You’ve been investing in real estate for a while and now you want to go bigger, but you’ve run out of your own capital. Or maybe you’re an experienced farmer or real estate operator and you are ready to scale your operation. Putting together a syndication pools “other people’s money” to enable someone to fund a much larger project than they could do with their own capital. Completing a successful syndication requires a knowledge of securities laws, an extensive network of investors, and some upfront capital. Fortunately, there are new ways available to lower those barriers to entry for a novice syndicator. Crowdfunding platforms have evolved that provide entrepreneurs a means to leverage the power of the “crowd” to raise capital using debt or equity. There are a few ways to set yourself up for success when kicking off your own crowdfunding campaign.
1. Have a Track Record
One of the primary methods investors use to make a decision on investing in a private placement offering is to look at how past raises the sponsor and/or the platform have performed. If you haven’t successfully funded smaller deals for a similar asset with your own money or with a few partners, it is unlikely that a crowdfunding company will allow you to raise capital on their platform. A crowdfunding company will likely ask for proof of similar completed projects, as part of the company’s due diligence process.
2. Numbers Matter
Before approaching a crowdfunding platform, you need to have a solid understanding of not only your deal’s financial projections, but how you will be making a return to investors in your offering. Many deals are very similar in their execution, but some are more unique when it comes to cash flows. For one deal, an equity offering might make more sense, while another would be more suited for a debt offering. Your numbers should support a realistic strategy with a timely exit for investors. The crowdfunding company may be able to offer you some advice on how to best structure your offering to make it more appealing to investors.
3. Know the Rules
Crowdfunding is regulated by a dynamic and complex set of laws and rules involving the Securities Exchange Commission (SEC), the Financial Industry Regulatory Authority (FINRA), various states’ securities commissions, and the Internal Revenue Service. The crowdfunding company can help you sort out issues, such as who can invest and how much, how the offering can be promoted to investors, and what documents are required for compliance. For example, some projects can only be invested in by accredited investors, while others are focused to mass appeal to “retail” investors. The complexity of your project, the total amount you need to raise, and the crowdfunding company’s own policies will determine the particular offering type. It is always a good idea to consult a securities attorney before launching your capital raise.
4. It Takes a Network
Though most crowdfunding platforms bring their own pool of qualified investors, marketing your offering to your friends, family, and network (keeping within the established SEC rules, which your crowdfunding platform can help you with), is helpful to getting it funded as rapidly as possible. It will also be helpful for your company to build a social media following prior to the campaign launch to help amplify the offering.
5. Keep Investors Informed
One of the appeals of crowdfunding is transparency. If you intend to sponsor a platform offering, be prepared to provide regular updates to investors on the status of your deal. Most crowdfunding platforms will allow interested investors to see how much of an offering is already funded. Investors prefer not to have their money sitting idle, especially if they don’t have an idea of how long it could take to completely fund the deal. Once your deal is funded and operating, you need to be responsive to the platform’s requests for financial and tax documents. A well informed investor is probably a return investor, who will bring additional capital to your future offerings.