Mark Roderick appeared on The Exchange with KB podcast with host Kirill Bensonoff, where he discussed Crowdfunding, Blockchain & Cryptocurrencies. In this episode, Kirill and Mark discussed the JOBS Act, Title II Crowdfunding, Accredited Investors, Regulation Crowdfunding, why we need investment regulation, the future of cryptocurrency, Libra and other blockchain tech and cryptocurrency, and legislation regarding blockchain and crypto.
On this episode of A Millennial’s Guide to Real Estate Investing, host Antoine Martel sits down with Mark Roderick, a leading crowdfunding, investing and fintech lawyer. They talk about blockchain, crowdfunding, the JOBS act, and how all of these things are going to be changing the real estate industry. Also discussed are the different types of crowdfunding flavors and how each of them work.
Questions? Let me know.
Technology has made it easier to raise capital for real estate deals. Since Crowdfunding has grown exponentially, John Casmon, host of the popular Target Market Insights podcast, invited me on his show to learn more about crowdfunding and fintech (financial technology). On this episode, I talk about different ways to use the internet to raise money and the impact new technologies will have on the way we buy real estate.
Key Market Insights
Crowdfunding is raising money on the internet
Two versions – donation based (think Kickstarter) and equity based
Crowdfunding is online syndication with 3 flavors: title 2, title 3 and title 4
All crowdfunding falls under the JobsAct
Title 2 is very similar to 506c for accredited investors
Title 3 is very different, can only raise $1MM annually
Title 4 can raise $50 million
FinTech – any technology disrupting the financial services industry
Many believe banks should be a disintermediary
Roboadvisor apps are apart of FinTech
Online syndication is not more risky than traditional syndication
Anytime you take money, you can be sued
When done properly, you should not be exposed to any actual liability – even if they lose money
Blockchain technology could disrupt the real estate industry
Blockchain is a database or ledger that cannot be changed and has no central authority – everyone must consent
Title companies and other “middle men” could be pushed away through blockchain
Questions? Let me know.
Podcast: Regulation A+ Crowdfunding
If you’re a entrepreneur, you’re probably looking for some way to raise capital. You probably have heard of crowdfunding, but you may not have heard of the Jobs Act of 2012 and how it relates to crowdfunding – which is significant because its potential is enormous. Besides Regulation A+, Reg. CF, and Title II crowdfunding options to name a few, now investors and issuers can take advantage of the “tokenization” of assets via Security Token Offerings based on blockchain technology. However, there are complicated rules associated with all aspects of crowdfunding, which is why it’s so important to have legal representation throughout all phases of the process.
In this podcast episode, we interviewed crowdfunding attorney Mark Roderick from Flaster Greenberg PC who gave us many insights on crowdfunding in general, plus his take on tokenization and what security tokens can actually do for issuers and investors alike. Forget what everyone says about raising money. As stated on the podcast, crowdfunding is a marketing business, but it’s smart to have legal counsel at all times too – which is why anyone thinking of getting involved with crowdfunding on any level would be wise to contact Mr. Roderick and read his crowdfunding blog where you can find hundreds of posts with excellent information dedicated to legal crowdfunding success. See that? Sometimes lawyers can be your friend!
And speaking of crowdfunding, according to Mark, about 90% of the Reg.A+ crowdfunding deals he’s seen is regarding real estate. You know what most of the Reg.CF deals are? (here’s a hint).
Questions? Let me know.
Recently, BAD Crypto Podcast hosts Joel Comm and Travis Wright were foolish enough to have me on their show, talking about Crowdfunding and Crypto and ICOs and blockchain and French cooking (or was that another podcast?). Click here to listen.
I hope it was informative – it was definitely fun.
Questions? Let me know.
Every day brings more bad news about ICOs: another class action lawsuit, another subpoena by the SEC, another “request for information” by a state Attorney General, another country that outlawed ICOs altogether.
The bad news is probably hurting the industry’s reputation and driving away investors in the short term. But from my perspective the bad news is, on balance, actually good.
The ICO market was crazy in 2017. Lawyers were giving questionable advice, investors were buying anything called a token, and the billions of dollars sloshing around attracted bad actors and instant-millionaires. People convinced themselves this was normal and justified, as they did with tulip bulbs in 1636.
From my perspective, the bad news in today’s headlines shows that the fog is clearing. Among the lessons learned:
- ICOs were not, after all, a law unto themselves.
- It’s easier to describe a network than to build one.
- Some smart contracts are dumb.
- Honesty is still the best policy with investors.
- An honest cop is good for the neighborhood.
- The laws of economics have not been repealed.
Most important, it turns out that there really is value in blockchain, even without the hype, and that real entrepreneurs are building serious value and finding it easier to connect with investors as the fog clears. Your Uber driver is no longer offering tips on Bitcoin, but you can do a legal ICO, there really is such thing as a utility token, and there are a lot of really smart folks building real companies that are going to disrupt and transform a lot of industries.
We’re going through a much-needed adjustment right now. It’s all good, as we young people say.
Questions? Let me know.
Cryptocurrencies are hot. And often the sale of cryptocurrencies is referred to as Crowdfunding. Unfortunately, the use of “cryptocurrencies” and “Crowdfunding” together creates confusion about both, along with some pretty serious legal risks.
We use “Crowdfunding” to mean raising money for a business or other venture online. We say “donation-based Crowdfunding” when we’re talking about Kickstarter, where people ask for donations. We say “equity-based Crowdfunding” when we’re talking about raising money from investors, who receive a stock certificate or some other security.
A cryptocurrency is, well, hard to pin down. It’s a transaction registered in a distributed, secure database. Because it exists in limited quantities and is secure, it has value. Like anything of value, it can be used as a currency. For purposes of this post, the key feature of a true cryptocurrency is that is has value of itself, like a nugget of gold.
You use Crowdfunding to sell shares of stock. Obviously, the paper certificates representing the shares of stock have no value by themselves, they have value only to evidence ownership in the business that issued the certificates or, more exactly, in the cash flow the business is expected to generate. So it wouldn’t make sense to say “I’m selling nuggets of gold using Crowdfunding.” The nuggets of gold have an intrinsic value without reference to the cash flow of anything else, or at least you hope they do. I can go shopping with a cryptocurrency like Bitcoin or Ethereum, just as I can shop with US dollars or, historically, with gold.
This is where things get tricky and words matter. The blockchain – the technology underlying all cryptocurrencies – can be used for a lot of things other than cryptocurrencies. As it happens, one of the things the blockchain can be used for is to keep track of stock certificates. In fact, the blockchain works so well keeping track of stock certificates that it will undoubtedly be used by (or replace) all public stock transfer agents within the next five years.
What’s happening today is that companies are selling what they call “cryptocurrencies” that are really just interests in the future operations of a business, i.e., really just hi-tech stock certificates. Cool, they’re using blockchain technology to keep track of who owns the company! But that doesn’t mean what you’re buying is really a cryptocurrency and that you’re going to get rich like the early buyers of Ethereum.
Words are powerful, and the confusion around cryptocurrencies is deepened by the nomenclature. Sales of cryptocurrencies are often referred to as “initial coin offerings,” or ICOs, which implies a similarity to “initial public offerings,” or IPOs. Yet if we’re being careful, the two have nothing in common. In an IPO a company sells its own securities, which have value only based on the success of the company. In an ICO somebody sells a product that has intrinsic value of itself.
Ignoring the difference is going to land someone in hot water, probably sooner rather than later. A company that sells something it calls a cryptocurrency but is really just a share of stock is selling a security, even if that company has an address near Palo Alto. And a company that sells a security is subject to all those pesky laws from the 1930s. If you sell a cryptocurrency that is really just a hi-tech stock certificate, then not only do you risk penalties from the SEC and state securities regulators, you’ll also face lawsuits from your investors if things don’t go as planned.
How to know whether you’re selling a true cryptocurrency or a hi-tech stock certificate? Here are some tips:
- If the value of the cryptocurrency depends on the success of the business, it’s a security.
- If the value of the cryptocurrency depends on, or is backed by, real estate or other property, it’s a security.
- If the cryptocurrency is marketed as an investment, it’s probably a security.
- If the value of the cryptocurrency depends what the buyer does with it, rather than the success of the business, it’s probably not a security.
- If the cryptocurrency merely gives the holder the right to participate in a group effort (g., the development of software), it’s probably not a security.
- If you’re selling the cryptocurrency in lieu of issuing stock, it’s probably a security.
Guest Co-Author: Benjamin L. Roderick
What Is Blockchain?
Blockchain is the term given to a highly sophisticated database tool that allows “distributed verification.” Most of us heard about blockchain because it is the technological backbone of Bitcoin, the alternative currency, but the possible applications go far beyond that.
To understand what “distributed verification” means, let’s look at a typical Bitcoin transaction, where Franchesca uses her Bitcoin currency to buy a TV from Herb.
On the surface, the transaction is simple: Herb gives Franchesca his TV and Franchesca gives Herb some Bitcoin. But how does Herb know that Franchesca actually owns Bitcoin? And how does he get it from her? The answer is the blockchain. Distributed all over the world, the blockchain verifies that Franchesca owns Bitcoin, and then records the transfer from Franchesca to Herb, so Herb can use the Bitcoin to buy groceries from Janet.
Benefits of Blockchain
The primary benefits of the blockchain are:
- It’s secure
- It provides universal authentication
- It provides trust for trust-less networks
- It’s automated
- It’s almost friction-free, drastically lowering transaction costs
- It’s easy to audit
- It’s decentralized
- It can be (but doesn’t have to be) anonymous.
Here’s a table illustrating where and how blockchain technology can add value:
Blockchain technology isn’t perfect yet; some might say it’s not even ready for prime time. Today, the primary drawback is how long it takes to authenticate transactions. A transaction today in Bitcoin takes about 10 minutes to clear, and Bitcoin is a microscopic market compared to, say, credit card transactions. Indeed, the Bitcoin community is engaged in a civil war as to how, or even whether, to change the technology to speed up transactions.
Application of Blockchain Technology
But you can understand why blockchain technology is attracting so much interest from government and private industry. For example, the music industry is plagued by uncertainty over ownership of rights. The title industry exists because of uncertainty as to the ownership of real estate. Credit card issuers spend tens (hundreds?) of millions of dollars processing and authenticating transactions. Airlines have yet to find a way to ensure that every plane is late.
Everyone wants a secure, decentralized, efficient network that can authenticate transactions or information, as long as the FBI gets a back door (no joke).
Here are some possible applications in the Crowdfunding industry:
- In Title III, we need a centralized system that knows how much an investor has invested in Title III deals.
- In Title III and Title IV, we need a way to verify the income and net worth of investors.
- In Title II and Title IV, we could certainly use a way to verify that investors are accredited in some centralized way.
- A blockchain: the ultimate aggregator and verifier of Crowdfunding deals.
Crowdfunding and blockchain are both pieces of the FinTech industry. We’re going to see blockchain startups raising money using Crowdfunding, and we’re going to see Crowdfunding companies using blockchain technology. A blockchain startup using a Crowdfunding company that uses blockchain technology – that’s not far down the road.
Ben Roderick is currently working on blockchain applications for his MBA Capstone project at Carnegie Mellon University, graduating in May 2016. His email address: Broderic@tepper.cmu.edu.
Questions? Let me know.