It used to be that owning part of a small business or development project was only for well-heeled investors. But thanks to a recent legal change, it’s easier for people with more average incomes to own part of a neighbor’s plan to turn blighted property into the next coffee shop, brewery, or restaurant.
On October 30th, the Securities and Exchange Commission changed the rules on equity crowdfunding, which is a way for small businesses to raise cash in exchange for offering individuals minority ownership opportunities. It used to be that you had to have a net worth of at least $1 million (not including your house) to participate in an equity crowdfunding campaign, but that’s no longer the case.
As a result, there are now fewer barriers to investing in local and small businesses in Virginia, Maryland, and DC.
Here’s how equity crowdfunding works
Most of us are familiar with websites that focus on donation crowdfunding, such as Kickstarter, Indiegogo, or GoFundMe. Multiple individuals donate to a specific project in exchange for non-monetary rewards.
Prior to the rule change, financing development projects often meant needing to rely on bank loans, real estate investment trusts, and other institutional funds like private equity or venture capital.
Now, using equity fundraising, entrepreneurs can ask anyone to invest in their idea or startup business opportunity.
In other words, if you have an idea for a project to turn a vacant or blighted property into a new neighborhood hangout, or you want to support someone who does it’s now a lot easier.
For example, do you know a craft brewing operation looking to expand into a new facility and needs to raise cash? Before, the expanding brewery would need to self-finance, secure a bank loan, or ask a high net-worth individual to invest. Now, the brewery can use a crowdfunding platform to raise the money it needs to fund its expansion while issuing securities to eligible family, friends, and others who want to own a small piece in a local brewery.
Equity fundraising is changing DC
DC is home to the country’s first real estate project that utilized equity crowdfunding. 1351 H St NE was a vacant building in 2012 when WestMill Capital used Fundrise, a DC-based real estate equity crowdfunding platform, to raise money for the building’s renovation (WestMill got special permission from the SEC for this project.) Today, 1351 H St NE is home to Maketto and Westmill Capital is returning cash to the project’s investors.
To date, 15 projects in the DC area have used Fundrise. These projects range from commercial opportunities such as 1351 H St NE to residential developments all across the district. With the new rule change, it is reasonable to assume development projects utilizing equity crowdfunding will increase in number.
Equity crowdfunding increases an individual’s ability to be financially involved in the development of their neighborhood. This democratization of real estate development financing has the potential to increase citizen engagement and social cohesion that creates a more empowered neighborhood. Anyone who has yet to amass a net worth of $1 million (particularly millennials) are now eligible to financially contribute and own a local business without transferring funds through a middleman or institutional investor.
Equity crowdfunding will not completely replace traditional forms of business financing. But it does offer more options for local businesses or promising ideas to access much needed cash for building better neighborhoods.