Crowdfunding has been around for a few years and has been used by startups to raise money from the public i.e., The Crowd. Due to existing regulations, the average individual could not invest in these startups, but new platforms enabled them to make donations to companies or projects in which they had an interest. In many cases the company provided rewards for such donations, and typically the reward was the product itself for which money was being raised. The most popular marketplaces for this kind of fund raising is Kickstarter and Indigo.
Rewards crowdfunding most commonly offers incentives or rewards to investors based on the funds contributed. More the money contributed the larger the rewards. This is best suited wherein tangibles are offered to investors. For example, a group of people contribute towards a movie, the investors might be offered movie passes, date with the stars, credits in the movie etc. Rewards crowdfunding is further categorized as All-or-Nothing and Keep-It-All. In All-or-Nothing crowdfunding the entire amount required to fulfill a goal is raised in a preset time frame. This method is usually chosen for projects requiring large initial capital. The entity raising the funds may have to start over in case they do not raise the entire amount for the goal. In Keep-It-All crowdfunding, it is not necessary to raise the entire goal amount in the preset time frame. The entity raising the funds can make do with the funds raised.
Investors can invest in portions of loans made to individuals or companies. In some cases, the loan is pre-funded by the sponsor and then sold to multiple investors and in some cases the loan isn’t originated until the total amount is raised by the crowd.
Equity Based Crowdfunding allows investors or contributors to be part owners of the company by investing capital in return for equity shares. As equity owners, the investors could receive a financial return on their investment in the form of dividends and/or capital gains if the company is sold privately or through a public listing.
Dividends: Shareholders receive a percentage of operating profits in the form of a dividend.
Private Sale: The company is purchased by another entity. The other entity acquires all investors’ shares at a negotiated price such that investors receive their original investment, plus a profit in the form of a capital gain.
Public Listing: Investors exit the investment similar to a private sale, but their shares are sold on a stock exchange to the public instead of to one entity.
Real Estate Crowdfunding
Real Estate Crowdfunding may use debt crowdfunding, equity crowdfunding, or can combine both debt and equity to fund real estate. Typically, Denbar only invests in debt that is secured with a first or second lien on performing real estate, and only invests in equity when there is 80% or less debt on a project.
In the past, passive investments in real estate generally required large sums of money and most were done by institutions. To invest smaller amounts, most projects required active investors -- searching for properties, performing due diligence, securing financing, personally guaranteeing loans, managing properties (performing maintenance, bookkeeping, evicting, advertising). Some found it overwhelming. Many investors preferred to be passive without putting large amounts into single projects, but there weren’t many options. For those who prefer putting lower amounts into any type of investment, crowdfunding offers a real solution. For example, investors who usually put $10k in each individual stock or bond, they may not want to put $100k into each real estate project. Now, crowdfunding lets them invest just $10k in each real estate project.