Crowdfunding is a way for companies to raise capital, and an easier way for investors to enter those projects. It uses the internet and social media networks, including Facebook, Twitter, and LinkedIn, to meet potential investor audiences. The theory behind crowdfunding is that a lot of people are willing to spend a small amount, and when they do, they can collectively raise large amounts of money very quickly.
Crowdfunding gives companies access to capital which they may never be able to collect. Crowdfunding gives investors the opportunity to be shareholders of a company or real estate.
- Real estate crowdfunding is using social media and the internet to link investors to investment in properties.
- Real estate crowdfunding is close to equity investing, as an investor is willing to buy into a property and become a shareholder.
- Crowdfunding gives companies access to capital which they may never be able to collect.
- Crowdfunding gives investors the opportunity to be shareholders of a company or real estate.
How Crowdfunding Works
In the past, crowdfunding was most frequently related to equity investments, with businesses using the mechanism to raise money. Crowdfunding brings capital together so that small and medium-sized companies may use the funds to invest in the future of the business, such as purchasing machinery or building a production plant.
Equity crowdfunding has historically been available only to accredited investors. Accredited investors include banks, pension funds, insurance firms and wealthy, affluent investors. The person had to receive $200,000 for an entity to qualify as an accredited investor, and have a net worth that exceeded $1,000,000.
One of the benefits of crowdfunding is that investors don’t need a huge sum of money to get in – and in some cases — the minimum is $1,000 to invest in a company. Also, if the company finally goes public, meaning they are selling new stock through an IPO or an initial public offering, the potential for investment returns may be massive.
Of course, one of the greatest risks or disadvantages to crowdfunding is that investors put money into a relatively unknown business. In other words, there is not a lot of financial history of the firm. As a result, there is the possibility that investors may lose all of their investment.
Crowdfunding emerged from the passage of the Jumpstart Our Business Startups Act (JOBS), which allowed crowdfunding to support small and medium-sized businesses with their capital needs. Since then the Securities and Exchange Commission (SEC) has lifted the prohibitions that prevented non-accredited investors from participating in crowdfunding. While limitations exist, non-accredited investors can engage in both equity transaction crowdfunding as well as real estate transactions.
Real Estate Crowdfunding
Before the JOBS Act, real estate investors could only invest in real estate by buying a physical property or investing in REITs or Real Estate Investment Trusts. Crowdfunding has also opened up a whole new way to invest in real estate.
Real estate crowdfunding in is somewhat close to equity crowdfunding in the sense that an investor can buy into a property and be a shareholder. The buyer is not required to buy all of the land. Instead, the investor can receive a portion of the profits from the investment in immovables. For example, the investors will be paying any revenue generated from the rental income of the building or any proceeds from the selling of the building.
One benefit for non-accredited investors in real estate crowdfunding is the low minimum investment amounts usually needed. In some cases investors will become real estate owners for $5,000. Often, crowdfunding immovable property will help investors raising the risk associated with an equity portfolio. In other words, crowdfunding immovable property lets investors diversify the risk of their investment portfolios by not getting all of their funds in the equity market.
Investment Crowdfunding Cap
Since every form of crowdfunding investment has risks, the SEC has placed investment limits on non-accredited investors. The investment caps of the SEC are below:
Less than $107,000
If your annual income or net worth is less than $107,000, you can spend up to the greater of either $2,200 or 5 percent of the lower of your annual income or net worth during any 12-month period.
More than $107,000
If both your annual income and your net worth are equal to or greater than $107,000, then you can spend up to 10 percent of your annual income or net worth over any 12-month period, whichever is less, but no more than $107,000.