The applications of crowdfunding, peer to peer investing and new online funding models are vast. As the new online market emerges, there are several opportunities for creating access to new audiences. Real estate has presented many opportunities in the past and it seems many applications of crowdfunding are being applied to the real estate sector.

House for sale in Elson Road (Photo credit: Wikipedia)

Recently we wrote on a few structures of organizing a real estate transaction and crowdfunding platforms back end operations. From our perspective of supporting several hundred peer to peer marketplaces, portals and online networks, we see a lot of action in the properties sector and the implementations are vast.

Despite the real estate being a commonly understood and relevant asset class, ownership of properties has long been locked with the responsibility of upkeep, maintenance and possibly development of said property. Crowdfunding may present a new paradigm in shared ownership and responsibility of properties in the shared economy.

There are several operating models and functions, but the two major parameters that can be identified are;

1. Security type, i.e. equity or debt transactions
2. Initial offerings or secondary transactions

Equity and debt models

Equity and debt transactions are both possible, as with the case of early or later phase companies, but both present different ways of structuring the deal for its stakeholders. Debt transactions may be simpler in implementation, as interest can be paid on the actual debt note. In some cases an upside is included with a debt transaction, where a property may be flipped and the profits distributed to the initial funders. In the case an equity only model is used, a vehicle is often used to facilitate the transaction and profits are paid out upon the realization of the investment. For more information and details on the type of transactions, see our earlier post on structuring real estate crowdfunding.

As in any other model, the underlying goal of the transaction will ultimately determine the appropriate methodology. While there may be many reasons for raising capital, as with any other industry, certain best practices will emerge on the most efficient framework.

Purpose of the fundraise

Despite a nascent (online) market, there are already several spins on the underlying role for crowdfunding to play in the real estate sector. To highlight the diversity of the market, we want to give a few practical applications in this sector.

1. Initial raises to acquire a property
2. Owner occupied real estate

Initial raises

The most commonly applied model to the real estate sector is undoubtedly to raise capital in a more efficient manner, utilizing either an equity or debt model, to acquire a property with the aim of making a profit on the property. This profit and utility sought from the property can be all the way from renovating and flipping the property and distributing profits or seeking to rent out the property to generate revenue on the property. While both models have parallels, their utility and characteristics are vastly different and will be applicable to different contexts.

Secondary offerings

There are several companies pioneering new models where occupancy and ownership of a property can be separated in a manner of (ideally) providing lesser risks associated with ownership of real estate, as well as diversification of a possible increase of value of the property. In practice in this model the person(s) residing in the property, may not be the ones owning all or even part of the property. There are several possible auxiliary applications and development to make the housing market more accessible, as well as (one would hope) more secure as well as liquid.

Outlook

Access to large asset class as well as a local impact angle (e.g. supporting and having a say in what you want developed locally) and efficiency are often at the core of these endeavors. The crowdfunding market is in its infacy and applications will surely develop upon realized success. Real estate present a largely known asset class and many all over the world are looking to add transparency and efficiency to it with modern, online tools.

AngelList and FundersClub both recently requested and received “no action” relief from the SEC staff. “No action” letters are often complicated and the law surrounding the discussion is extremely opaque. We have sought to set out the implications of the relief granted by the staff at the SEC as well as a summary of the type of structures the two companies intend to employ, the assumptions upon which they requested and were granted relief and a number of other salient points.

What is a no action letter and does it have the force of law?

A “no action letter” does not have the force of law.

An individual or entity who is not certain whether a particular product, service, or action would constitute a violation of the federal securities law may request a “no-action” letter from the SEC staff. Most no-action letters describe the request, analyze the particular facts and circumstances involved, discuss applicable laws and rules, and, if the staff grants the request for no action, concludes that the SEC staff would not recommend that the Commission take enforcement action against the requester based on the facts and representations described in the individual’s or entity’s original letter.

It is important to note, however, that these letters do not have the force of law and might, when tested in a court, be overturned or ignored when applied to a specific set of facts.

AngelList Letter

What are the services and the investment structures with respect to which AngelList sought no action relief?

There are two deal structures proposed by AngelList: “Angel Followed Deals” and “Angel Advised Deals”. Both deal structures start with forming AngelList Advisors (“Advisors”) and both envision a LLC or partnership under Advisors.

What is the timing around offering the investment opportunity, generating interest and closing the fundraising?

1. Each interested Investor will submit, through the platform, a non-binding request for information (“RFI”) to Advisors specifying the Portfolio Company about which the Investor is seeking information and the investment amount the Investor is considering.
2. In order to submit an RFI each Investor must:
   1. complete a detailed questionnaire certifying that he or she is an Accredited Investor, a qualified client, and if necessary, a qualified purchaser;
   2. wait at least thirty days from the time he or she submits the questionnaire before he or she closes on the investment;
   3. execute an agreement with Advisors acknowledging the terms of use of the AngelList platform and restrictions relevant to the terms of the Investor’s participation; and
   4. if relevant, provide AngelList with any supplemental information that may be necessary to identify the type of investments in which the Investor might wish to participate.
3. Each Investor will have the right withdraw an RFI at any time prior to the Investor’s binding agreement to invest in the Investment Vehicle.
4. Upon submission of an RFI, a potential Investor will receive the following information with respect to the Portfolio Company from Advisors electronically over Advisors platform:
   1. the private placement memorandum or similar offering document from the Portfolio Company;
   2. a supplemental memorandum that provides pertinent information about the Investment Vehicle, AngelList Advisors, the Lead Angel (if applicable), the general risks of investing in angel and venture companies, and conflicts of interest in connection with the Investment Vehicle; and
   3. any relevant addendum to the private placement memorandum reflecting the terms of the investment.
5. Advisors will not close on an Investment Vehicle for at least 3 business days following the later of the distribution of the supplemental memorandum or the addendum to the supplemental memorandum.
6. If Advisors receives a sufficient amount of investment interest (in the judgment of Advisors) to proceed with the investment, Advisors will close the Investment Vehicle and collect a Subscription Agreement from each participating Investor.
7. Advisors will be responsible for reviewing the completed Subscription Agreements and determining whether each potential Investor meets the applicable qualification criteria for the particular investment.
8. Upon acceptance by Advisors and the Portfolio Company of his Subscription Agreement, each Investor will be instructed to forward his capital contribution directly to a bank or other financial institution at which the Investment Vehicle maintains an account. Such funds will then be contributed to the Portfolio Company. Neither the Lead Angel nor Advisors will handle Investor funds or securities.

What are the important assumptions presented by AngelList and relied upon by the SEC staff?

• Advisors will be a registered investment adviser with the Commission or one or more states.
• Advisors will operate an internet-based platform that will be exclusively available to accredited investors.
• Investments in each Investment Vehicle will be offered and sold in compliance with Rule 506 of Regulation D. This means that, until the prohibition on general solicitation and advertising is lifted, there will be no “general solicitation or general advertising”.
• Advisors and any Lead Angel (if applicable), will receive compensation only in the form of carried interest and will not receive any transaction-based compensation. No officer, director or employee of Advisors or any Lead Angel will receive any transaction-based compensation in connection with interest in any Investment Vehicle or any Portfolio Company.
• Neither Advisors nor any Lead Angel will handle any customer funds or securities.
• Neither Advisors nor any Lead Angel will solicit Investors, aside from the website itself

Key takeaways from AngelList’s letter

• AngelList has referred customers to SecondMarket and seems to assume this will continue in the future.
• AngelList will select the Portfolio Companies and the Lead Angels.
• Recouping the costs incurred by Advisors in setting up the Investment Vehicle will not be considered transaction related compensation.
• The period between when an interested Investor requests an RFI and the close of any investment by that interested Investor must be at least 30 days. This is, in part, to avoid issues with general solicitation/advertising.
• Advisors will not:
  • Receive any transaction related compensation (only carried interest);
  • Participate in any negotiations between the Portfolio Companies and the Investors;
  • Directly assist Investors in completing a transaction;
  • Hold itself out as providing securities related services other than a listing or matching service.
• AngelList does not intend to carry out activities or provide services that would lead to the requirement to register as a broker-dealer.

FundersClub Letter

What are the services and the investment structures with respect to which FundersClub sought no action relief?

FundersClub Inc. (“FC Inc.”) is venture capital fund adviser that solely advises venture capital funds. FundersClub Management LLC (“FC Management”) is a wholly owned subsidiary of FC Inc. and is also a venture capital fund adviser. FC Inc. and PC Management identify and perform due diligence on start-ups for which FC Management may wish to form investment funds.

What is the timing around offering the investment opportunity, generating interest and closing the fundraising?

1. Start-up identified and diligenced by FC Inc. and FC Management.
2. FC Management enters into a non-binding term-sheet with the Portfolio Company with target amount of capital that would be invested.
3. FC Inc. then posts information about that Portfolio Company, provided by the Portfolio Company, on its thefundersclub.com website. The name of and information about a start-up company is available online only to FundersClub members who have already been qualified as accredited investors
4. FC Inc. members offer non-binding indications of interest.
5. FC Inc. provides those members who express indications of interest in an investment fund with standardized legal documentation through which they will invest in that investment fund.
6. When an investment fund reaches indications of interest sufficient to fund the target amount originally agreed upon between FC Inc . and the Portfolio Company (or if the company agrees to increase the target level of capital), then FC Inc. closes the indication of interest process.
7. FC Inc. then reconfirms the indication of interest with each member who has offered the indication of interest and reconfirms the accredited investor status of each of those members. Simultaneously, FC Inc. negotiates the final terms of the investment fund’s investment with the Portfolio Company.
8. FC Inc. obtains signed agreements from the members who had provided non-binding indications of interest concerning that investment fund, but until the investment fund closes (as discussed below), the members can withdraw their indications of interest without penalty at any time. When FC Management has reached a definitive agreement with the start-up company on the terms of the investment by the investment fund, FC Management then signs the limited liability company agreements with the investors and closes the transaction.
9. Investors in an investment fund provide funds for their investment in the investment fund directly or indirectly to a custody account. The custodian bank or trust company serves as custodian for the life of the investment fund.
10. An investment fund’s investment in a start-up company is funded directly from the custodian bank or trust company account to the account specified by the start-up company.
11. The custodian bank or trust company provides periodic statements for the investment fund directly to each of the fund investors, or indirectly through a fund administrator.

What are the important assumptions presented by FundersClub and relied upon by the SEC staff?

• FundersClub and FC Management are advisers solely to venture capital funds as defined in Rule 203(1)-( 1) under the Investment Advisers Act of 1940.
• FC Management’s management services include: exercising any rights negotiated with the start-up company; providing the start-up company with strategic advice and networking assistance; voting investment fund shares; offering or selling its securities in the start-up company; deciding on any tender offers; and winding up the investment funds.
• FundersClub and FC Management receive compensation (i.e., carried interest) for their services, the nature of which are traditional advisory and consulting services, and not transaction-based compensation.
• The officers, directors and employees of FundersClub and FC Management personally do not receive transaction-based compensation for their efforts in raising investments for the investment funds.
• Any portion of the administrative fee remaining in the custody account at the time a fund is wound up will be distributed to investors along with the other assets of the fund.
• Neither FundersClub nor FC Management is able to withdraw any deposited funds from the custody account for its own use, and while an investor’s funds will pass through an escrow account or similar account established for the benefit of the investor, the only permitted withdrawals from such account are either to an investment fund’s custody account to purchase fund interests for the investor or back to the investor if a proposed investment fund does not close.
• FC Inc. and FC Management do not handle customer funds or securities for the investment funds or the investors in the investment funds.

Key takeaways from FundersClub’s letter

• FundersClub stated that it expects to take between 20%-30% carried interest in any given investment.
• The focus here is on the ability of venture capital funds to bring their fundraising online.
• As with AngelList, FundersClub does not intend to carry out activities that would lead to the requirement to register with the SEC or FINRA as a broker-dealer.

Conclusions

Although the no action letters discussed above represent a small step forward in online investing, the letters also illustrate the limits of the current crowdfunding market. Both AngelList and FundersClub go a long way to avoid designation as a broker dealer and although the models are interesting for accredited investors, these “no action” letters likely represent just one step in the evolution of equity crowdfunding in the United States.

Crowd Valley COO Paul Higgins took part in a debate entitled: “Equity Crowdfunding – Fools Money or Financial Revolution?” at the Colorado Crowd event in Denver on 3rd May 2013.

The panelists included :

- Nicholas Thomas, Founder and President at Fincity, Salt Lake City, UT
- Dave Milliken, Founder and CEO at Grofolio, Inc., Boulder, CO
- Benjamin Hadley, Managing Director and President, Latin America at Clicksco, Vail, CO
- James Dowd, Managing Director at North Capital, INC., San Francisco, CA
- Brian Korn at Pepper Hamilton LLP, New York, NY
- Bill Decker at Partners International, Inc., Denver, CO
- Paul Niederer, CEO at Australian Small Scale Offerings Board (ASSOB), Sydney, Australia
- Korstiaan Zandvliet, Managing Director at Symbid, Rotterdam, Netherlands

Watch the video in full on YouTube here.

Crowdfunding is all the rage these days and real estate crowdfunding might be the prettiest girl at the ball. It’s linked to tangible assets in an improving market. People understand the process around buying a property. The amount of capital required an entrepreneur needs to raise for a given property is comprehensible and (one hopes) imminently feasible.

But how does it actually work? What are investors actually buying? How and when is the money raise?

Green For Sale sign (Photo credit: Diana Parkhouse)

The answer to these questions is that there is no single answer. Processes will vary depending on the jurisdiction, the type of asset, the type of investment structure and the type of investors. We’ve set out a few of the questions and options below.

When is the money raised and when is the property purchased?

Although it would be preferable to raise funds based on a specific property, this seems unlikely to work for at least the first few properties that any Manager/Syndicator crowdfunds. In order to raise funds for a specific property, the Manager/Syndicator would either need to (1) purchase the property with cash and then raise the funds, or (2) somehow get a property under contract without a pre-approved mortgage or proof of sufficient funds and seek to raise the required amount between putting the property under contract and closing.

Option 1 entails a large capital commitment and increased risk.

Option 2 is unlikely to work in the absence of an extremely active and liquid investment community/market due to the timing given that the Manager/Syndicator would have approximately 30 days to raise the funds.

Another option is put the property under contract, agree to take out a mortgage with a 10%-20% down payment (as required), raise the funds and then either (1) decline to take out the mortgage (if the funds are raised before closing), or (2) pay off the mortgage with the funds once raised. As above, option 1 raises the risk profile. Option 2 may result in material additional costs and penalties, including prepayment of the mortgage.

Let’s look at the Timeline

The timeline below assumes that the Manager/Syndicator raises funds for the purchase of a property in a specific market (i.e. geographic location).

Days -60 through Day 0: Listing and Fundraising

1. Manager/Syndicator raises funds by providing information to potential accredited investors, including:

Buyer/Manager: credentials, experience, background checks

The total amount to be raised, based on property type;

• target amount, including:
• cost of property;
• renovations;
• other costs (e.g. closing costs); and
• if debt structure, interest rate and costs should be considered.
• Manager/Syndicator should consider contributing 10%-20% of the total amount raised

Duration of investment

• Fix and flip (potentially best for loan/debt structure); or
• Buy, hold, rent (potentially best for equity structure)

Potential return to investors (accredited investors only, for now!):

• Interest rate to be paid to investors (8%-10%); or
• Potential equity share including: target purchase price (range), target investment in property (renovation), target rental income (as applicable), length of holding and target sales price (range).

Details of potential property

• Market (upmarket or downmarket, finished or requiring heavy renovation)
• Geographic location

2. Funding process:

• Investors express non-binding interest in fund, including the amount they would like to invest.
• Once the total amount required is reached (or usually exceeded to allow some investors to pull out), investors execute investment agreement.
• Funding closed.
• Investors transfer money to account of Manager/Syndicator.

Day 1 through 30: Finding and purchasing the property

• Manager/Syndicator finds property.
• Manager/Syndicator (now “Buyer”) secures contract for property (closing process (assumed to be 30 days) starts).
• Title of property acquired by Buyer.
• Seller receives money for property.

Days 30 through Day 270 (for example): Renovating and Renting or Selling

• Renovations are made, as required.
• If equity structure is used, the proceeds from the rent and sale are distributed according to the equity structure.
• If debt structure is used, interest is paid to investors until the property is sold. The loan is repaid to investors upon sale of the property.

Conclusions

It’s hard to know exactly how many of the new real estate crowdfunding companies are intending to structure their investments and offerings. The timeline and structure we’ve set out above is just one example. Much of the decision making revolves around issues of timing, disclosure and liquidity. As the market grows, as certain Managers/Syndicators gain prominence and credibility and as the crowdfunding market opens up to non-accredited investors, we expect real estate crowdfunding to evolve into a fundament sector of the market.

There are new applications for the sector developing each day. We’re always looking to support new innovative approaches that add value, and encourage an open dialogue around these models to find sustainable frameworks. If you have any thoughts and comments on what we’ve discussed below, please do get in touch with us.

April 24, New York City & Luxembourg – Two Global Innovators in Finance, Crowd Valley Inc and TreveriMarket Announce to Offer Private Companies Much Needed Funding Support Services

Crowd Valley, the crowdfunding platform and back-office solution provider announced today that is has established a partnership with TreveriMarket, the global marketplace connecting investors to entrepreneurial startups, so that together they can offer private companies a wide range of professional services, including access to compliance, accounting and due-diligence functions. With the partnership’s established network of approved broker dealers, innovative companies around the world will benefit from access to real capital and to a streamlined framework for securing funds to fuel growth.

The partnership combines TreveriMarket’s expertise in the financial services industry with Crowd Valley’s network of portals facilitating private securities marketplaces around the world. Together, Treveri and Crowd Valley will simplify the process of capital formation that finances well-structured business plans. The two companies’ management teams are motivated by the prospect that their work will benefit local and global economies, and that their partnership will help jumpstart economic growth and job creation.

Streamlining the Process

“One of the major problems private companies face is the friction of closing a deal,” explained Peter Keller, CEO of TreveriMarket. “Even after finding investors, the process of securing real funds needs to be simplified and speeded up. Entrepreneurs deserve transparency in the process, and protection from hidden fees and unwarranted cost. Our partnership with Crowd Valley is designed to streamline the process of funding promising businesses.”

Crowd Valley CEO Markus Lampinen couldn’t agree more. “Lack of transparency and high costs get in the way of small businesses trying to create jobs. By creating access to trusted broker dealers simpler and standardizing the diligence process, a greater volume of deals can be closed more efficiently. We’re not only offering a much-needed service to our clients around the world, we’re also creating more efficient processes for the private securities market to benefit from.”

To ease transparency for all parties before properly offering an investment to clients through its broker dealer partner network, TreveriMarket will give Crowd Valley clients a standardized diligence template. Thanks to this uniform approach, costs on the broker dealer side can be reduced so Crowd Valley clients will effectively receive this service for a fraction of what a broker dealer typically charges.

“This is an exciting time to be in the business of helping solid companies and entrepreneurs find funding,” stated Lampinen. “Never has it been more important to bring investors and private businesses together and together we are taking a big step to making it significantly easier.”

About Crowd Valley

Crowd Valley is the one stop shop where you can start your own crowdfunding business in minutes and manage every aspect of the community with secure infrastructure, a variety of powerful tools and back office services. The Crowd Valley infrastructure also allows you the option of connecting your network to hundreds of other networks and investment communities around the world, so you can choose to stay local or go global.

About TreveriMarket

With its transparency, innovation and simplicity, Luxembourg-based TreveriMarket is the first global online marketplace that benefits both companies and investors in the private securities market. TreveriMarket is a web-based capital raising platform built to empower private companies and potential investors to streamline the process of raising capital in the private marketplace. More information is available at www.TreveriMarket.com

More Information

For more information or to get started with your own platform please go to www.crowdvalley.com

The latest in Imperial College London’s series of Best Practice events on Entrepreneurship, Innovation and Design looked at ways to fund ventures and projects through socially-driven investments.

Crowd Valley’s co-founder, Paul Higgins presented on Equity Crowdfunding as part of the discussion forum.

Access the slides and continue the discussion on SlideShare below.

Crowd Valley Inc is a global pioneer in the new online private securities and investments market. We have been at the forefront in applying new crowd-based funding models across the financial services sector worldwide for the past five years.

Keys. (Photo credit: Bohman)

We are now hiring extremely talented and motivated individuals who believe, like we do, that in twenty years’ time financial services will be built around new global online investment markets, creating a more effective and open ecosystem with fewer gatekeepers and middlemen; that financial investment markets will embrace the global trends towards greater democracy and direct participation; and that people will no longer accept that investments in startups, commodities, real estate, pensions, or alternative funds, need to take place offline. The Internet has revolutionized so many sectors and financial services should not be the exception.

We are looking for a highly talented and achievement-driven technical professional to join our team. Upon proven fit, the role can evolve substantially into a partner role in the company. Strong knowledge of PHP / Symfony and a network in the financial services industry and other securities markets would be advantageous. The chosen individuals would be working with customers and partners such as innovative companies, nimble financial institutions, financial professionals as well as new world pioneers in crowdfunding and peer to peer marketplaces.

Be advised, Crowd Valley does not offer any traditional working positions and we absolutely value entrepreneurial commitment and those skills associated to pioneering a new, global market. If you are looking for a safe journey, this will not be it.

There are several positions open at Crowd Valley. You can find out more details and how to apply below:

http://www.crowdvalley.com/available-positions/

Crowd Valley has been a part of organizing funding events, at the Mobile World Congress in Barcelona as well as SXSW in Austin Texas in the past month with big success. On April 5th, Crowd Valley and its partners, will be talking of new funding models and crowd funding at Thomson Reuters Investing Symposium in Boston.

You can find more information and sign up to attend here. If you’re coming, do sign up as tickets are going fast. We look forward to seeing you in a few weeks.

Crowd Valley co-founder Paul Higgins spoke on the topic of ‘Company building online through crowdfunding’ at the Berlin Startup Camp 2013 event on Saturday 16th March.

You can see the full presentation on SlideShare below: