Structuring Investing and New Crowdfunding

[Blake LeVine]

I am part of a local networking group and we will be potentially pooling money to buy and rent out local properties. I was researching Crowdfunding as an easy way to allow us to invest together. I wanted to ask this community what you feel might be the best structure for us to invest together. Also, are we able to ask new members to invest with us? I am trying to figure out what constitutes the need to do something like a Reg D or a Private Placement. I am trying to keep it as simple, cost effective and safe for the group I am in. Also, I found very minimal information on when exactly and how exactly the Crowdfunding might work. If you have any advice in this please let me know. I also understand that even with your suggestions I will make sure to talk a lawyer before actually doing anything. I was surprised that my internet searches could not find a clear or easy answer to this question. Thank you for your help and suggestions.

[Jilliene H.]

Hi Blake,

You're going to need to set up some kind of legal structure if you are pooling money together. The most common in real estate/real estate syndication is a Reg D 506 offering but it is limited to accredited investors and up to 35 "sophisticated" investors, so depending on the net worth and income level of the people you are investing with, that may or may not work. It's typically $10k - $20k in legal fees to get this set up with an operating agreement to guide the investment / what the limited members and what the general member can and cannot do.

Crowdfunding right now is mostly limited to Reg D 506 raises (online) limited to accredited investors although there is another exemption called Reg A that has been used that allows for non-accredited investors. Reg A can be very expensive as there are substantially more filings than a Reg D 506 private placement. For your purposes, I'd rule Reg A out IMO. Yet another exemption exists in some states if you limit it just to investors in that state, so you may want to look for state specific exemptions. Georgia for example has legalized pooling capital together for non-accredited investors.

Title III of the JOBS act has been proposed, but not finalized yet. When it is finalized, you will be able to use crowdfunding to raise money from non-accredited investors, but you will have to use a third party portal or a broker-dealer. There are also limits on how much you can raise (proposed rule is $1MM), the potential for mandated audited financials (if you raise more than $500k) and limitations on how much any one non-accredited investor can invest. None of these rules are finalized yet though, so this is currently illegal.

**I'm not an attorney so don't take this as legal advice, just live and breathe the crowdfunding space.....