Crowdfunding Real Estate: Legal Structures Part 1

Crowdfunding has been around for a bit now thanks to sites like Kickstarter and Pozible. But Equity crowdfunding is a different in a fundamental way. In sites like Kickstarter you are essentially making a donation to the person or company making the offer. Despite the promise for a reward there is nothing concrete that binds the issuer to fulfilling that to the person making the contribution. You don’t get any legal stake in the venture or project being promoted.

In Equity crowdfunding you get a stake in the project, this can take the shape of debt or equity or something else depending on the structure of the deal. This is now fundamentally the same as pooling money for investment purposes and falls under all the regulations that the local securities regulatory body (ASIC in case of Australia) has for investment offers.

The difference is the delivery mechanism (online) and user experience, ease of use. But the underlying legal structures have to obey the law of the land. Let’s take a look at a few of the existing structures in Australia.

An undisclosed private offer

This is the simplest of them all and commonly used for joint ventures and private deals. Under the 20 12 rule you can raise upto 2 million from upto 20 retail investors. Retail investor simply means anybody who is not a wholesale investor. And a wholesale investor is someone who has made at least 250K each in the last two years or has 2.5M in assets. This is a general definition and there is more to it, but the simple idea is it is someone who is quite wealthy. The government believes and rightly so that those who have done well for themselves and are well aware (sophisticated) of intricacies should be able to access deals without hindrances. They can then decide for themselves whether or not it makes sense. And if they deal goes south it is their own responsibility for not studying it enough.

The Government wants to protect retail (Mom and Pop) investors from being exposed to “buyer beware” offers. Hence there is a limit of only 2 Million per issuer (someone who makes the offer) per year. And only 20 small investors can participate in that offer so it does not become a free for all. There are significant restrictions around making a specific offer which is made under these provisions in a public manner. You cannot be seen to solicit investments publicly and not make a full detailed disclosure about its details.

You are supposed to only make 20 offers and these are meant to be personal offers.

In the next post we will look at what an Introducer does.

Do check our property investment platform at http://www.estatebaron.com