The Basic Knowledge
It helps to be familiar with basic concepts in real estate investing and crowdfunding. In this section, some of this basic knowledge is provided in these three topics.
It helps to be familiar with basic concepts in real estate investing and crowdfunding. In this section, some of this basic knowledge is provided in these three topics.
Why you want to be a real estate investor? Sure there are many types of investment around like Stock, bond, mutual fund, annuities and precious metals like gold or diamond. Smart investor will spend many hours to research and analyze the pros and cons of each investment type and then makes a right choice. No matter the ultimate goal is for making money to achieve your personal goals like buying a house, paying for education or grow your retirement savings, Becoming a real estate investor will provide you the opportunity to build your financial security and prosperity.
Here are the driving considerations for investing in real estate:
Income: Real estate can provide you with steady income, often referred to as cash flow. Investor can rent real estate to a tenant. Overtime, rental payments from that tenant can cover the mortgage loan payment, cover any property management and maintenance costs, and can still leave enough income for the investor. Although there are other investments that provide steady income, such as bonds, and stocks that offer dividends, real estate typically provides a steady amount of income than stock and precious metals.
Appreciation: Over the course of the last fifty years, studies have shown that overall real estate market has kept pace with inflation. In some areas, real estate values have even appreciated above and beyond inflation. For smart investors, appreciation is an added financial bonus to being a real estate owner, not the reason to buy property. You can only benefit from real estate appreciation if you own it. Therefore, owning some real estate as you can, as wisely as you can, can give you the best probability of gaining appreciation on your investment.
Equity: When you invest in real estate, you have the opportunity to own a property that over time will go up in value above the price what you invest in. The difference between what you invested in for and what it is worth is called equity. The old saying, "In real estate, you make your money when it appreciates," applies here.
By comparison, publicly traded stocks are purchased at market value. The market may be undervaluing or overvaluing the stock at the time of purchase. But the stock market is more volatile and one may not realize its purchase price at the time of stock disposal when the market moved against the investment at the wrong time. A recent example is the 2007-2009 stock market crash. With real estate, however, you can invest in a property and hold the property when the market is not in your favor to dispose.
Leverage: When the investor borrows money to buy real estate, the investor is using leverage. Many financial institutions such as banks, mortgage companies, hedge funds, mutual funds, pension funds, insurance companies and private individuals would want to lend you money to buy real estate. These types of real estate lenders would require good credit, significant downpayment and good appraisal value to make the lending decision. If, for example, you buy a $100,000 property and you put down $20,000, you are using leverage to own a $100,000 asset with only $20,000 of your own money. If you realize cash flow of $5,000 a year, you will realize a net return of 25% a year on your cash investment. The ability to borrow money to buy real estate is the use of leverage that allows you to generate great return on your cash and buy more real estate with less money.
Liquidity: As an investment, real estate-both residential or commercial-is less liquid compared to stock and bond. There is no publicly traded market for real estate properties except for listed REITS which are traded companies holding real estate assets. The process to acquire and dispose a piece of property is complicated and time consuming.
This lack of liquidity is a good thing when it comes to investing. It’s what makes real estate such a stable, appreciating asset. Investing in real estate should be done for the long term with money you can put aside for a longer time to watch it grow.
Crowdfunding is a new and evolving method to raise money using the Internet. It serves as an alternative source of capital filling the niche between personal resources and venture capital. An entity or individual raising funds through crowdfunding typically seeks small individual contributions from a large number of people. A crowdfunding campaign generally has a specified target amount for funds to be raised, or goal, and an identified use of those funds. Individuals interested in the crowdfunding campaign may share information about the project, cause, idea or business with each other and use the information to decide whether or not to fund the campaign based on the collective "wisdom of the crowd."
The Jumpstart Our Business Startups (JOBS) Act, enacted in 2012, establishes the foundation for a regulatory structure for startups and small businesses to raise capital through securities offerings using the Internet through crowdfunding. This provision allows small businesses to offer securities through a crowdfunding exemption to SEC rules governing traditional publicly traded enterprises. SEC finally adopted Regulation Crowdfunding rules on May 16, 2016.
By Regulation Crowdfunding aka Equity Crowdfunding, everyone - not just the rich - can invest a small amount in any private company subject to certain income and net worth restriction rules. Any private enterprise or entrepreneur can raise capital up to a certain amount per year directly from the individual investors. The investment and fundraising transaction has to be conducted through a qualified broker dealer or funding portal registered with SEC and FINRA membership.
These are some of the rules and limitations that apply to Equity Crowdfunding investing and fundraising:
Fundraising Limitation. Only $5.0 million can be raised from a Regulation Crowdfunding offering each year by any US enterprise or entrepreneur.
Investment Limitations. Investors in a Regulation Crowdfunding offering are limited to investing between 5% to 10% of their income or net worth each year but not exceeding $107,000 annually.
No Offline Crowdfunding. By law, all Regulation Crowdfunding investments must be made through a funding portal or a broker/dealer registered with SEC and FINRA Membership.
Advertisements must be factual. The fundraising entity can advertise anyway you like after Form C is filled with SEC-- email, Facebook, road shows, etc. However, all your advertisements must be limited to factual information. Also, by law, all fundraising advertisements must include a link to the online platform that gathers the investors and executes the investment.
Ongoing reporting. Each year, after a completed fund raise, the fundraising entity must file an annual report with financial statements updating your investors. If you neglect to do so, you will be unable to fundraise with Regulation Crowdfunding again until you file the annual.
Full disclosure. The fundraising entity cannot mislead the investors intentionally. It's best to stick to factual statements or historical data and present all the facts and information concerning the business project, the investment terms, and the fundraising entity structure including history of the principals.
Risks and Characteristics of Real Estate Crowdfunding Investments
Crowdfunding investments in real estate ventures are speculative and these ventures often fail. The success of the real estate venture depends on the issuer's management expertise and market condition. You should not expect guaranteed returns. You should be able to afford and prepared lose your entire investment if investment fails.
Crowdfunding investors are limited in the ability to sell their investment for the first year and may have to hold the investment for an indefinite period of time as no public exchange exists for the trading of real estate unlike investing in companies listed on the stock exchange.
Underlying Tenant Quality
When assessing an income-producing property, an important consideration is the quality of the underlying tenancy. This is important because when crowdfunding investors evaluate real estate investment , you're banking on two things: the physical real estate, and the income stream from the tenants. If the tenants are likely to default on their rental obligation, the risk of the investment failure to meet its obligation is high and the investment might lose its value.
Requires Professional Management
To ensure income production and sustainable value, income property needs to be managed in a hands-on manner. Tenant complaints must be addressed. Landscaping must be handled. And, when the building starts to age, it needs to be renovated. As crowdfunding investors play no management role in the underlying real estate investment, they will have to rely on the issuer's management ability and credibility.
Variability among Regions
While it sounds cliché, location is one of the important aspects of real estate investments; a piece of real estate can perform very differently among countries, regions, cities and even within the same city. These regional differences need to be considered when making a real estate investment by crowdfunding investor when they select which crowdfunding offering to invest on MinnowCfunding.
The purchase of stock or debt in an real estate holding entity is only suitable for persons or entities that can afford the risk of losing their entire investment. The Issuer's business, financial condition and operating results could be adversely affected by any of a number of factors, and you could lose part or all of your investment. The risks and uncertainties described by Issuers are not the only ones that the company may face. Additional risks and uncertainties not currently known, or that are currently thought of as immaterial, may also impair business operations. Minnowcfunding LLC only provides a portal to present investment opportunities and does not evaluate or recommend any investments.
An additional risk relates to minority ownership by Investors. Depending on the security an Investor may or may not have voting rights and collectively with the other investors may have a minority interest in the Issuer Company. Having a minority interest limits an investor’s ability to make any decisions and all investors should consider this risk and assess their confidence in the management team to make prudent decisions in the interest of all stakeholders.
The restrictions on the resale of securities offered and sold
The securities being purchased are private securities; meaning there is no public market where you can sell the securities. Generally you cannot transfer or sell any securities purchased for 12 months. Even after 12 months there may not be a market for the securities. During the first 12 months these transfer exceptions are allowed: 1) to the issuer of the securities; (2) to an accredited investor; (3) as part of an offering registered with the Commission; or (4) to a member of the family of the purchaser or the equivalent, to a trust controlled by the purchaser, to a trust created for the benefit of a member of the family of the purchaser or the equivalent, or in connection with the death or divorce of the purchaser or other similar circumstance.
Types of information that an issuer is required to provide in annual reports, the frequency of the delivery of that information, and the possibility that the issuer’s obligation to file annual reports may terminate in the future
An issuer is required to identify a location on their website where Annual Reports will be filed each year. They must post these for Investors within 120 days from the end of their corporate fiscal year end.
The annual report will contain financial statements certified by the principal executive officer of the issuer to be true and complete in all material respects. If Issuer has financial statements that have been reviewed or audited by an independent certified public accountant they will be provided.
Issuer must post the annual report on its website and make them available to investors.
Termination of reporting may occur and an investor may not continually have current financial information about the issuer. Below are the circumstance that an issuer may cease to publish any annual report:
the issuer is required to file reports under Exchange Act Sections 13(a) or 15(d);
the issuer has filed at least one annual report and has fewer than 300 holders of record;
the issuer has filed at least three annual reports and has total assets that do not exceed $10 million
the issuer or another party purchases or repurchases all of the securities issued pursuant to Regulation Crowdfunding, including any payment in full of debt securities or any complete redemption of redeemable securities; or
the issuer liquidates or dissolves in accordance with state law.
Any issuer terminating its annual reporting obligations is required to file notice on Form C-TR reporting that it will no longer provide annual reports pursuant to the requirements of Regulation Crowdfunding.
The limits on the amounts investors may invest
Because of the risks involved with securities-based crowdfunding, you are limited in how much you can invest during any 12-month period in these transactions. The limitation on how much you can invest depends on your net worth and annual income. Following are the inflation-adjusted investment limits.
If either your annual income or your net worth is less than $107,000, then during any 12-month period, you can invest up to the greater of either $2,200 or 5% of the greater of your annual income or net worth.
If both your annual income and your net worth are equal to or more than $107,000, then during any 12-month period, you can invest up to 10% of the greater of annual income or net worth, but not to exceed $107,000.
Information Issuer is required to disclose
This information will be disclosed by Issuers to Investors
Information about officers and directors as well as owners of 20 percent or more of the issuer.
The price to the public of the securities or the method for determining the price, the target offering amount, the deadline to reach the target offering amount, and whether the issuer will accept investments in excess of the target offering amount.
Financial statements and specific line items from income tax returns, both of which are certified by the principal executive officer of the company for offering $107,000 or less; financial statements reviewed by an independent public accountant and the accountant’s review report for offering between $107,000.01 to $535,000; and financial statements reviewed by an independent public accountant and the accountant’s review report (for first time crowdfunding), financial statements audited by an independent public accountant and the accountant’s audit report (non-first time crowdfunding) for offering from $535,000.01 to $1.07 million.
Copy of FORM C Offering Statement filed with SEC with legend stating the risks of investing in a crowdfunding transaction
Breakdown of compensation to MinnowCfunding and other costs associated with the offering
The location on the issuer’s website where investors will be able to find the issuer’s annual report and the date by which such report will be available on the issuer’s website
Disclosure if issuer or any of its predecessors previously failed to comply with the ongoing reporting requirements of Regulation Crowdfunding
Issuers must disclose their current number of employees
Issuers must disclosure the material terms of any indebtedness including, among other items, the amount, interest rate and maturity date of the indebtedness
Issuers are required to provide disclosure about the exempt offerings they conducted within the past three years describing the date of the offering, the offering exemption relied upon, the type of securities offered and the amount of securities sold and the use of proceeds
Through MinnowCfunding, Issuers must show progress updates towards their target amount
Provide investors right to cancel the investment commitment until 48 hours prior to the deadline identified in the issuer's offering materials.
Disclosure of any material changes, whereby the Investors need to reconfirm their investment within 5 days.
Issuers can offer a fixed target amount or a range with a minimum and maximum. If a range Issuers disclose where additional funds will be used.
The circumstances in which the issuer may cancel an investment commitment
Issuers can cancel an investor’s investment under these circumstances:
Issuers are required to report all material changes while selling securities. Investors are notified of the change and have 5 business days to reconfirm their investment or it is cancelled. A notice will be sent out to the investor with the reason for the cancellation and the investment will be refunded if funds were collected. All communications will be by email to the investor’s registered email address on the portal.
If material changes to the offering or to the information provided by the issuer regarding the offering occur within 5 business days of the maximum number of days that an offering is to remain open, the offering must be extended to allow for a period of 5 business days for investors to reconfirm their investment.
If the target investment is not met, the investment is cancelled and returned to the Investor.
The escrow agent bank will perform and Anti-Money Laundering check which is standard practice at a bank. Should this come back negative the Investor funds will be returned.
The circumstances in which the investor may cancel an investment commitment
Investors have a right to cancel their investment in these circumstances:
Right to cancel the investment commitment until 48 hours prior to the deadline identified in the issuer's offering material.
Right to cancel the investment commitment if there is a material change to the terms of the offering or to the information provided by the issuer. Investors will be notified of any material changes and must reconfirm their investment within 5 business days of receipt of the notice or their investment will be cancelled.
The need for the investor to consider whether investing in a security offered and sold is appropriate for him or her
This Fact and Risks bulletin identifies a number of risks for investors which include the potential loss of investment, lack of control as a minority shareholder, the unpredictable future of the Company and potentially long term nature of investing in early stage companies. Each Investor should consider these risks seriously and seek any advice needed before making an investment. Prior to confirm the investment subscription online, each investor will be required to acknowledge that one has reviewed the education materials about this type of investing. Also the investor has to affirm the understanding that one can lose all the investment and can bear such a loss.
Following completion of an offering, there may or may not be any ongoing relationship between the issuer and MinnowCfunding
MinowCfunding is a crowdfunding portal to bring Issuers and Investors together. Once an Issuer has completed their offering there may or may not be an on-going relationship between MinnowCfunding and the Issuer. Investors will own securities in the Issuer and will have a direct relationship with them regarding the securities. MinnowCfunding will be available should the Issuer choose to offer additional securities (Issuers can offer up to $5.0M each year) and may in the future offer other services to help with annual reports and consulting. Investors should understand this change to working directly with the Issuer once the transaction is complete.