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Crowdfunding is a personal and small business financial revolution whose time has come at last. Though it began in earnest back in the 2006-2009 time period around the Great Recession and its immediate aftermath, these sites, companies, and platforms have really come into their own in the last three to four years. 2012 saw the initial implementation of the JOBS Act that allowed equity crowdfunding to begin in earnest, and this space has only grown from strength to strength in the past few years. Now you have top players and niche crowdfunding sites encompassing equity, real estate, student lending, medical research and innovations, creative and technological innovation, and overseas microloans. Long live the revolution!
What Is Crowdfunding?
Crowdfunding is the almost magical effect that you get when you take hundreds of thousands or even millions of people in some cases and allow them to pool their money together over platforms on the Internet to assist the endeavors of individuals, businesses, and other types of organizations like not for profits and foundations. This crowdfunding can support all sorts of activities and efforts, such as startup companies, real estate purchases and development, inventions, medical and scientific research, civic projects, software development, creation and promotion of motion pictures, albums, and books, and more.
The ones that are most interesting to investors center more on the equity crowdfunding, real estate crowdfunding, and research crowdfunding, where ownership stakes and financial incentives are typically a part of the motivation for becoming involved with the crowdfunding in the first place. In the past, this type of financial and equity crowdfunding has been limited to only accredited investors, those who could prove at least $70,000 in income and assets, or from $250,000 to a million dollars in just assets. Thanks to the JOBS Act Title IV passage back in end of October 2015, this is all changing as the new regulations allowing most smaller investors to participate are fully implemented in early 2016. This means that true freedom to invest your money as you best see fit has finally returned to the markets after an 80+ year hiatus.
What Are the Different Types of Crowdfunding?
• Equity CrowdFunding – Examples of this type of crowdfunding include sector leaders AgFunder and EquityNet, which calls itself the original equity crowdfunding platform. Equity crowdfunding involves companies that fund their endeavors via selling tiny equity stakes to numerous investors. These are longer term investments that could take a year, three years, or sometimes even seven years to pay off, assuming that they succeed.
• Real Estate Crowdfunding – Includes such heavyweight outfits as international giant Funding Circle, Upstart, Fundrise, Patch of Land, Realty Shares, Realty Mogul, and Real Crowd. iFunding, the real estate crowdfunding expert, claims that the estimated combined size of this market is $11 trillion. Investors love this type of crowdfunding meets real estate market, combining the best of both worlds so that:
- Investors can invest in real estate with smaller amounts of cash.
- Investors work hands on with real estate developers, gaining a say in the developing process.
- Investors pick the real estate projects in which they want to participate.
- Investors can choose form an enormous selection of possible real estate and development investment options.
This sector of crowdfunding already has as many as 50 different real estate crowdfunding platforms either in existence or planned and on the way.
• Creative Project Crowdfunding – Includes original crowdfunding titan Kickstarter. These creative and technological innovation crowdfunders mostly make use of donations in exchange for project favors and project gifts.
• Philanthropic Crowdfunding – Examples of philanthropic crowdfunding endeavors include the likes of Zidisha and Medstartr. There are returns to be made in this type of crowdfunding, but more importantly there is the satisfaction of helping out people, like sick patients waiting on medical cures and devices, or African and Asian micro-business people who need a little low-interest capital to build up a family business that can feed, clothe, and put their children through school.
Who Are the Major Players in the Crowdfunding Industry?
Kickstarter is the original and the biggest of the traditional crowdfunders, while Medstartr is the leader in philanthropic and medical crowdfunding. AgFunder is the foremost crowdfunder in the AgriBusiness and AgTec. Real estate crowdfunding has grown by leaps and bounds, with Realty Mogul a major commercial real estate player. British- and European-based Funding Circle is the largest business crowdfunding group in the world, with over one billion British pounds (over $1.5 billion USD) worth of U.S., British, German, Spanish, and Dutch business loans funded so far.
How Crowdfunding Works
Interested participants and investors can buy an equity stake in a mortgage, commercial and industrial real estate, or a small business deal in exchange for some percentage equity stake in the venture. They might also donate money to a creative or philanthropic cause in exchange for project favors, gifts (like artist-produced CDs, DVDs of new films and movies made, or signed copies of books published), or experiences (as in getting to go back stage on the movie filming set, getting to meet and greet with the band after a concert, or receiving a phone call or in- person visit from an author or technological creator/inventor).
Comparison of the Top 12 Crowdfunding Platforms
|Realty Mogul||Fundrise||Funding Circle||Real Crowd||Patch of Land||AgFunder||Upstart||MedStartr||Realty Shares||KickStarter||Zidisha|
|Personal Loans Investments|
|Commercial Loans Investments|
|Equity Stake Investments|
|Minimum Credit Score||Varies||Varies||620||Varies||Varies||Varies||Varies||None||Varies||None||None|
|Cost for Investors||Varying Maintenance Fees||.3 - .5 Percent Annual Management Fee||1 Percent Annual Account Maintenance Fee||None||None||None||None||None||1 Percent Annual Management Fee||None||None|
|IRA Eligible Investment|
|Review||Read Full Review||Read Full Review||Read Full Review||Read Full Review||Read Full Review||Read Full Review||Read Full Review||Read Full Review||Read Full Review||Read Full Review||Read Full Review|
|URL||Visit Site||Visit Site||Visit Site||Visit Site||Visit Site||Visit Site||Visit Site||Visit Site||Visit Site||Visit Site||Visit Site|
Which Investors Are These CrowdFunding Companies Ideal For?
Most of the equity and real estate crowdfunding operations are only available to either accredited investors or the traditional and powerful institutional investors. Accredited investors in real estate and startup businesses are commonly required by the SEC to show as much as a million dollars in assets. This will all soon be changing in early 2016, thanks to the new rules being implemented by the SEC as a result of the national passage of the JOBS Act Title IV that has been years in coming.
These crowdfunding companies are actually most ideal for smaller investors. In the past they have seen their access to the best opportunities and most lucrative business deals blocked at every turn by the overly-protective and manipulative big brother U.S. governmental regulatory agencies such as the Securities and Exchange Commission that worked to ensure that all of the best investment opportunities and returns in the U.S. went to the powerful, rich, and well-connected families and institutional investors. Thanks to the rise of Internet-based equity and real estate crowdfunding in particular, smaller mom and pop types of investors have gained financial investing power and are imminent to be allowed to pour savings and investment dollars into these lucrative deals that have returned an average of more than 20% annual returns for the last thirty years plus.
What to Look for in CrowdFunding Companies as An Investor
You have a number of different features to consider when contemplating with which crowdfunding companies to invest your money.
• Projected Returns – How much in potential returns does the platform suggest you can realistically make? Part of this equation has to take into account a certain number of ventures that you back failing to succeed or deliver expected returns. Diversification is the important point that you can not neglect. With real estate or small business ventures, this means try to back numerous ventures with smaller amounts where you are able to, even up to at least dozens or if possible hundreds of different investments.
• Types of Investments – There is a crowdfunder for every niche interest under the sun. The better ones allow you to invest in secured businesses, real estate, or other asset-backed ventures. As you might expect, the amounts of hoped-for returns are commiserate with the level of risk entailed. Commercial real estate crowdfunding tends to pay better than residential mortgages real estate crowdfunding, though the risk of failure could be significantly higher with any given commercial real estate venture.
• Cost to Investors – Several of the newer crowdfunding platforms are not charging investors much of anything or anything at all, even when they manage the real estate or small business investments portfolio for you. Other more established outfits like Funding Circle typically take a half percent to 1% fee right off the top each year as an investment management or account maintenance fee.
• Better Business Bureau Ratings – Most of the crowdfunding operations count an A- to A+ rating with the BBB, so treat the ones that do not have a rating or profile at the BBB with more caution.
Equity and real estate crowdfunding is the greatest single revolution to hit the world of finance and investments in literally decades. Smart and savvy investors will always want to be in on the cutting edge of changes in any industry like this whenever the opportunity presents itself. Remember that such investment opportunities as crowdfunding do not come along every day. You should be sure to perform your due diligence on any platform that you consider, as well as for every investment opportunity that you seriously contemplate on the platforms. Make certain also that any capital you commit to these ventures is money that you can do without if part of it disappears in failed business deals, and more importantly that you can afford to tie it up for as many as from one to seven years until the deal or investment matures and pays.