Crowdfunding has emerged as a new way for businesses and real estate projects to raise capital online from many individual investors. There are four main types of investment crowdfunding - donation, rewards, debt, and equity-based. Some states have also implemented their own intrastate crowdfunding regulations to facilitate these types of online investment opportunities. Real estate projects in particular are seen as a natural fit for crowdfunding, as it allows communities to invest in local developments. However, investors must still carefully evaluate each crowdfunding platform and investment opportunity to fully understand the risks and ensure their interests are protected.

1. Commercial Real Estate Advocates, Inc.
Writing Truths
March 2015
A Message to the Real Estate Investment Community
Re: Crowdfunding Your Investment
Everyone is looking for new ways to grow our economy. And, they are specifically looking at
small businesses to start this new growth. Banks, large institutions and a small number of
individuals have traditionally made this investment in small businesses. But now, a larger
number of individuals have the opportunity to invest in the businesses and possibly be on their
way to making riches. Some may say that this is another redistribution of wealth.
To facilitate this, President Obama signed the Jumpstart Our Business Startups (JOBS) Act into
law April 2012. Through it, Titles II and III have emerged as the provisions that allow
businesses to offer securities to a larger number of investors using the Internet. A Securities and
Exchange Commission (SEC) fact sheet tells us that in accordance with Title II, they now allow
businesses to use the Internet when soliciting and advertising private security offerings, provided
that the sales are limited to accredited investors and that an issuer takes reasonable steps to verify
that all of the purchasers are accredited investors. To date, SEC has proposed regulations that
will comply with Title III. This will be the “crowdfunding” provision that will allow businesses
to offer securities to non-accredited investors without registering the securities with the SEC.
State Crowdfunding
While the SEC is working on the regulations for implementing Title III, some states have written
their own crowdfunding regulations. Most of these states, like Maryland and DC, are using the
intrastate exemptions found in the Securities Act of 1933, Section 3(a)(11) along with Rule 147
adopted under the Securities Act of 1933 (12CFR230.147 §230.147) to support it. This is
according the CrowdCheck website. The states’ implementation of their own crowdfunding

2. regulations could be seen as a good thing. I say this because according to Carolyn Betts, an
attorney and legal writer for The Solari Report, “the cost of conducting Title III offering may be
prohibitive, even for relatively large offerings.” And, according to Jason Best, co-founder and
principal of Crowdfund Capital Advisors (CCA), “Leaders in these states have an opportunity to
use this as a powerful point of differentiation in bringing innovative individuals and companies
to their state.” Jason Best made this comment in the Washington Post article “District of
Crowdfunding: Washington DC ranked top spot to raise capital online.”
The Corporations and Associations - Maryland Securities Act –Registration and Filing
Exemptions is one of the more conservative state crowdfunding laws says Masai McDougall in
his article “Maryland Securities Commissioner Finalizes Rules for Intrastate Crowdfunding”
published on the CrowdFund Insider website. He refers to Maryland’s businesses being able to
raise only $100,000 in only debt capital from Maryland residents who can only invest $100 per
security offering without regard to whether or not they are an accredited investor. He also talks
about Maryland’s contemplation that small businesses use their own website to advertise their
fundraising campaigns as well as the simplified and less burdensome disclosure requirements.
The DC-Only Securities Offering Exemption allows DC businesses the ability to raise up to
$2,000,000 based on whether the business has audited financial statements and allows DC
residents and businesses the ability to purchase a certain amount of securities based on their
income. Issuers can advertise the offering through the website of a licensed broker-dealer or
through the issuer’s website. Regarding this new exemption, Chester A. McPherson, Acting
Commissioner for the Department of Insurance, Securities and Banking says “Our goal is to
provide a streamlined, cost-effective alternative for raising capital that benefits District
entrepreneurs and at the same time protects local investors.” And, they have. According to CCA,
“The District of Columbia ranks higher than any state in the country in terms of the ease with
which entrepreneurs and small business owners can raise money through new online funding
portals called crowdfunding sites.” CCA reported this in the Washington Post article “District of
Crowdfunding: Washington DC ranked top spot to raise capital online.”
With these new regulations allowing for online, Internet marketing of private and public
securities to accredited and non-accredited investors, we have seen the emergence of many
crowdfunding sites. In fact, Chance Barnett is quoted as saying that “The crowdfunding industry
has grown exponentially over the last five years, helping people raise billions in funding for
everything from donations for personal art projects to equity financing for businesses.” in a
Forbes article, “Crowdfunding Sites in 2014.”
Investment Crowdfunding
Essentially, there are four types of investment crowdfunding. Yes, I said four types of investment
crowdfunding. Each of the four is different in the type of expected return on investment.
Donation based crowdfunding is where an individual gives money to a business because they
believe in the cause and feel good about supporting it. The expected return on investment is a

3. better society regarding issues like clean water projects, domestic violence issues, homeless
shelters, animal rights, etc….
Rewards based crowdfunding is where an individual gives money to a business because they
expect to receive a product or service from the business. Some of the returns on investment may
include discounts from restaurants, movie theaters, and music venues as well as services from
yoga studios, hair salons and barber shops.
Debt based crowdfunding is similar to a bank lending money to a business. It is where an
individual lends money to a business in exchange for a binding agreement that the business
promises to repay the amount borrowed, at a specified interest rate and time intervals.
Equity based crowdfunding is similar to investing money in the stock market. It is where an
individual receives a specified percentage share of ownership in the business. The individual
expects the business to make a profit and thereby receive a share of the profits.
Crowdfunding Real Estate
“The practice of using the Internet to solicit funding has come to commercial real estate, and it
may be a game changer for developers, brokers and investors alike” says Mariwyn Evans in his
article “The Funding Power of The Crowd” published in the “Realtor” magazine. Ethan Mollick
a management professor at Wharton University of Pennsylvania concurs. According to him, “real
estate is a natural fit for crowdfunding.” He believes that “It helps communities pool their own
resources and take control of their own environment, in addition to providing returns on
investment.” This was experienced first-hand by Ben Miller, co-founder of Fundrise, a DC
based firm. In a Realtor magazine article “Crowdfunding”, Ben Miller explains that he started
crowdfunding because some people in the neighbor would fight his real estate projects because
they did not understand them. So, he said “what if we squared the circle and let the community
become both a capital resource and a partner in our real estate project, so they would have some
skin in the game?” “And you know what, it’s worked” he said. The key, Mariwyn Evans
cautions, is that “you need a mix of government safeguards, legal and enforceable contracts, and
some of the value that a crown can bring into a situation.”
Scott Picken founder of Wealth Migrate, a leading global real estate crowdfunding site, reminds
investors to invest based on the fundamentals, i.e. capitalization (CAP) rates, management
teams, vacancy trends, financing metrics, internal rate of return (IRR), macro and micro
economic considerations, sector trends and most importantly, managing risk and wealth
preservation. He explains “Those real estate crowdfunding sites that had substantial real estate

4. experience prior to the advent of crowdfunding will be the ones who most likely can ensure that
they are building quality market places.” He adds that “While the market grows, early adopters
should be cognizant of the inherent risks in this industry, think carefully about each platform’s
due diligence process and assess whether its business model incentivizes its management to truly
have their investors’ best interest in mind.”
I say that with every investment there is risk. You must be the one to determine your risk
tolerance and how much control you want to have over your investment dollars. You must also
know your exit strategy. And, read the documents.