With the passage of Title II of the Jobs Act last September, the 80-year ban on general solicitation has been lifted. Companies that are looking to raise can now do so under 506-C and advertise their offerings on crowdfunding portals and platforms. There has also been an increase in the peer to peer loan market, or marketplace lending, for consumers and businesses to raise capital for debt.
James Jones, Director of Business Development at Crowdnetic, says that real estate is one of the fastest-growing asset categories in crowdfunding because, as opposed to start-up operating companies, real estate is a real, secured asset that is the most popular asset category among millionaires and wealthy credit investors. Real estate is also popular in marketplace lending, so investors are immediately receiving interest income of 8-12%. When done in a Self-Directed IRA, they're able to do that in a tax-efficient manner, such as in a tax-deferred traditional IRA or ultimately, a tax-free Roth IRA.
There is an advantage to the borrower in that they have the opportunity to access the "crowds." In real estate, where the average deals are in the $1-$25 million range, that range is considered the "sweet spot," because it allows the crowd to collectively pool their monies in order to make the investment, Jones says. As such, the borrower doesn't have to chase one or two wealthy investors and it doesn't have to chase the bank, where that amount is normally considered too small. The accredited investor is considered the typical investor at this point, Jones adds.
After real estate, operating, or start-up, companies would be considered the second largest asset class but Jones says we're also seeing traditional asset classes in the alternative space, such as mining, mining rights, oil, oil exploration and some other alternative categories that were traditionally reserved for wealthy individuals.
With a Republican congress now in effect, Jones doesn't see this affecting crowdfunding but just in the hold up in the SEC. There has been a two-year wait for the continuation of Title III and he's still hoping for Title IV, which would be regulation A or Reg A Plus.
Jones believes the most common misconception about crowdfunding is that it's still rife with fraud. He says there's a difference between a company failing and fraud and to a great degree, there's been very little fraud because many of these companies raising are debted by the actual portal or platform. The crowd is also able to do their own due diligence through social media. Jones says it remains to be seen how successful some of these start-up companies will be.
James Jones is the Director of Business Development at Crowdnetic and spoke with Alternative Investing News, providing online alternative investing video news content. Alternative Investing News is a featured network of Sequence Media Group. This video was brought to you by Vantage Self-Directed Retirement Plans.