Crowdfunding is a new concept, but could it be used to fund future construction projects? Holly Squire looks into it.
With banks apparently still hesitant to go overboard on funding, the idea of getting a large number of people to contribute smaller amounts of money towards a still impressive total has really taken off.
Crowdfunding, as the process is known, is all about eliminating the middleman and allowing small businesses to obtain the funding they require without banks taking a cut of their margins in fees. These ventures frequently offer the potential for much higher returns to savers. In the United Kingdom alone, equity crowdfunding raised £28 million in 2013.
Until recently, financing a business, project, or venture entailed asking a few people for large sums of money; however, crowdfunding flips this concept by utilising the internet to communicate with thousands – if not millions – of potential funders. It is essentially a method of raising funds by asking a large number of people for small sums of money.
The actual process varies and includes reward-based, equity and debt, donation-based for a non-profit, peer-to-peer fundraising, and individual charity.
Is crowd funding, however, a viable way to fund a construction project?
Real estate crowdfunding is becoming increasingly popular in the United States, with a plethora of websites solely dedicated to crowd funding property.
Fundrise has helped developers close investments for more than a dozen projects totaling more than $10 million, with funds currently being raised for four projects in Austin, Texas, San Francisco, Philadelphia, and Brooklyn. When those projects are completed, the total amount raised through Fundrise could exceed $12 million.
Civic crowdfunding, in which local communities band together to address local issues, is also becoming more popular, particularly in the case of potholes. Civic crowdfunding has taken place on a large scale in Rotterdam, with residents raising funds to help rebuild a bridge that connects the city’s two halves. A pre-war thriving core of Rotterdam had been cut off from the rest of the city by modern development, and officials estimated that a connecting bridge would take 30 years to build. As a result, a group of young architects decided to crowdfund it.
The first 18 metres of the wooden Luchtsingel bridge connects Rotterdam’s two downtown halves after more than 1,300 planks, each one stamped with the sponsor’s name.
Back on British soil, Kevin McCloud’s sustainable housing developer Hab Housing, founded in 2007, has successfully raised just under £2 million on the equity crowdfunding platform Crowdcube.
It overfunded by 90% after extending its pitch after meeting its original £1m target in 46 days, making it the largest amount ever raised through an equity crowdfunding platform.
Hab Housing has a total of 642 shareholders, with investments ranging from £100 to £150,000.
“We are pleased that so many people have joined Hab’s merry band of shareholders,” says McCloud, the company’s founder. “From the beginning, Hab has been fuelled by passion, commitment, and vision, and while it has at times felt lonely, we now feel vindicated and invigorated by the people who have thrown their encouragement and financial support behind us.”
Those who invest in Hab Housing are eligible for the Enterprise Investment Scheme (EIS), which provides income tax relief of up to 30% on the amount invested as well as no capital gains tax on disposal.
In addition to now owning a combined 26.31 percent of the equity in its business, Hab Housing intends to pay a 5% dividend to shareholders by the end of 2016.
“We’re thrilled that an innovative company like Hab Housing turned to Crowdcube to help it capitalise on the new market opportunity it identified,” says Crowdcube co-founder Luke Lang. “Britain is full of people with great ideas, and crowdfunding is helping to transform equity finance by providing a new way for budding businesses to attract investment.”
Crowdfunding is not without issues in a market where many investors operate behind closed doors and each site has its own set of rules. Crowdcube verifies all investors’ identities and conducts anti-money laundering checks, but how well regulated is the rest of the crowdfunding market?
Salvador Briggman, who runs Crowdcrux.com, Kickstarterforum.org, and Crowdfundingpr.org and is based in New York, believes it depends on the country and type of crowdfunding.
“Rewards-based crowdfunding is not heavily regulated across the board, primarily because there is no exchange of securities, as there is in equity crowdfunding.”
“With the exception of a personal lawsuit between backers and creators, platforms do not generally regulate whether or not creators deliver on their promises to produce rewards.”
“Equity crowdfunding for everyday Americans was recently legalised in the United States, but the specific regulations and rules are still being drafted and have not yet been put into effect, but they appear to be fairly strict at first glance.”
In the United Kingdom, the Financial Conduct Authority (FCA) has issued a set of regulations in response to a 2013 consultation paper, requiring crowdfunding platforms to provide “clear information” on the risks associated with lending beginning on April 1.
Loan-based platforms will need to implement plans that allow repayments to continue even if systems fail. According to the FCA’s proposals, “inexperienced” investors will also be required to confirm that they will not invest more than 10% of their portfolio in unlisted companies.
“It is critical that equity crowdfunding is more accessible to everyday investors, and the FCA’s confirmed equity crowdfunding policy achieves this,” says Lang. “The United Kingdom leads the world in equity crowdfunding, and these changes will help build market confidence, ensuring that the crowd stays in crowdfunding and the industry continues to thrive.”