10/27/13: Crowdfunding Update – The Next Phase of Connecting Dollars and Deals

We think crowdfunding could be the Facebook of connecting money to Main Street.  Yes, it could be THAT big.  So we decided to go to Ruth Hedges’ 2nd annual Crowdfunding Bootcamp in Las Vegas to find out more about it.

And of course, we took our mobile microphones with us.  So when we weren’t listening to panel discussions and presentations, we interviewed a few of the many interesting people in attendance for this episode of The Real Estate Guys™ radio show!

Crowding into the mobile broadcast booth:

  • Your well funded host, Robert Helms
  • His go-fund-yourself co-host, Russell Gray
  • Crowdfunding securities attorney, Doug Ellenoff
  • Small Business & Entrepreneurship Council President and CEO, Karen Kerrigan
  • Crowdfunding real estate entrepreneur, Jilliene Helman
  • Longtime listeners of The Real Estate Guys™ radio show: John Collins, Deborah Razo and Markus Mueller

Ever since our good friend and attorney Mauricio Rauld told us about the JOBS Act, we’ve been monitoring the progress of the crowdfunding “movement”.

You may recall that at Freedom Fest last July, we talked with Ruth Hedges (the organizer of the Crowdfunding Boot Camp) and found out the long awaited new regulations to loosen the restrictions on general solicitation (advertising) would be going into effect September 23rd.  And unlike the Federal budget, the regs actually came out on time!

So by the time we got to the Crowdfunding Bootcamp in Las Vegas, these new regulations were only three weeks old.  We were very anxious to see what they looked like in the real world.  You may have heard that sometimes the implementation of new government regulations can be a little…shall we say, “sketchy”?

But unlike Obamacare, the websites for crowdfunding are all being built by private entrepreneurs.  And from what we saw in Las Vegas, there’s a lot of them up and running. So far so good.

Now, in the spirit of our “no investor left behind” policy, let’s take a quick moment to review the crowdfunding concept…

In short, crowdfunding is a modern term to describe the age old practice of raising money from a large group of people.  Prior to all the rules prohibiting such things (circa 1933), you could just run an ad or knock doors and pitch people on your deal.  If you were really clever, you’d hold a meeting and pitch to the crowd.

After the Securities and Exchange Commission (and a bazillion other government agencies) was formed, rules were put in place to prevent the public from buying into private deals offered by strangers.  Instead, the government thought it would be safer for the common folk to be restricted to only investing with people they knew, or with complete strangers who funneled their deals through Wall Street via a public registration.

As much as we’d like to deride that, we’ll keep a lid on it for now.  The point is, for the last 80 years, if an entrepreneur wanted to raise money, he could go to friends and family, or go through the expensive (prohibitively so) brain damage of putting together a public offering.

With the JOBS Act and its “crowdfunding” provision, effective September 23rd, 2013 it’s now legal for private offerings to be advertised to the public – with the restriction that you can only receive money from “accredited” investors (someone with a net worth over $1 million or an annual income over $200,000).

Now there are limitations and a whole bunch of regulations, but it’s the first step towards getting money FROM Main Street TO Main Street without having to pass through Wall Street.  And the crowdfunding community is excited about it.  So are we.

Now, because there are rules, you can’t just put up a website and start collecting money (sorry).  You have to be an approved “platform”, or put your deal on someone else’s approved platform.  As you might guess, lots of entrepreneurs are anxious to become the Amazon.com of crowdfunding.  And just like the early days for social networking and e-commerce, lots of today’s players won’t be here in a decade.  It’s like watching salmon swim upstream.

But even though it’s just the Wild Wild West phase of crowdfunding, the potential is clear.  And better yet, more regs are coming (in fact are already here and being digested by the lawyers), to allow NON-accredited investors to get in on the action, too!   When you combine the lightening of these general solicitation restrictions with the huge reach of the internet, it opens up HUGE potential for a small time operator to have access to lots of investment capital.

So imagine you have a killer deal on a great apartment building that just spits out cash flow.  You could “syndicate” it by setting up an LLC (check with your lawyer) and then putting it up on a crowdfunding platform, and getting dozens (or more) of investors to put in relatively small amounts of the money.  You take all that cash and do the deal.  The crowd becomes your partner!

Sound intriguing?  It is!

So in this episode, we talk to attorney Doug Ellenoff.  Doug is a securities attorney who sees the potential and has cleverly positioned himself as the crowdfunding community lawyer.  Rather than wait to see if the movement will gain traction and then jump on the bandwagon, Doug and his firm are on the forefront of helping the fledgling industry get off the ground.  Doug shares important details about how the whole crowdfunding thing works from a legal perspective.

Next, we talk to Karen Kerrigan from the Small Business & Entrepreneurship Council.  You’ve probably heard ad nauseum about how small business is the backbone of the American economy, and is a major force in new job creation.

Karen’s organization advocates for small business.  And one of the many challenges small businesses have is raising the capital necessary to start and fund operations when just starting, or to expand operations once the model and market are proven.  That’s why folks like those on Shark Tank are out hitting up rich people to invest money.  Banks are too busy running scared after the Great Recession.  The normal channels for connecting investors to investments (banks via loans) is constipated.  With lending clogged up, equity is an option, but up until now, only the big, publicly traded companies.

Karen sees crowdfunding as one of very positive things Congress has done to help get connect small entrepreneurs to investors, except that instead of a panel of uber rich on TV, they can take their deal to the masses through cyberspace.  It’s too bad it took the Executive Branch two years to get the regulations in place to actually start doing it, but we’re finally here, so everyone is hoping to see businesses getting funded as early as 2014.

Of course, we’re The Real Estate Guys™, so what’s most interesting to us is the real estate angle.  That’s why we’re excited to interview Jilliene Helman from Realty Mogul.  She grew up in a real estate family, but ended up in wealth management as a profession.  When she saw crowdfunding, she recognized the potential to put the two together and she’s already up and running.

Jilliene tells us a little about her background, how she got started, and what she’s up to today.  She’s a sharp gal, and we’re looking forward to getting to know her better.

Last, but certainly not least, we took the opportunity to sit down with three of our several listeners who were in attendance.  As real estate investors, they tell us how they see crowdfunding fitting into their go forward plans.  It’s our version of a man-in-the-street interview.

All in all, it was a great time.  We continue to be intrigued by crowdfunding and will be watching the industry develop.  For now, listen in to the episode and consider how YOU might utilize crowdfunding to help other investors while expanding your own real estate empire.

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