CROWDFUNDING REAL ESTATE Susanne Ethridge Cannon Chairman, Department of Real Estate and Douglas and Cynthia Crocker Endowed Director The Real Estate Center DePaul University September 17, 2014

History of Crowdfunding Source: Fundable.com

Statue of Liberty Granite base needed $250,000 ( $6.3 million today) but fell short by $100,000 Joseph Pulitzer and The New York World 160,000 donors, $101,000, 5 months, names in the paper Source BBC News 24 April 2013

Crowdsourcing and funding Obtaining labor, products or content outside the company; morphed into crowdfunding in Wired magazine Passion and belief (social causes, arts, environment) Donation based gofundme Reward based kickstarter indiegogo Financial Return Lending based- lending club, on deck capital, dealstruck, zopa, kiva Equity based-circle up, hyperfund, fundrise, realty mogul

Disintermediation and reward Reaching beyond institutions to fund charity and artistic endeavor Fund a specific cause or person directly Reward, not investment

GoFundMe

Kickstarter

indiegogo

Research and grants

The context of disruption and disintermediation over the past 20 years

Online transactions Disruption Less than 20 years, each started in a garage Ebay 2013 general merchandise $67 Billion Amazon 2013 $74 billion Democratization of Information CONSUMER POWER from feedback, knowledge (price discovery on bluenile.com) The changing role of real estate brokers

ebay

High ticket items

Amazon

Blue Nile

Real Estate Information and facilitation Valuation Market comparison Transactions that by pass brokers, newspapers and signs

Zillow, trulia, redfin

Redfin

trulia

Peer to peer lending Not for profit For profit

Lending Club It’s about that spread: Renauld LaPlanche and his 18% credit card rate, 1.5% CD rate Disintermediation could be the answer $3.7 Billion today, up from $750 million in 2012 Google takes a stake Larry Summers, John Mack, Mary Meeker, Peter Thompson Banks are actually investing

Which leaves us where? EQUITY FINANCE is the missing piece Regulatory Impediments Securities Act 1933 Securities Exchange Act 1934 Registration except for Rules 504, 505, 506 of Regulation D Constraints on marketing and securing investors Accredited investors Even so, $1 trillion a year, nearly the size of the public debt market

Answer: Jumpstart Our Business Startups Act Emerging companies and community businesses Lift the restrictions on marketing, open up to the internet Accredited investors with one set of rules, non-accredited with another Called crowdfunding, even though we don’t have the rules yet to raise from the crowd, we do have the ability to use the web, and other media to reach accredited investors

Crowdfunding Background $1.5 billion in 2011, 1 million campaigns globally, 450 CFPs $2.7 billion in 2012 $5.1 billion in 2013 Who knows in 2014 Source: massolutions research form 582, crowdsourcing.org

Source: crowdnetics.com

A few definitions Crowdfund investing: small investments, less than $1million, non accredited investors; JOBS act modified Sec 4(6) of US Securities Act of 1933; requires brokers or Crowdfunding Portal Less than $100,000 issuer provides tax returns; $100,000 to $500,000 financial statements, over $500,000 audited statements Rule 506 Regulation D Exemption: permits broad solicitation but still accredited investors, no longer need to have pre- existing relationship, but must take reasonable steps to determine accredited Regulation A permits raising $5,000,000 Regulation A+ permits companies to raise $50,000,000

Accredited Investor In order for an individual to qualify as an accredited investor, he or she must accomplish at least one of the following: 1) earn an individual income of more than $200,000 per year, or a joint income of $300,000, in each of the last two years and expect to reasonably maintain the same level of income. 2) have a net worth exceeding $1 million, either individually or jointly with his or her spouse.

Rules for the crowd? Source:fundable.com

Waiting for the regs for actual crowdfunding Expected 2014 Broker dealer required Funding Portals possible Brain damage

Source: Forbes.com

Reg D Revised Internet and other ways to reach accredited investors Platforms for owners and developers to reach new investors

Source: crowdnetics.com

Players and where they play

Will it work? Is it the disruptive force some of us think it is, or is it just another 1031/TIC play that will vanish after the deals blow up? Will it democratize real estate investment and lead to a more efficient, transparent market? Is there a social/community investment component that will change the development product? (Atlantic Monthly story) Will the regulators kill it with kindness? Will it entice scam artists and the bad boys of real estate?