Not long ago, it was hard to imagine that doing ‘good’ could mean anything more than philanthropy, charitable giving, or donating to a non-profit cause. Around 2009 Indiegogo and Kickstarter launched their online platforms, where the act of ‘giving’ evolved into rewards-based donations. Entrepreneurs, artists, filmmakers and businesses found a new way to reach (potentially) millions of people, tell them about their idea, and ask for a monetary contribution in return for t-shirts, posters, thank you cards, and products or prototypes. This new marketplace spawned innovative product launches, like 3D printers and virtual reality headsets.
As the online donation and fundraising space grew, so too did the understanding that the power of the crowd, brought together online for a common cause, had the potential to fix one of the most devastating financial crises in American history: The Great Recession.
In the years leading up to the crisis, many Americans were buying homes-- homes they couldn’t afford, even several homes they couldn’t afford, enticed by low interest rates and irresponsible institutional lending practices. The outsized greed of big banks and Wall Street ultimately caused the loss of those homes, and millions of jobs.
America needed to rebuild. It needed jobs, businesses and economic growth. Banks however, weren’t lending. Despite historically low interest rates, they were not extending economically critical credit to businesses and entrepreneurs. Who could entrepreneurs turn to for business funding? Where could skilled real estate entrepreneurs get the funding necessary to rehabilitate tens of thousands of homes in blighted neighborhoods, left abandoned and ruined? Could crowdfunding help business owners raise much needed capital to fund their businesses? Could millions of unrelated individuals contribute to small business and real estate growth?
Turns out, they could.
Crowdfunded investment first emerged with the passage of the Jumpstart Our Business Startups ("JOBS") Act in 2012. It wasn’t until 2015 that all four of the Titles of the JOBS Act were adopted by the SEC, since this entails the sales of securities. However, Title II was adopted in September of 2013, and many entrepreneurs who had been building investment crowdfunding platforms launched what has now become an unstoppable engine of growth for America. Prior to the law's passage, entrepreneurs seeking funding were not allowed to solicit investment widely; general promotion of investments through various media, including the Internet, were prohibited. The law removed this restriction, allowing the use of "broad based advertising" to attract accredited investors.
Rebuilding Communities with Real Estate Crowdfunding
Crowdfunding as a source of capital for real estate investments quickly became the most widely adopted form of crowdfunded investment. In the past four years, dozens of companies have proliferated, with some industry observers tracking dozens of firms of varying sizes facilitating investment across just as many product types and markets.
The industry's performance in 2015 and its increasing mainstream acceptance point to sustained future growth as it continues to mature.
In 2014, industry researcher Massolution tracked $570 million in crowdfunded investments in North America with real estate crowdfunding capturing 56% of investment in 2014 and an estimated 54% in 2015. Funds raised through crowdfunding platforms have primarily financed residential developments (57%), but investments have also targeted commercial (26%) and mixed-use (17%) projects as well. These investments are roughly evenly split between debt and equity. Massolution estimates that real estate crowdfunding grew to $1.4 billion in North America in 2015, and surpassed $2.5 billion globally.
Real estate crowdfunding has benefitted investors-- those willing to place their savings, and part of their investment portfolios into a new, yet untested asset category. These investors have indirectly, but substantially contributed to rebuilding homes, neighborhoods and communities.
Real estate crowdfunding platforms are not only a marketplace for investing in residential and commercial projects, but a marketplace of ideas and visions, too: experienced, professional developers get the funding they need while providing a return to investors. Neither party has to wait for the permission of slow-moving, institutional investors to get the wheels of investment and rejuvenation turning again, in the very neighborhoods in which they're already invested. The "permission" to revitalize, and reinvest, no longer has to come from "the bank," or from “the street” but can flow from peer-to-peer-- through the power of the crowd to build wealth, and grow communities.
AdaPia d’Errico is the Chief Marketing Officer at Patch of Land