If you have not heard, the JOBS act was signed into law in April by President Obama. JOBS stands for “Jumpstart Our Business Startups.” Part of this legislation includes a provision for crowdfunding which is intended to allow small startup companies to raise much needed seed money to grow without having to obtain that capital from accredited investors. This is exciting news for the small investor who can soon get in on ground floor opportunities that would otherwise be off limits due to the red tape required for such offerings.
While the Securities and Exchange Commission is highly skeptical about the possibility of fraud, they are still mandated to finalize the exact rules in early 2013. Crowdfunding, in theory, would work with you as the investor buying shares of stock from a company that is listed on an SEC approved investment portal. Such portals exist today (http://www.crowdsourcing.org/directory), however, they are restricted to selling to only accredited investors. The JOBS act now opens true equity funding to the masses. So, how do you profit in these deals and mitigate your risks at the same time? Three rules to follow are: 1) invest in who you know, 2) invest in what you can touch, and 3) be realistic about risks/returns.
1) Invest in who you know: Invest only in companies to which you are referred by a trusted source. Having been a part of an internet startup back in 1999, the investors who participated in our stock offering were introduced to us by my business partner’s brother, who was also our investment banker. All parties involved trusted each other. One suggestion is to utilize Linked-In to cross check the founders’ names to see if you can make a connection back to yourself.
2) Invest in what you can touch: If you can drive to a location, whether it’s a production facility, a commercial real estate shopping center, a large tract of land, or an office with real people, and put your hands on your potential investment, the chances are greater your investment will be around longer than just a company with a website.
3) Be realistic about risks vs. returns: If you are reading a prospectus online which purports to provide a 25% return on your money in the first year, and every year after, be prepared to lose all of your money. If it sounds too good to be true, it could be another Madoff scheme. It is up to you to determine how much risk you are willing to take, so be prepared to analyze the upside along with the downside along with understanding the business model and how returns are generated.
In 2011 an estimated 452 crowdfunding platforms worldwide (but mostly in Europe and North America) raised nearly $1.5 billion, according to a May report from Crowdsourcing.org. That study estimates volume will hit $2.8 billion in 2012. This number is projected to grow exponentially once the SEC finalizes the rules. Remember, it is up to you to do your homework, as the Dr. Jekyll side of crowdfunding is very real.
Resort Realty Capital is currently searching for value-add and opportunistic acquisitions in Aspen and 10 other Rocky Mountain markets through our broker partners. If you would like to learn more, please contact us.
Darren Nakos, CCIM
Resort Realty Capital
111 Main Street
Frisco, CO 80443-0630
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