Crowdfunding for investors may soon get easier

Molly Wood Jan 21, 2014

Crowdfunding for investors may soon get easier

Molly Wood Jan 21, 2014

We’ve all heard of websites like Kickstarter, where you can donate to projects you believe in. Well what if, instead of just donating, you could go online and buy an equity slice of a small business? This crowdfunding of investment is what the JOBS Act is trying to promote. And it’s how one real estate company in Washington D.C. wants to shake up local development.

Sharon Lewis is a hairstylist who’s lived along the H Street corridor for decades. When she describes how the neighborhood’s changed, she chooses her words very carefully.

“On H Street, it used to be a lot of hairdressers,” she says. “But now it’s a lot of bars.”

It used to be a black neighborhood, now it’s gentrifying. And booming. You can’t park on a Friday night. But developer Ben Miller says, until now, it’s been impossible for local people to invest in development right across the street.

“Who owns your environment? You don’t know,” he says. “Who’s building your environment, who’s building your city? Not you.”

Miller is co-founder of the group Fundrise, which has started selling shares of private real estate projects to the public online. A tiny slice of ownership for a hundred bucks a pop.

First they bought 1351 H Street with private capital, then crowdfunded about a third of it.

“This building has almost 180 owners,” Miller says.

It’s going to be an Asian night market. 906 H Street has 360 owners. And at 1300 H St, there’s a funky, shuttered library. Fundrise wants to buy the site from the city and turn it into apartments.

“It could have ten thousand investors,” he says.

To solicit small investors now, Fundrise goes through a lengthy review with the Securities and Exchange Commission. These equity shares are securities, after all, and the SEC wants to protect small investors.

But once the JOBS Act is implemented, crowdfunding could take off nationally. Companies will be able to crowdfund up to one million dollars a year from small, unaccredited investors. If they choose to qualify with the SEC the way Fundrise does now, they should be able to raise $50 million a year from small investors (up from $5 million currently).

The whole idea is to create new avenues for small businesses to access capital. But there are risks to this deregulation.

“Do not invest money in crowdfunding that you can’t afford to lose,” says Rick Fleming, deputy general counsel of the North American Securities Administrators Association, the organization of state level securities regulators.

Fleming says crowdfunding can be an important tool. But he warns that most small businesses fail. Lighter regulation of crowdfunding to come could lead to more fraud. And you can’t sell your crowdfunded shares on the stock exchange.

“You’re not going to be able to get that money back anytime soon. These are going to be illiquid investments, because there’s no secondary trading market for these types of securities,” he says.

Still, a lot of people investing in Fundrise think it’s just fun and interesting. Elan Schnitzer lives on H Street. He expects a seven percent return.

“My first $7 dividend check, I will take right back to the restaurant that comes in and get a sandwich,” he says.

Actually, Schnitzer bought two shares, so he might be able to afford dessert. He won’t have much say in the property he owns, but at least he’ll get lunch.

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