Tag: crowdfunding

CFGE Crowdfund Bank And Lending Summit in San Francisco

On By crowdfundattnyIn Crowdfunding, Crowdfunding Portals, Crowdfunding Real Estate, Crowdfunding Speaking Engagements, Entrepreneurs, Equity Crowdfunding, Investing, Investor, JOBS ActLeave a comment

Roderick CFGE

Since Labor Day, I’ve spoken at half a dozen events: for entrepreneurs, for intellectual property lawyers, for finance professionals, for digital marketing groups. This week I’ll be speaking at one of the premier Crowdfunding events in country, the CFGE Crowdfund Banking and Lending Summit on the 16th and 17th in San Francisco.

The conference features some of the leaders in the industry, including:

  • Richard Swart, Director of Research for Innovation in Entrepreneur and Social Finance, Colman Fung Institute for Engineering Leadership at UC Berkeley.
  • Ron Suber, the President of Prosper.
  • Jason Fritton, the Founder and CEO of Patch of Land.
  • Tom Lockard, the Vice President for Real Estate Investment and Institutional Sales of Fundrise.
  • Nikul Patel, the Chief Lending Officer of LendingTree.
  • Jesse Clem, the Co-Founder of LOQUIDITY, LLC.
  • Joy Schoffler, the CEO of Leverage PR.

Whether you’re new to Crowdfunding or an industry veteran, I’d strongly suggest you attend. I’m always amazed how much more there is to learn.

To register, click here. Make sure to use my promo code and receive a 25% discount! Promo code: Roderick

And while you’re there, please stop by and say hello. Crowdfunding and skiing – those are my two favorite topics.

Questions? Let me know.

SEC On Intrastate Crowdfunding: Relax

On By crowdfundattnyIn Crowdfunding, Crowdfunding Laws, Intra-State Crowdfunding, Rule 147, UncategorizedLeave a comment

I think the SEC has done a terrific job with Crowdfunding, all things considered. In its latest contribution, the SEC just told issuers how to navigate a bumpy stretch of highway in intrastate Crowdfunding.

The bumps start with Federal Rule 147, written long before the Internet was a glimmer in Al Gore’s eye. Among other things, Rule 147 provides that an intrastate offering must be offered only to residents of a single state. That rule makes sense in a paper-only world, but how to comply when an offering is on the Internet, visible to everyone with a browser?

To get past the bumps, the SEC drilled down on the technology and realized that a user’s IP address reveals the state where his or her computer is located. Taking the logical step, the SEC confirms that as long as the offering can be viewed only by users with in-state IP addresses, it satisfies that piece of Rule 147.

I’d like to say the SEC got that idea from my blog, but I’m sure that’s not true.

From the 2013 no-action letters to the flexible regulations under Rule 506(c) to the proposed regulations under Regulation A+, the SEC has shown that it “gets” Crowdfunding. Now, if Congress would just give us a workable Title III. . . .

Questions? Let me know.

Encouraging Local Investment In Crowdfunding

On By crowdfundattnyIn Crowdfunding, Crowdfunding Articles, Investing, Investor, JOBS ActLeave a comment

Crowdfunding provides deep pools of capital to entrepreneurs and makes high-quality investments available to individuals for the first time. Those things are great, transformative.

But Crowdfunding achieves its greatest potential at the local level, where communities invest in themselves. An entrepreneur needs capital to start a local business. Her customers are her neighbors. They help design her business to respond to their needs, and they invest in her business to share in the financial rewards and to improve their own neighborhood. There’s a lot more going on there than finance.

I once served on a panel with David Paterson, the former Governor of New York. Governor Paterson spoke about the usefulness of Crowdfunding for community development and community redevelopment, and now works as the Director of Community for iFunding, one of the leading portals.

I have spoken with and represent others thinking along the same lines, putting local money back into local economies.

We should think about ways to encourage localized Crowdfunding investment. When we’re talking about revising Title III, or crafting better state Crowdfunding laws, we should include community development folks in the conversation. They’re going to have better ideas than I have, but I can think of one small step in the right direction.

Why not provide some economic incentive? For example, suppose State X allows a $5,000 maximum investment from non-accredited investors. Why not raise that limit to $7,500 or $10,000 if the project is in the same county as the investor?

That works for two reasons. One, it encourages investing locally. Two, the investor is likely to know more about the project in his neighborhood than he knows about a project on the other side of the state, so he can make a more informed decision. For that matter, as a consumer he might be in a position to help the project after it’s built.

It’s a small step. Crowdfunding is global, but it works even better when it’s local.

Questions? Let me know.

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.

Improving Legal Documents In Crowdfunding: Internal Rate Of Return

On By crowdfundattnyIn Crowdfunding, JOBS Act, Legal DocumentsLeave a comment

Internal rate of return, a financial concept, is not always used correctly in Crowdfunding documents.

The internal rate of return, often referred to as IRR, calculates the total rate of return of an investment, expressed as a percentage. Suppose you invested $100 in a bond that paid $5 at the end of each year for four years and were redeemed at the end of the fifth year for $105. Not surprisingly, that investment has an IRR of 5%.

Suppose you try to calculate IRR at the end of the fourth year? You tell Microsoft Excel that you paid $100 and have received $5 per year for four years and Excel says your IRR is minus 43.25%, i.e., you’ve made a terrible investment. What went wrong?

What went wrong is that you didn’t give Excel all the information it needs. It’s like the George Carlin joke, when he plays a sportscaster and announces “Here’s a partial score: Yankees 3.”

To get the right answer for IRR at the end of the fourth year, you have to tell Excel that the bond is still worth $100. When you do that, Excel calculates that your IRR is 5%.

And so it is in Crowdfunding. Often, the sponsor promises that upon any “capital transaction” – a sale or a refinancing, typically – the investors receive an IRR of X% before the sponsor receives his “promote.” Typical language:

The net proceeds of a Capital Transaction shall be distributed first to Investors, until they have received an internal rate of return of 8%, and then 70% to Investors and 30% to Sponsor.

But that’s like “Yankees 3.” It works if the Capital Transaction was a sale of the entire business, but it doesn’t work if the Capital Transaction was anything else, like a refinancing or a sale of only part of the business. With this language the investors are going to receive a complete return of their investment even if only a portion of the project has been sold, which might not be what the parties intended.

To get the right result you need to say something like this:

The net proceeds of a Capital Transaction shall be distributed first to Investors, until they have received an internal rate of return of 8%, and then 70% to Investors and 30% to Sponsor. If the Capital Transaction does not consist of the sale of all of the Company’s property and the distribution of all of the net proceeds to the Members, then the internal rate of return shall be calculated by (i) assigning to the remaining assets of the Company a value determined in good faith by the Manager, and (ii) assuming a residual value to the Investors equal to the amount they would receive if all such remaining assets were sold for such value and distributed in a Capital Transaction.

As for a definition of internal rate of return:

The term “internal rate of return” means the internal rate of return calculated using the XIRR function in Microsoft Excel.

Questions? Let me know.

Improving Crowdfunding Legal Documents

On By crowdfundattnyIn Crowdfunding, Legal DocumentsLeave a comment

I don’t know much about videos or marketing, but I know a lot about legal documents. In a series of posts I’m going to suggest improvements to some of the legal documents used in Crowdfunding. Most of the time, I’ll suggest actual language a portal or issuer can cut and paste – after talking with a lawyer, of course.

By and large, the legal documents you see on Crowdfunding websites were pulled from other deals. For example, the Operating Agreement you see on a real estate Crowdfunding website is usually the same document the lawyer used for pre-Crowdfunding deals. And in many respects that’s okay because legal documents are pretty agnostic as to industry.

But in other respects it’s not okay. Sometimes you have to tailor the legal document to the industry.

An example is the section of the Operating Agreement that talks about an investor’s right to information. The provision from one well-known site says that the records of the company “. . . shall be available at the Company’s principal office for inspection and copying by any Member at any and all reasonable times during normal business hours at such Member’s expense.” Another says “A Member and the Member’s authorized representative shall, upon reasonable request and for purposes related to the interest of that Member, have reasonable access to, and may inspect and copy, during normal business hours all books, records and other materials pertaining to the Company or its activities.”

No! These provisions were typical in the pre-Crowdfunding world, but they don’t work with Crowdfunding.

You might have 218 investors in a Crowdfunding deal. You have to limit the right of investors to come to your office to inspect the books, and you have to limit what they can see. Under the Delaware limited liability company statute, if you don’t provide otherwise, your investors have the right to see basically everything, including a list of all the other investors. With one or two unscrupulous or irrational investors, that’s a recipe for losing sleep.

We want to:

  • Be fair to investors and provide all the information they need
  • Avoid spending an inordinate amount of management time dealing with bad apples
  • Protect your confidential information
  • Avoid dealing with 218 investors each asking for the same information
  • Give you discretion to protect your business and the interests of your investors

For an example of actual legal language that does just that while, I believe, fully complying with the Delaware Limited Liability Company Act, click here.

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.

Choosing And Protecting A Name For Your Crowdfunding Business

On By crowdfundattnyIn Crowdfunding, Crowdfunding Articles, Crowdfunding Real Estate, Investing, Investor, LLCs, Real Estate, Technology PlatformsLeave a comment

Names matter, even for a local business, but they matter a great deal for a Crowdfunding business, where your customers know you only from a distance.

Generally speaking you can choose three kinds of names:

  • A name that describes what you do, e.g., Real Estate Crowdfunding Portal, LLC.
  • A name with no inherent meaning, e.g., Xeta, LLC.
  • A name somewhere in between, e.g., Lifelong Investments, LLC.

Each category has advantages and disadvantages:

  • A name that describes what you do…well, it describes what you do. When a consumer sees the name she knows what you’re selling. On the other hand, a name that describes what you do is often not very memorable.
  • The strongest names are those that start out with no inherent meaning. Amazon, Starbucks, E-Bay. When consumers think of Amazon they think about the gigantic online retailer, nothing else. The name is worth a billion dollars! On the other hand, Amazon had to spend more than a billion marketing dollars to give meaning to a name that otherwise belonged to a river.
  • A name somewhere in between is somewhere in between. It might be sexier than a name that is merely descriptive and require a lot less marketing fuel than a name with no meaning, but with the associated disadvantages as well.

In the Crowdfunding industry to date, most portals have chosen the more descriptive over the more powerful. Poliwogg is an exception. Fundrise might be another.

With two well-known Crowdfunding companies – Crowdentials and VerifyInvestors – we see two different approaches to choosing a name. And we can’t say for certain whether one is better than the other. That will depend on what each company does with its name.

Having chosen a name, how do you protect it?

To start with, a business acquires “common law” rights to a name merely by using it, without filing anything with the government and without involving lawyers. If another real estate Crowdfunding portal tried to use the Fundrise name today they couldn’t do it, even if the Miller brothers had never done anything to protect their name (they have).

Contrary to common belief, merely registering a company name with the state by forming a corporation or other entity provides no real protection. State filings are simply a matter of bureaucracy – the state wants to make sure that no two names are confusingly similar on its own records.

For the best protection, however, the business owner should obtain a Federal trademark from the U.S. Patent and Trademark Office. A Federal registration provides important benefits, including:

  • The registration constitutes “constructive notice” to all later users in all locations.
  • The registration permits the owner to get an injunction against a trademark infringer and sue for damages, including profits, costs, treble damages and attorneys fees.
  • The registration can strengthen the value of the name as a corporate asset.
  • The registration demonstrates your right to use the name to the owners of other websites, such as Google, Facebook, and Twitter, which are often called on to “officiate” disputes over names.

The trademark application process normally takes about a year, assuming no significant problems. Once granted, a trademark registration can last forever if continuously used and renewed.

NOTE: Not every name can be trademarked. A name like “Real Estate Crowdfunding Portal,” which merely describes the product or service, probably cannot be registered by itself. But it might be registered with a distinctive logo.

Finally, don’t forget to acquire the domain name.

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

 

The Next Big Thing In Crowdfunding: Pooled Assets

On By crowdfundattnyIn Crowdfunding, Entrepreneurs, Investing, JOBS Act, SEC, Title II CrowdfundingLeave a comment

September 23rd marks the first anniversary of Title II Crowdfunding. The number of portals has grown exponentially but most or all portals continue to offer investments in single deals, e.g., an apartment building in Austin. Before long, I believe the market will shift to investments in pools of assets. Rather than the single apartment building in Austin, a portal will list a pool of 20 apartment buildings in the Southwest.

Accredited or not, very few individual investors have the knowledge or experience to invest in individual deals. And based on the stock market, most individual investors don’t want to. Individuals have historically preferred mutual funds over individual stocks; a mutual fund is just a form of pooled assets.

An investor can create his own pool, investing $5,000 in each of 20 apartment buildings rather than $100,000 in a single property. On Prosper or Lending Club, I bet most investors participate in multiple loans.

But that doesn’t give consumers quite what they want. What they want is a fund manager, someone who will choose the 20 apartment buildings and also decide when to sell them. A stock market investor who wanted to creat her own pool could buy 20 individual stocks, but instead she buys a mutual fund.

Do Crowdfunding investors view the portals themselves as mutual funds? Maybe investors expect Fundrise, Patch of Land, Wealth Migrate, or iFunding to play the role of the mutual fund manager, selecting only deals worthy of investment. On the advice of counsel, every portal tries hard to disclaim that legal responsibility, but maybe investors ignore the disclaimers, looking for a “brand” for investing.

I certainly expect portals to start offering asset pools. I’ll go out on a limb and say the first portal offering curated pools will have a great competitive advantage, and I’ll go further and say that Crowdfunding won’t reach its potential until pooled asset investments are widely available.

Pooling assets makes things a bit more complicated and a bit more expensive: more legal rules come into play; you have to think harder about giving investors liquidity; and, most important, you have to pay someone to make investment decisions and take the legal risk. But that’s where the market is headed.

Questions? Let me know.