Three Types of Crowdfunding

Crowdfunding is technology changing the marketplace. There are different types of crowdfunding. Let’s go over these so you can choose the one that fits your needs best. 

Technology has virtually transformed every industry. From travel to taxis, technology has shifted the marketplaces all around us. The Internet connects people to businesses directly, cutting out the middlemen. It is leaving the landscape looking very different than it did before.

Moreover, crowdfunding is transforming how people raise money for causes and startups. It is a very impactful difference what crowdfunding is doing in the real estate market. Real estate developers now have access to more capital than ever, and individual investors have better opportunities to enter the real estate market.

“Crowdfunding,” as a term, can be applied to many methods of raising money. In real estate development, there are 3 basic types of crowdfunding that individuals can participate in. Under these 3 rules and regulations, accredited and non-accredited investors can find ways to invest in real estate development. Accredited investors are individuals who earn an annual income of at least $200,000/year ($300,000 with spouse), or have a net worth of at least $1,000,000. While these numbers may seem high, the good news is that there are still opportunities to participate in crowdfunding real estate for non-accredited investors.

types of crowdfundingThe following are three types of crowdfunding that you may consider:

1. Rule 506 (b) break down

Rule 506 (b) is the old school way of investing in real estate investment. These offerings are the same type of private placements that developers have been participating in for the past 3 decades. One thing has changed, however. Now, investors can participate in these deals online. It is not like anyone can see these opportunities. Potential investors must apply and then wait out a “cooling down phase” of 30 days before they can view any deals and begin investing.

Under Rule 506 (b), developers can raise an unlimited amount of money from an unlimited number of accredited investors plus a maximum of 35 non-accredited investors. However, deals including non-accredited investors require massive amounts of paperwork and other legal actions.

 

2. Rule 506 (c ) break down

Rule 506 (c ) is very similar to Rule 506 (b), however only accredited investors can participate. Developers must also perform their due diligence before accepting investors. There is a certain amount of background work to do before individuals can begin investing. The potential investor’s tax returns and financial records must be thoroughly checked before they can begin viewing and investing in deals.

Another key difference in Rule 506 (c ) is that the real estate developers and crowdfunding sites can advertise the deals however they like. From digital to print, these opportunities are readily available and do not require any type of “cooling off phase”. This difference makes it easier for investors to find opportunities.

 

3. Regulation A – Breakdown

Similar to 506 (b), under Regulation A, both non-accredited and accredited investors can participate. And, similar to 506 (c), developers can advertise however they like: the internet, print, broadcast, etc. However, Regulation A has some major differences as well.

In order to raise money, developers must file complicated registration statements with SEC. This process can take up to 6 months and cost a substantial amount in legal fees. In some deals, the registration statement may also include audited financial statements. Once the project has been fully funded, the developers could also be required to file reports periodically with the SEC.

 

The takeaway

  • Crowdfunding is still relatively young. Therefore, laws still need to be made to govern it.
  • Congress is working on ways to improve crowdfunding laws while regulations currently vary from state to state.
  • It’s a safe bet that in the future, crowdfunded real estate investment will be more commonplace and may even be how the majority of projects get funded.
  • This is an exciting change in the industry, especially for those who are looking to diversify their portfolios.

Why work with DiversyFund?

DiversyFund is a real estate crowdfunding online investment platform connecting accredited investors to borrowers with in-house vetted real estate investments. The platform provides the ease of browsing, investing, and managing investments online, anywhere, anytime. DiversyFund is your gateway to exclusive real estate investing. We simplify the process of crowdfunded real estate investments. Our team of dynamic real estate professionals is committed to providing you with the best investment opportunities. We have combined our extensive knowledge of real estate with our experience in asset management, consulting, investment banking and technology.

We are here to revolutionize the real estate industry by making the investment process simple and accessible for you. Click here to learn about current opportunities and to create your profile. Start investing today.

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