Questions

Are The Deals Safe And Potentially Lucrative?

It’s possible to get involved in investments that are either lucrative or produce a solid rate of return on a cash flow basis – and they don’t have to be excessively risky. Each investor can select the type of investments that they like based on the type of risk profile that they prefer. This helps ensure that they select investments which meet their needs. That being said, deal making and selection really has nothing to do with CrowdFunding, per se. Where CrowdFunding comes in is for the matchmaking process of exposing prospective investors to opportunities.

CrowdFunding is not magic. CrowdFunding is really not much more than a mechanism for a Promoter or issuer to find people who are interested in his or her opportunity, and it’s a mechanism for investors to find opportunities that they might not otherwise be able to access. Private Placement investing can be a very smart way for people to work together and pool money. CrowdFunding, on the other hand, is a very smart way for people to find one another, which is exactly what the Internet is so great at doing.

Is CrowdFunding Different From Regular Private Placement Deals?

Other than CrowdFunding being a mechanism for helping investors to more easily find deals, there’s not much else different about it compared to the traditional world of Private Placements. CrowdFunding activity is still controlled by a body of Securities laws – though some of these laws are new and have not yet been tested in the courts.

Like any Private Placement transaction, there still are three different documents that are required for investors to participate in an opportunity. There’s a Private Placement Memorandum, which is the disclosure document that advises on all that can go wrong with the investment along with other material information such as where the money is going to come from, where it’s going to go, backgrounds of the principals, and so forth. Secondly, there’s an Operating Agreement, which defines the relationship between the Promoter and the investors. Finally, there’s a Subscription Agreement, which recaps the material from both of the other two documents in a form of a contract or agreement that an investor signs and submits with their cash investment.

Why Should I Participate In CrowdFunding?

All investments in some way are based on many people pooling their resources together for a common outcome. The whole stock market is really based on the concept of collective investing, where we put our resources together for a common purpose. Most businesses that end up on the stock market start as small enterprises funded by friends, family, angel investors and others who put up capital in exchange for a percentage return in the opportunity.

Real estate works similarly, except the goal is not a big exit such as “going public”, but rather to share profits from appreciation and cash flow. Real Estate transactions operate where there are pools of investors who share profits under the direction of a manager who should be experienced in the craft of making these assets better and more productive.

The Real Estate Private Placement business has been around for at least 40 years and many of the major issues have been flushed out over that time. The IRS didn’t like a lot of the tax treatment that occurred in the 1980’s, so in 1986, the Tax Reform Act of 1986 was enacted to put a stop to most of the tax-sheltered components of the Private Placement business. But that didn’t stop Private Placements because this alternative class serves many critical functions in our complex economy, including providing capital to innovative companies. But Private Placements are also a smart way for investors to participate in deals, especially in the real estate and venture communities.

Private Placements are a smart way for companies to get cash and a smart way for investors to get stocks at what could be a very substantial discount from the future value. If the investment becomes successful, the investor who comes in early will have made a lot. Of course, there’s a lot of risk when someone comes in early because there’s no precise way to predict what exactly will happen and whether the company will be successful. But everybody also knows, and certainly those in the venture capital world know, that the money is not made in the stock market. The money is made at the Private Placement level. It’s at the Private Placement level where you can buy stock for a penny or a nickel or a dime before it becomes stock market ready, at which time it might go for $5 a share or more. This level is also where many of the best real estate deals are organized.

What Are The Key Definitions?

Before we jump into the meat of this material, you will notice that the same words keep coming up so let’s define them:

Promoter: The words Promoter, Sponsor, Syndicator, Dealmaker, Issuer and Fund Manager are frequently used interchangeably, but this generally refers to the person or team of people who put the deal together and has responsibility for making the investment work – in exchange for fees and usually a piece of the deal.

Funding Platform: Sometimes referred to as a Portal, the SEC is quick to point out the correct term is “Funding Platform”. Portal is a term of art that is reserved for a form of CrowdFunding for non-accredited investors that does not yet exist, so let’s use the proper term – Funding Platform.

Many Promoters use a Funding Platform to facilitate the transaction where the investor joins a Private Placement investment. The Funding Platform is nothing more than the automated platform that manages the investment and subscription process. The Funding Platform will probably contain information about the transaction, it will house the documents, and it will also be the cash register that facilitates signing of the documents as well as handling the transfer of the money so that the investor can invest in the transaction when he or she is ready. By the way, the emerging business of managing financial transactions is known as Financial Technology (FinTech).

Accredited Investor: Accredited Investors must meet one of the following 3 tests: a) if single, they have income in excess of $200,000, b) if married, they have income in excess of $300,000, c) they have a net worth in excess of $1 million exclusive of their primary residence. And it is also a new requirement to participate in crowd funded offerings that their status as an accredited investor be verified by a third party.

Non-Accredited Investor: Anyone who is not an Accredited Investor.

Private Placement: There is a lot of confusion over this and not a lot of industry agreement – at least not yet. Historically, Private Placement offerings have always been private – and they are the opposite of Public Placement which require SEC registration. Public Placements are generally for companies listed on the stock market.

Prospectus: A Prospectus generally has three parts to it. First, the Private Placement is the disclosure document that explains how the units will be offered for sale and everything that could go wrong with the offering. It also provides information about where the funds are coming from, how they’ll be spent, biographical information on the sponsor, basic information about the purpose and goal of the investment, the term of the investment, and how investors will be compensated for the use of their capital. The next part of the Prospectus is the Operating Agreement which defines the relationship between the Promoter and his or her investor(s). And finally the

Subscription Agreement which is the contract summarizing the two previous documents and allowing for the investor to sign and then remit their cash contribution to be invested.

SEC: The SEC (Securities & Exchange Commission) is the department of the Federal government that oversees securities transactions in the United States. Most people usually think of securities transactions as occurring on the New York Stock Exchange – and that is partly correct. But the universe is much wider and it applies even to private securities transactions.

Securities Transaction: A Securities Transaction is any sale of company stock including that of a closely held Limited Liability Company (LLC). It also includes many other investment vehicles where a passive investor puts capital into the custody of an active investor who is responsible for making a profit with those dollars. The definition is very broad and has been the subject of many court cases. And although this definition is very well accepted, many Promoters try hard to find ways around the rules.

What Are The Mechanics Of A CrowdFunding Campaign?

CrowdFunding is surprisingly simple. Once you understand the concept, you’ll understand that it’s very similar to the traditional mechanism of investing and in fact, it’s generally even easier. First it’s important to understand that a CrowdFunding investment is no different fundamentally from any other kind of investment except that the capital probably comes from more people in potentially smaller increments – but not necessarily.

Historically, Private Placement investments have been reserved for people who are rather wellheeled and can withstand the potential loss if the deal is not a success. Further, it was common wisdom when these investments were created that more well-heeled people would also be more sophisticated people who could better understand how these investments work. Accredited investors were also thought to have the wherewithal to hire accountants and attorneys to review these investments for them and to help them make decisions about how to best move forward. Of course, being well-heeled and being sophisticated and capable of making good decisions are not directly correlated as we all know.

The sponsor who prepares a Private Placement for a CrowdFunding investment prepares it exactly the same as any other Private Placement except that new Private Placements are based on the CrowdFunding rules which were adopted by the US congress in April 2012 and under regulations promulgated by the Securities and Exchange Commission in September of 2013. These offerings are exempt from SEC registration under rules known as Regulation D, 506(c). A reader might not really notice any differences between 506(c) (i.e. CrowdFunding) and the old rules which are now known as 506(b) (i.e. before CrowdFunding). But what predominately is different is the ability to generally solicit investors. In other words, Promoters can now reach out to the Crowd. And members of the Crowd can invest – as long as they are accredited which mean having income in excess of $200,000 (single), or $300,000 (married), or a net worth in excess of $1 million exclusive of their primary residence. Historically, the investor would “self-certify” that he or she is accredited to invest, but it is a new requirement that that the status as an accredited investor be verified by a third party.

For the last 80 years, Private Placements have been private and that means that a Promoter (sometimes called an issuer, sponsor, or deal maker) could only share the opportunity with people who were close to him or her and people with whom they had a personal relationship. But the new CrowdFunding rules allow accredited investors to participate whether you know the Promoter or not. The new rules allow accredited investors to subscribe to opportunities which they learn about through a public means. That can be an advertisement on the radio, on television, or an e-mail over the internet. As long as one is accredited, they are now eligible to participate in the investment opportunities of sponsors, whether they know them or not.

Unfortunately, at this moment, most opportunities are not available to non-accredited investors, but don’t despair because Congress and the SEC will probably address this soon. 97% of Americans fall into the non-accredited bucket and this is too many too ignore, especially when those 97% are asking “how they can ever earn any big money if they are kept out of the most lucrative deals that could help make them wealthy”.

Now back to mechanics. In the “old days” (i.e. 2013 and prior), investors would receive a prospectus from the Promoter either physically or sometimes electronically. Nothing changes under the CrowdFunding rules. The prospectus still has three parts to it (we’ll describe them later) and these documents still control the deal. And the relationship which the investor has with the Promoter is also still the same throughout the transaction.

All that might be different from the old days is that back then, an investor might have met the Promoter through a referral from a friend, whereas now, they might meet via some other means such as an advertisement. CrowdFunding allows investors to find Promoters on the Internet and subscribe directly into their transactions. The beauty of finding a promoter on the Internet is that investors will find the people doing the exact types of deals they are interested in – in exactly the right geographies.

For example, investors might want to find Promoters who work in certain asset classes, or those who offer specific yields, or those who have specific investment amounts, or even those located in specific geographies.

Investors may also notice a new level of automation for storing, reviewing and signing their documents as Funding Platform technology improves. Though the world is moving in the direction of automation, each investor is welcome to talk to the Promoter and also welcome to interact with them to the extent that both of them agree is right, but this is not a requirement as it was in the past.

By using the Internet to grease the wheel of investment opportunities known as “deal flow”, investors can now come into many transactions that would have previously been unknown to them -- in a whole new way with a whole universe of choices they would not have known about in the past.

What’s In All Of The Documentation?

The offering materials that an investor will be provided on the Funding Platform to evaluate regarding the investment in any particular deal (from ours and hopefully from any other platform they work with as well), should be relatively standard between transactions -- although, certainly not identical. There’s no standard deal, and there are no standard set of deal terms that every investor can assume is uniform between investment Promoters. Each Promoter decides for him or herself how much profit sharing to provide the investors and what rate of return to provide the investors.

And, all of the very small details that are so very important -- such as voting rights and terms and conditions that govern the investment -- can vary wildly between deals. So it’s critically important that investors review the documentation and materials carefully for any investment that they make. And if they need to better understand how they’re impacted by all of the different parts of these agreements, it would be wise to hire an attorney or an accountant for accounting, tax and other advice. Occasionally, a financial advisor can provide this type of service as well.

Investors will notice as they review these materials that they are terribly complex. Some of the language is boilerplate, but not all of it. And it’s important to identify the parts that will significantly impact them. And if an investor decides to move forward after reviewing these materials, please know that this is their decision. And also, at least for the time being under Title II of the Jobs Act, only accredited investors can make the decision to move forward to participate in any given deal because an accredited investor is expected to have the resources to get advice if necessary. What an investor will see in the material is the prospectus which will usually have three parts.

First is a set of disclosures and a description of the securities being sold. That is typically called the Private Placement Memorandum -- or now, the Offering Memorandum. It’s an extensive document that advises prospective investors about all the aspects of the offering: how many shares are being sold, the timing of those shares and who is being paid for what. Much of this material is governed by guidelines provided by the Securities and Exchange Commission of the Federal Government. There are also disclosures about all the different possibilities for things that could go wrong in a wide variety of areas. For example, what could go wrong in the investment environment; what could go wrong from a tax point of view; what could go wrong from a liability point of view -- and all of the other different ways that someone could be harmed as an investor. Each investor is expected to acknowledge that he or she understands the disclosures and the issues that could go wrong. No one is protecting them. This is an environment where they will have to protect themselves.

The next part of the document, which receives a lot less fanfare, is called the Operating Agreement. Frequently between two parties, an Operating Agreement is sometimes written on the back of a napkin. Two friends might conceptualize the business and say “we’ll go 50/50”, shake hands, and then walk away. But in an offering such as the types that are being offered on our Funding Platform, there are passive investors who have little to no input in the management of the transaction. And there is an active investor, who serves as the manager. Because there’s such a tremendous imbalance of power, the Operating Agreement has to be extremely detailed and is frequently much more complex. The Operating Agreement details the relationship between the various parties who are involved with the transaction. Generally, that is the Promoter (i.e. the manager of the opportunity) and the investor. Some Operating Agreements are very simple and they have just two classes of shares - typically one class for the investors and one for the Promoter. Some have multiple classes of shares, offering many different options, both to the investors and to the Promoter. It’s important that you understand the many options that are put out for you to select from and that you select carefully the best fit for you.

And finally, the Subscription Agreement is the agreement the Investor signs acknowledging that he or she has reviewed all of the terms of the Offering Memorandum, that that he or she accepts and agrees and adopts the Operating Agreement, and that he or she is in a position to make such an investment. Once the investor has signed the Subscription Agreement, the investor can mail (or wire) the funds in order to become a party to the transaction.

These documents are deliberately complex because there’s so much ground to cover. And it’s important that the investor understands what they’re signing. In fact, as a Promoter, I regularly refer to our documents to know whether or not I can move forward with a certain transaction in a certain way. Everything that we’ve agreed to with our investors is written down in advance, and we all agree on the terms before moving forward. Working in this way leaves very little room for misunderstanding. I review my fund’s documents regularly as the Manager, and I recommend that each investor review those documents carefully as well.

What About The Web Portal?

The concept of a Web Portal is not much more than the automation behind the investment opportunity. It is the virtual system that serves as the “e-commerce” platform and cash register that processes the securities transactions over the Internet. Because it’s highly automated, it serves to clear up and bypass many problems that might otherwise occur. For example, each investor has a place where he or she can store investment documents. Investors can also access and read these materials online whenever they want. This means they can go back and review them online in the future without having to store them or lose them somewhere in their own computer or in their own world. Investors can also make their actual investment online via a Web Portal.

The concept of a Web Portal is not much more than the automation behind the investment opportunity. It is the virtual system that serves as the “e-commerce” platform and cash register that processes the securities transactions over the Internet. Because it’s highly automated, it serves to clear up and bypass many problems that might otherwise occur. For example, each investor has a place where he or she can store investment documents. Investors can also access and read these materials online whenever they want. This means they can go back and review them online in the future without having to store them or lose them somewhere in their own computer or in their own world. Investors can also make their actual investment online via a Web Portal.

The concept of a Web Portal is not much more than the automation behind the investment opportunity. It is the virtual system that serves as the “e-commerce” platform and cash register that processes the securities transactions over the Internet. Because it’s highly automated, it serves to clear up and bypass many problems that might otherwise occur. For example, each investor has a place where he or she can store investment documents. Investors can also access and read these materials online whenever they want. This means they can go back and review them online in the future without having to store them or lose them somewhere in their own computer or in their own world. Investors can also make their actual investment online via a Web Portal.

We want each and every one of our investors to have a positive experience, both from a customer service point of view, investment management point of view, and of course from an investment success point of view. We want everyone to make a return on their capital and get their capital back, which is often the primary goal (but not a guarantee) of any investment that any investor would have.

So with all of these items in mind, it’s our objective to bring CrowdFunding to a large audience of people, to bring opportunities to a large audience of people that they wouldn’t otherwise be able to access, and to bring investors to Promoters who have done a good job in their own circles, but who are looking to make offerings to accredited investors and other sophisticated people based on common interests, common goals, and trust that each will do what the other says he or she will do.

What Is A CrowdFunding Portal?

First, the SEC will be quick to point out the correct term is “Funding Platform”. Portal is a term of art that is reserved for a form of CrowdFunding for non-accredited investors that does not yet exist, so let’s use the proper term – Funding Platform.

First, the SEC will be quick to point out the correct term is “Funding Platform”. Portal is a term of art that is reserved for a form of CrowdFunding for non-accredited investors that does not yet exist, so let’s use the proper term – Funding Platform.

Understanding that this is so very similar to the way that it’s always been done, investors should take some comfort in knowing that the electronics do a better job of managing the process than people probably ever could. For example, there may be time stamps proving that an investor was provided with certain investment documentation, and this helps protect both the Promoter and the investor. By providing a layer of transparency and knowledge that everybody received what they were supposed to receive, all of the parties can be comfortable with the process.

Promoters want to deal with sophisticated and educated investors because those people tend to be better investors. A Funding Platform that makes sure everyone has everything that they’re supposed to have is good for all parties. The amount of time that the investor spends reviewing the documents is also sometimes recorded. Other information the investor chooses to add to the file can also be recorded permanently. This way, in the event there are problems in the future with the transaction, if there are judicial issues that come up or if there are regulatory issues that come up, there’ll be a good trail of information so that everybody can be on the same page about what happened with the transaction.

The CrowdFunding Funding Platform really does a good job of making sure that everything is handled above board, transparently, and that all investors are treated fairly and equally in the transaction so that everyone is given the same information at all times. Essentially, this makes it much more reasonable for all investors to make a good decision that works for them.

How Do The Taxes Work in a CrowdFunded Deal?

The taxes for Private Placement investments are generally handled in a very specific way. Assuming that the investment is an LLC, organized and operated in the United States, the investor should expect to receive a tax form called a K-1 from the investment manager. The K-1 recaps all of the different activities that are taxable to the shareholder (which in an LLC is actually called an Affiliate because LLCs are technically partnerships). This includes a statement of the particular number of dollars attributable to that investor.

The K-1 is a relatively complicated tax form that has many different lines for documenting the character of each item of income and expense. Accountants have special training in the compliance with the Internal Revenue Code, which is where the tax law originates. The investor will see that some of their income could be called ordinary or capital gains. They could also have dividend income, and the items are all carefully broken out separately, so that they can be placed correctly on the investor’s personal income tax return or the tax return of the entity that owns the investments.

Investors are cautioned to speak with an attorney or accountant about how to hold title to a specific investment, because there are states, such as California, which tax the investor differently if they are an individual person, as opposed to another LLC. So in other words, if an LLC invests in an LLC, the taxes in a state like California are much more significant than if the individual invests in the LLC directly. So investor beware. Talk to your tax professional.

Investors are cautioned to speak with an attorney or accountant about how to hold title to a specific investment, because there are states, such as California, which tax the investor differently if they are an individual person, as opposed to another LLC. So in other words, if an LLC invests in an LLC, the taxes in a state like California are much more significant than if the individual invests in the LLC directly. So investor beware. Talk to your tax professional.

It’s possible that even though an investor didn’t get a cash distribution from the company, he or she could still have income attributed to them from the investment. It’s very important when making an investment in a company to ask how the company will deal with taxable income and whether or not investors will receive at least enough distribution on any profits to pay the taxes.

Our fund always pays out at least 45% of the annual profit that was made by the investment, so that our investors will have at least enough money to pay for the taxes attributable to their allocation of profit in the transaction. We might pay out more or we might retain some of that additional profit to reinvest and make even more money – but the investors get at least enough to pay the government and do not have to deal with a surprise and have to pay taxes out of pocket.

It’s very important that investors get the K-1s from their Promoter before filing their tax return because if they don’t file it with a return it could cause them to have to amend their return, and this could be an expensive proposition. It’s also important for an investor to ask the Promoter when they will deliver the K-1. We always deliver the K-1 by April 1st, so individual investors will have plenty of time to incorporate the K-1s into their personal tax returns.

It’s very important that investors get the K-1s from their Promoter before filing their tax return because if they don’t file it with a return it could cause them to have to amend their return, and this could be an expensive proposition. It’s also important for an investor to ask the Promoter when they will deliver the K-1. We always deliver the K-1 by April 1st, so individual investors will have plenty of time to incorporate the K-1s into their personal tax returns.

We deliver the K-1 electronically by e-mail. Some Promoters will deliver it by paper, FedEx, or by U.S. mail. In the future, K-1s might be posted directly into the Funding Platform where the investment was made. There are a variety of ways to do it. None of it is mandated by the IRS, but know that we do file a tax return and the IRS (along with some states) knows that you’ve received a K-1 from us, which is the reason that you must include it in your tax return and account for it properly. Otherwise, expect a letter summoning you for a visit.

The other consideration of K-1s from LLCs is that Private Placement investments are considered passive for almost all investors. Beginning with the Tax Reform Act of 1986, passive losses can only offset passive gains and active income has to offset active losses. In other words, an investment in our opportunity cannot offset an investor’s salary and other types of expenses.

Tax planning tip: talk with your tax professional if you have lots of passive gains because you might want to look for opportunities to have lots of passive losses (to offset the gains). Or if you have lots of passive losses you might be looking for something that has lots of passive gains. There’s a strategy behind working those numbers and your accountant would be able to guide you in that area.

How much contact will I have with the Funding Platform Operator?

We believe that investors should create a very comfortable relationship with the Promoter of each deal in which they invest. It’s critically important for each investor to feel entirely comfortable with the person chosen to manage the investments in which they are involved. Personally, whenever I take in a new investor, it’s my preference to interview them and allow them to interview me. I recognize that I’m not for everyone and I also recognize that not everyone is a match for us either, so we spend a lot of time on the front-end talking to investors. We talk about their goals, their experience, their level of sophistication (i.e. making sure that they understand the documents), personal matters such as their financial plan, their financial situation, their risk tolerance and what factors matter most to them so we can understand their investment profile.

We spend a lot of time on the front end with each of our investors - or prospective investors - to make sure that their personal goals and objectives are consistent with the direction, the timing, and the objectives of our fund. We recommend that each prospective investor have a similar discussion with each Promoter.

But not every affiliate wants to speak with every investor, and not every investor wants to have a conversation with the deal promoter. This is a personal decision for all parties, though we recommend having some contact so that the best decision can be made for all parties.

As a Funding Platform, we advise, but cannot direct, each of our affiliates to have a similar discussion with their prospective investors. But remember, every Funding Platform operator is independent.

Every Funding Platform operator makes his/her own decisions. And every Funding Platform operator has strengths and weaknesses in various aspects of the investment cycle. Some might be better operators. And some might be better with the intake of capital. And it’s very important that the investor take a proactive and assertive role in making sure that any investment is suitable for his or her needs.

Only once the investor has been honest with the Promoter, and the Promoter has laid out the objectives for the investment opportunity, can the investor decide that they are on the right track and make the right decision for him or herself. It might be appropriate to bring a financial advisor or a CPA into the mix so that person can weigh-in and provide advice. But ultimately, the decision about how much to invest, and how fast to move forward with any single Promoter, is a decision that must be made by the individual prospective investor -- and that person alone.

What About Investors? Are They Screened before they can Invest?

By the rules of the JOBS Act of 2012, only certain investors are presently allowed to make investments into CrowdFunding activities and we follow those rules carefully. At the current time, under Title II of the Act, only accredited investors may actually invest capital. These rules are strict and they’re clearly defined in the law, so our Funding Platform is not making subjective decisions about who can participate.

That being said, anyone who would like to peruse the offerings on our site may do so. They must self-identify at the beginning of the registration process whether they are accredited or non-accredited. All registered members will be able to see everything that’s on the site, but only accredited investors will be able to invest in offerings designed for accredited investors. In the future, we hope to have offerings available to both accredited and non-accredited investors, as the law allows.

That being said, anyone who would like to peruse the offerings on our site may do so. They must self-identify at the beginning of the registration process whether they are accredited or non-accredited. All registered members will be able to see everything that’s on the site, but only accredited investors will be able to invest in offerings designed for accredited investors. In the future, we hope to have offerings available to both accredited and non-accredited investors, as the law allows.

It is anticipated that the Congress and the Securities & Exchange Commission (SEC) will address the rules provided under Title III of the JOBS Act, which allow non-accredited investors to participate in CrowdFunding offerings. At the current time, however, those investors are not allowed to participate. With that said, our Funding Platform is looking forward to the day when we can accommodate investment opportunities targeted at non-accredited investors as well. For that reason, we are registering all investors on our site so that once non-accredited investors are allowed to invest, those people who are previously registered on our site will gain access to a whole new world of investment opportunities which will open up to them.

The verification of the investor’s status is done by the Broker/Dealer – our agent who is trained and federally licensed to comply with the securities rules that govern our transactions. In addition to verification of an investor’s accredited status which requires third party verification (as required by law), all of the capital that runs through the Funding Platform is subject to approval by our broker/dealer. A broker/dealer is a FINRA member entity that’s licensed to make evaluations on various capital transactions. They will be evaluating the capital that comes into the Funding Platform as well as every investor for anti-money laundering (AML) requirements. Plus, they will be the body within our system that enforces the “know your customer” (KYC) rules so that the Funding Platform can provide excellent service and quality to all of its members.

All investors must meet the standards outlined by the broker/dealer as well as by federal law so that we’re in compliance with all aspects required of us with the capital raising business. By adhering to these standards, and by being strict about these standards, we protect all investors from basic problems as well as insulating ourselves from problems that individual investors might cause each other. By looking out for these two interests, we protect everyone from potential issues in the future.

How Do I Perform Due Diligence On A Promoter?

Due diligence is a complicated subject. Everybody has their own formula for how they perform due diligence. Historically, because the investors usually knew the promoter, they might rely on their relationship. In the CrowdFunding environment, though, where you might not have the personal relationship, you might want to do more investigation on the Promoter behind the opportunity or on the investment in particular -- especially if it’s a single property type of project. Professional investors might actually go to the office of the Promoter, review the books and records, go to the properties, travel, make inspections, hire a third party, review appraisals, and take other actions which individual investors might find excessive or onerous.

Of course, the amount of due diligence that you perform has a lot to do with how much money you invest, how significant that amount of money is to you personally, and what your capabilities are for doing due diligence and understanding the outcome. For example, the more involved in the real estate business you are, the better you’ll understand the issues just from reading the prospectus. If you’re less involved in real estate, you probably will have to rely on third partiesor some other information gathering method in order to complete your process. The process isentirely personal and you might need to lean on your attorney or your accountant as part of this process.

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