I’d rather have a small group based off fact and truth than a crowd full of rumors! — Merle Rutledge, Jr.
My introduction to crowdfunding was a few years ago via a friend to help raise money for her dog’s operation. Right around that time, I noticed these equity start-ups sprouting through the media and even in what I thought was unrelated conversation. Another sent money to one of his favorite heavy metal bands as they were preparing an acoustic-based studio album. He got some perks with the release of the album, which actually debuted at #19 on the Billboard 200. Heck, a game I played as a kid used crowdfunding to make a sequel.
But this is commerce, and where there’s smoke…
Crowdfunding has undoubtedly made an impact on the business world, Since I deal regularly with small business and start-ups, I’m often asked by owners and potential investors about whether it’s a viable way to raise equity.
There’s no one answer, and just like any phenomenon involved with the transfer of funds, a certain amount of regulation is needed to make sure all transactions and negotiations go smoothly.
There are some players who’ve understood the technology and the process and evolved their business models.
Jilliene Helman, founder and CEO of RealtyMogul.com has had success with the digital-first approach. During a 2015 real estate investment panel, she described that major REITs are no longer exclusively getting all their equity from very large institutions and are now, thanks to crowdfunding, entering the sub-$20 million transaction size when they have historically not.
Perhaps that’s a sign of hitting base hits rather than always swinging for the fences, as we’ve discussed. It’s symbolic of so many facets of business and law.
Time will tell if those cases will be the exception or the rule. It is in its relative-infancy, so I will say that just because those pros have been able to see a project to completion with money in the bank doesn’t mean it’ll always happen.
Real estate can be complex enough in itself
Pepper that with lightly-regulated investment opportunities and your recipe could ruin the dish.
An example of things possibly going south was reported recently by The Real Deal, in which iFunding, one of the first crowdfunders to throw its hat in the ring, is being sued for fraud.
The plaintiff, Capstack, alleges in the complaint that iFunding repeatedly lied about how much money it had raised and about supposed commitments from individual investors. CapStack is also suing iFunding for breach of contract, breach of fiduciary duty, fraudulent inducement, fraudulent concealment and deceptive business practices, and seeks damages of at least $585,000, or more than 10% of the intended amount for the Ohio and Missouri projects.
iFunding’s CEO denied the accusations and, should the suit proceed, we’ll be following it closely.
If you want to invest
Thoroughly research the company. New names pop up constantly and it’s easy to get swept up in the concept. Since it’s still in its early stages, you should be looking for names attached to its leadership and the caliber of its reputation.
Just like with any endeavor or stock pick, there’s an element of a gamble or chance to it and you have to make your peace with that. However, never take that loss when it comes as a result of fraud or mismanagement.
Thinking of raising money?
According to Wikipedia, crowdfunding raised $5.1 billion globally in 2013. There are a lot of middlemen you can avoid, you can use social media to reach investors and can immediately track your progress. The temptation to jump in is understandable.
As we’ve seen with every technological or digital evolution of a traditional business, it takes time to flesh out the snakes and oftentimes years to set legal precedents to deter future ones. Then we wait for the next generation of snakes to arise based on those.
Err on the side of caution in the immediate future.