need a workable Title III or its equivalent. Accredited investors, all eight and a half million of them, make up only a small fraction of American adults. To truly democratize the formation of capital, we need to let everyone into the game.

Less than a year after Title II came into effect the market is exploding, with some very large real estate players getting into the business. To me, that’s just vindication of our business model, proof that the Crowdfunding business is being taken seriously.

I don’t worry much about the competition from those companies because small, nimble companies like Patch of Land enjoy a bunch of advantages:

  • Crowdfunding is a new business. Those of us who have been here from the start know the business inside out.
  • There’s a reason Walmart can’t seriously challenge Amazon. Amazon’s business was built online from the ground up, while Walmart’s entire model, entire way of thinking, is based on bricks and mortar. For more on that, click here.
  • Our business runs on technology, and our technology is second to none. In one seamless, integrated process, we control a project from application to interest-paying loan.
  • Our cost structure is far lower, allowing us to share the savings with both borrowers and investors.
  • There are wide swaths of the American real estate market the big players have never touched and will never touch. We call that market “under-served” or “most of America.” That’s the market Crowdfunding was created to address.

Among the many transactions we’ve complete, our loan to Deborah Smith in Georgia shows what we’re about. Deborah developed a rent-to-own program where veterans with poor credit could qualify for financing from the Veterans’ Administration. Using financing from Patch of Land, she was able to get those veterans in homes they couldn’t afford otherwise. And our investors made money in the propatch of landcess. That’s a long way from solving every problem in the real estate market, but it’s a start.

I’m super optimistic about the future of Patch of Land. If you had told me five years ago that I could be doing what I’m doing today, I’d have thought you were dreaming. Wait until you see what we’ve built five years from now.

Follow Jason Fritton on Twitter: @JasonFritton

Follow Patch of Land on Twitter: @PatchOfLand

 

Update On Accredited Investor Definition

On By crowdfundattnyIn Accredited Investor, Crowdfunding, Investor, JOBS Act, SEC, UncategorizedLeave a comment

I wrote to my close friend Mary Jo White, the Chair of the SEC, urging that the SEC expand, rather than restrict, the definition of accredited investor. My letter is here.

SEC letter_Roderick

Questions? Let me know.

Carriages, Cars, And Policeman – By Scott Picken, Senior Managing Partner of Wealth Migrate

On By crowdfundattnyIn Crowdfunding, Investing, JOBS Act, Real Estate, UncategorizedLeave a comment

WM ScottBy: Scott Picken, Founder & Senior Managing Partner of Wealth Migrate.

I’m Scott Picken, the founder and Senior Managing Partner of Wealth Migrate. Our investment committee has collectively 227 years of experience in international real estate. We have facilitated 10,779 investments to a value of over $1.3 billion and invested on five continents. We’re passionate about Crowdfunding as an enabler of our current business, helping to make everything more efficient, accessible, and transparent.

When I spoke at the Coastal Shows event in New York City at the end of June, many of those speaking and attending seemed to believe that Crowdfunding was invented in America in 2012. Far from it! In Australia and elsewhere around the globe, companies have been Crowdfunding for years. At this moment I’m returning from a Crowdfunding conference in Singapore, which was conservatively speaking 10 times the size of the New York City event.

Why invest globally? Because real estate markets do not all move in synch. When the U.S. market was plummeting in 2007-8, the Australian market was doing quite well, actually growing on average by 8.6% in 2009. And if anyone hasn’t noticed, the U.S. dollar has lost about 72% of its value against other major currencies over the last 10 years. No one market, not even the U.S., can protect itself against that kind of loss.

It is just like in nature. When winter comes in the Northern hemisphere the birds fly south and when summer returns they fly north. Migration is a law of nature, and yet we humans remain firmly planted in one place, winter and summer. It is why we called our company Wealth Migrate, as in the 21st century it is about finding the safest and best returns, globally.

Robert Kiyosaki, the author of Conspiracy of the Rich and Jim Rogers in Street Smarts, both teach that the easiest way to get rich is to follow long-term trends. If the globalization of the international economy is not a long-term trend, then I don’t know a long-term trend.

Actually, globalization is not enough – just try selling American cheeseburgers in China. At Wealth Migrate we believe in glocalization, which means thinking globally and acting locally. McDonald’s modifies its menu to fit local tastes and we find best-of-breed partners on the ground in local markets and then partner with them. A bird in a flock can fly 70% further than a bird flying on its own.

Read my book, Property Going Global. It’s all about successful investing in foreign markets.

When I read Ben Miller’s post about the problems he faced with his first Crowdfunding offering, I knew exactly what he was talking about. You can’t imagine how many accountants and lawyers told us “No!” when we started to look at the U.S. investor market and the opportunities in the US. With everyone using the Internet for everything, with Twitter literally driving the Arab Spring, the investment world needed to change from horse-drawn carriages to automobiles and these “experts” were like policemen not giving us a license to drive a car. It just about drove me crazy but fortunately not so crazy that I gave up.

In 1998 I wrote a dissertation about the real estate market and the coming IT revolution. My synopsis said “taking an old industry, steeped in tradition and run by many smaller, disparate and often inefficient operators, and redefining it through the use of web technology to increase global reach, partnerships and efficiencies of scale, so as to provide a ‘one stop’ enhanced and personalized service to our clients.” I didn’t realize then that I was talking about Crowdfunding, the real estate finance market, and Wealth Migrate, but that sums up our business model pretty well.

Look, almost 50% of the world’s wealth is held in real estate yet only a small fraction of the world’s population (12.9%) owns real estate, much less has access to great deals. I am a firm believer in the business philosophy of Zig Ziglar that “You can have anything you want in life if you help enough other people get what they want.” The Afrikaans say “Ver van jou goed, na aan jou skade,” which loosely translated means “Keep your assets close to home, if you don’t want to lose them.” But in the 21st century that is no longer true. To give millions of individuals what they want, we need to look beyond our own homes, even beyond our own national borders, and ultimately help create global wealth for all.

In my opinion it’s a great time for cars, not a great time for carriages or outdated policemen, but the cars do need to be driven safely. It is all about trust, transparency and most importantly everyone’s interests being aligned. You are no longer bound to a country, a currency, an economy or even an asset class. I believe it is less about where you live and more important about where you wealth lives.

 

99-Investor Rule Affects Crowdfunding Deal Structure

On By crowdfundattnyIn UncategorizedLeave a comment

From real estate to IT, many of the equity investments offered on Title II Crowdfunding portals share a common deal structure. Investors do not acquire interests directly in the operating company, but instead acquire interests in a separate entity, which itself acquires an interest in the operating company. If the operating company is Newco and the separate entity is Investco, then the investors purchase shares in Investco and Investco purchases shares in Newco.

This deal structure holds advantages for Newco and its principals. For one thing, Newco adds only one investor – Investco – to its cap table, rather than adding every individual who invests. For another, if Investco is controlled by the portal, Newco has effectively farmed out the logistics headaches of investor relations to a third party. Not coincidentally, the Investco structure may also allow the portal, not the sponsor, to maintain the all-important investor relationship.

(For a more complete description of how such a structure might operate, see my blog post here.)

The advantages notwithstanding, the Investment Company Act of 1940 holds a potential trap for portals and sponsors using this structure.

Because it holds only securities – the stock of Newco – and not real estate or other business assets, if Investco has more than 99 investors it could be treated as an “investment company” and required to register as such with the Securities and Exchange Commission. A registered investment company is subject to onerous reporting obligations, far beyond anything contemplated by Crowdfunding portals and sponsors.

Holding only one security and making few if any investment decisions, Investco certainly doesn’t look like the typical company registered under the 1940 Act. Just as the SEC took a permissive attitude toward general solicitation and advertising in the 2013 no-action letters that gave the green light to Crowdfunding before the JOBS Act became effective, perhaps it will rule that an entity organized to hold a single security is not an investment company.

Then again, as Crowdfunding becomes mainstream sponsors might start admitting the public investors directly to their own cap tables, eliminating the need for Investco. Until the SEC clarifies the definition of “investment company,” direct investment is probably the prudent course for any deal expected to attract more than 99 investors.

Questions? Let me know.

Marketing In Crowdfunding

On By crowdfundattnyIn UncategorizedLeave a comment

At the Coastal Shows event in New York City, I asked “Where are all the marketing people?” One or two people raised their hands, but not more.

Crowdfunding portals are not technology companies. No portal can succeed without great technology, but ultimately the success of the portal does not ultimately depend on its technology. Nor are portals venture capital companies, or real estate companies, or health care companies.

In my opinion Crowdfunding portals are ultimately marketing companies, in the same sense that Morgan Stanley is ultimately a marketing company. Like today’s investment banks, portals will compete for the best deals and, of course, for the eyes and checkbooks of millions of individual investors. It seems clear to me that while the technology and, to a large extent, even the expertise of the portal are commodities in the sense that they can be purchased, the ability to market effectively will tip the scales one way or another.

Beyond that, my experience suggests that the term “marketing” might be understood too narrowly in the Crowdfunding industry today. On one hand, of course marketing means reaching out to and attracting investors. On the other hand, marketing also means figuring out what investors want and tailoring the product(s) on the portal accordingly.

Why has marketing played such a small role in Crowdfunding so far? Maybe because the industry is so young. Maybe at the next conference the marketing sponsor will raise her hand and ask “Where are all the lawyers?”

Questions? Let me know.

What You Didn’t Know About Texas Crowdfunding

On By crowdfundattnyIn UncategorizedLeave a comment

Texas plans to introduce intra-state Crowdfunding within the next couple of months. If you thought Texas would follow the lead of Georgia and other states, you’re in for a surprise.

In fact, many of the things being done in Crowdfunding around the country will be prohibited in Texas:

  • An entrepreneur looking to raise money under the Texas intra-state rules will not be allowed to do it himself. Instead, all Texas Crowdfunding must go through a Texas broker/dealer or a registered Texas Crowdfunding portal.
  • In the Crowdfunding industry today, from FundersClub to RealtyMogul to Fundrise, it’s typical for the portal or its affiliate to take an interest in the issuer, i.e., a “carried interest” or a “promote”. Not in Texas, where the portal may not receive or hold any financial interest in the issuer.
  • In the Crowdfunding industry today, third party services like bancbox typically serve as escrow agents. Not in Texas, where a Texas depository institution (e.g., a real bank) must hold the initial escrow.
  • In the typical Crowdfunded debt transaction, exemplified by Patch of Land or RealtyMogul, the portal or an affiliate lends the money to the ultimate borrower and then borrows money from the crowd. Not in Texas, because technically the portal or its affiliate is then the issuer, which is prohibited.

For some of these hurdles there are Texas-specific workarounds, while for others there are not. However that plays out, it’s interesting that Texas, more often associated with laissez faire economics, adopted what looks to be the most restrictive intra-state Crowdfunding law in the country.

Questions? Let me know.

CROWDFUNDING IN NYC

On By crowdfundattnyIn UncategorizedLeave a comment

The Coastal Shows Crowdfund Investment and Alternative Finance Summit in New York City June 26th – 27th brought together luminaries from the Crowdfunding industry. To name just a few:

  • Manish Kapoor, the Managing Partner of Wheelhouse Capital. Manish brings to the Crowdfunding industry in general and the P2P segment in particular an unparalleled understanding of the credit markets.
  • David Jaffin, the Chief Financial Officer of Poliwogg, the health care industry portal. Outside the real estate market Poliwogg is my favorite Title II portal and its re-launched site demonstrates the potential of the industry.
  • Scott Pickens and Dr. Dolf de Roos of Wealth Migrate. Wealth Migrate is the largest and most successful real estate Crowdfunding portal you might not have heard of. . . .yet.  An international portal with tens of thousands of registered investors worldwide, Wealth Migrate is ramping up U.S. operations and promises to be a major player.
  • Cromwell Coulson of OTC Markets. A secondary market for Crowdfunded investments is among the holy grails of the industry, along with a robust Title III. OTC is a big step in the right direction.
  • Amy Cortese, author and journalist for the New York Times. The panel Amy moderated was among the most interesting of the conference, addressing (among other things) whether the P2P markets are skewed in favor of institutional money.
  • Jesse Clem, a Co-Founder of Loquidity. Loquidity is a newcomer to the real estate portal market, focusing on properties in the Midwest.
  • Brandon Jenkins of Fundrise. Fundrise is. . . .well, you know.

In my keynote address, I asked the audience to remember that Crowdfunding is in its infancy and, in an important sense, fragile. The industry holds enormous promise for both entrepreneurs and investors. But if we do things wrong Congress could bring the whole enterprise to a halt or, just as bad, individual investors could decide the Crowdfunding industry is rigged against them and stay away.

It’s up to all of us – those who spoke at the conference and those who just listened.

Although I make it my business to know about Crowdfunding, I spend most of my time at these conferences listening and learning. If you are getting into the industry or want to learn more, I suggest you get on the Coastal Shows mailing list and join us next time.

Austin Roundup

On By crowdfundattnyIn Crowdfunding Real Estate, Crowdfunding Speaking Engagements, JOBS Act, Speaking Engagements, Title II, Title II Crowdfunding, Title III Crowdfunding, UncategorizedLeave a comment

Austin cityscapeHats off to the folks at Coastal Shows for making the Austin event – officially the CFGE Crowdfund Real Estate Summit – the best Crowdfunding event ever.

The event featured the leading players in the industry:

Title III of the JOBS Act may be flawed, and the final rules for Regulation A+ may be long overdue, but the speakers and panelists agree that Crowdfunding is here to stay, with Title II leading the way. Two days before the conference began, Fundrise raised $31 million of capital in a Series A round of financing. That served as a very useful background, illuminating the potential of a market that promises to transform the U.S. capital formation industry.

Over coffee during the day and beer in the evening, I spoke with dozens of real estate developers and entrepreneurs. Their message came through loud and clear: We’re tired of dealing exclusively with our traditional sources of capital and are eager to raise money through Crowdfunding channels.

Developers are eager for new sources of capital, and individual investors are eager to participate in a market that, until now, has been reserved for institutions and the very wealthy. That’s Crowdfunding, in a nutshell.

What happens in Vegas might stay in Vegas, but what happened in Austin is going to spread across the country. Thanks for a great event, Coastal Shows.