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(*Moderator note: These posts were split off from another thread as they deserved a separate thread*).
Take a look at SimpleEquity.co.uk. An FCA approved crowdfunding site for raising equity. There are a number of different deals on the site so you can look at what others have done in the past.
I have no stake in SE. I just think more people should comply with the FCA requirements for fund raising. SE is one of or the only site at this time which allows developers to put up a deal on a no-win, no-fee basis. All the other sites that I know of will want a piece of the deal or a slice of the profit on the bank end. SE charges a success fee based on the amount raised and otherwise leaves you to get on with your project.
If more people raised money legally, the rogues would struggle to attract investors.
I host the London Real Estate Meet on the 2nd Tuesday of every month since 2005. If you have never been before, email me for the 'new visitor' link.
Also happy to chat on the phone. Pay It Forward; my way of giving back through sharing. Click on the link: PropertyFortress.com/Ask-John to book a time. I will call you at the time you selected. Nothing to buy. Just be prepared with your questions so we can use the 20 minutes wisely.
Hi John,It's interesting that you raised the topic.What concerns me about this is that people are raising additional money before completing on previous projects. In other words, the first round of investors have not been repaid, before another project is crowd-funded for. I regard this as high risk.A bank would want to see a project completed before lending again to an un-tested person. That "protection" does not seem to be in place for crowd funding.Someone could, in theory, raise 10 lots of money for 10 separate developments, but some, or all of them fail.I want to see people repaying existing investors first, at least in the beginning, before going for more raises.Unless this protection is in place, it might inadvertently encourage people to scale up too quickly, and we all know what the outcome of that could be. It will be the investors who lose out the most.Also, is it transparent how much of their own money the developer has invested? Does SE allow 100% financing by investors?I hear of millions being raised in minutes.It has hallmarks of the "go go" days of easy money and many people suffered because it was too easy to get your hands on funding.It's high risk in my mind and I expect some fall out.Why does FCA regulation deter rogues? What DD do SE do on prospective projects? Having seen some of their projects, the jury is out for me for now ...Also, you say you have no stake in SE, but you have been involved in promoting their crowdfunding workshops, so what is the relationship there? Are you a paid for speaker?
Vanessa Warwick Landlord and Co-Founder of PropertyTribes.com **If you have got value from Property Tribes, find out how you can support it in remaining a free to use community resource**
I am intrigued how FCA deters rogues, In my opinion it just makes them more sophisticated, admittedly it may reduce the ones that operate at a very basic level but i see plenty of dodgy dealing where being FCA regulated gives some credibility and means people dont do the DD they should because they hold FCA in such high regard.
V, you are right in that banks now want so much from the developer to fund deals that crowdfunding aleviates, I am aware of someone running 3 schemes in the North that are absolute 'dogs',. There's no way they will make money but all the time the developer is drawing a management fee, he doesn't have any money in the deals so really doesn't care, it will be 2 plus years before reality hits the investors.A bank would never have stood for this, they certainly wouldn't have funded the second, let along the third before they saw the first completed.
Stewardson Developments Ltd.
Burson Land Ltd. & Jennings & Gilchreaste Ltd.
Follow me on twitter - @philstewardson
If you are investing in London at present crowdfunding is the only way to do it unless you want to take huge risks. I wouldnt want my money tied up in London developments with 30k homes under construction and thousands of new or redeveloped properties unsold. iTS THE SMALL INVESTORS IN CROWDFUNDING THAT ARE TAKING RISKS THEY DONT UNDERSTAND.
EG last week had an article saying in zone3 & outwards the market was dominated by Help To Buy but is fast switching to Help to Sell.
The point above about selling one scheme before starting another is very important. Such hype surrounds these crowdfunding schemes and how they sell out in hours, people pile in. No lender would allow this they would be wanting to see the results of the last one before funding the next.
Some of the individuals involved in these schemes leave a lot to be desired in my opinion, i am not going to name names because i have been calling out for one to prove his experience for yrs and everytime i ask he goes away and hides. BUYER BEWARE!
I could not find an automatic way to quote your post so I could answer the specific points. I will manually do so. I am hoping the formatting makes it easy to read. Sorry if it does not. And this has turned into a very long response. Crowd funding is a big topic which is pretty new to most people.
"Vanessa Warwick 14 Jul at 13:40What concerns me about this is that people are raising additional money before completing on previous projects. In other words, the first round of investors have not been repaid, before another project is crowd-funded for. I regard this as high risk."
I agree with the core concern that multiple rounds of funding could be manipulated if people fail to conduct their DD.
That said, I think we are talking about slightly different things.Let's use a construction loan from a bank. The bank will want to have their loan in 1st position. Any existing debt secured by the property would be paid off before the construction finance is put in place.
Different phases of a project using different finance for the specific phase is another way to hear it.
In the case of a planning project where the crowd is funding the planning, the terms of the public offering would state what is to happen. In the two situation I am associated with, the investors will be cashed out of their investment when the target property is sold on with planning or when the construction finance is put in place. The later assumes the project is not sold.
In both situations, the legal process (sale with a completion or a construction loan being attached to the property) are the milestones or triggers for the investors to be paid out.
Now, any SPV with multiple shareholders can vote to change direction or other corporate actions. Normal stuff under the Ltd company rules and regulations. Some things are driven by the majority's vote and other things are in place to protect a minority shareholder. The shareholder agreement plus the Companies House rules / regulations cover the topic. Anyone who does not understand is best to speak with a lawyer who specializes in corporate activities (not a conveyancing attorney).
In addition, a person who is really new to investing in companies really needs to consider what they can afford to lose. That way they can minimize their exposure until they can peel back the unknown unknowns. Ignorance of a topic can be overcome through education and practice. The FCA restricts retail customers so they can not invest more than 10% of the liquid investment capital in any one year. THe FCA is treading a line between letting adults making their own decision and the public being ignorant of the risks they are taking. Limiting the exposure and learning while or through investing are the two ways I think people can deal with their lack of experience."Vanessa Warwick 14 Jul at 13:40
"Also, is it transparent how much of their own money the developer has invested? Does SE allow 100% financing by investors?
Yes. Or, it depends. The offer is made using an FCA compliant website. There are specific processes or procedures each offer has to follow. One principal is transparency. The investors have to be given the material facts and the same facts as all other investors. That is more my understanding that a quote from the FCA bible. The FCA approved person for compliance at the platform will judge the offer materials and disclosure before it is made public.
Second, if people who are thinking about investing want to ask questions, they are encouraged to do so. When an answer is provided by the party raising funding, the answer is published so all can see.
Third, if the fund raiser has a stake in the deal, what ever that might mean in the specific deal, it will be clear from the offer documents and the shareholder agreement.
If someone does not like what is being offered, they can ask for changes. The asking questions and seeing what the response is. Everyone gets the same deal in the end except when there are different classes of shares. If there are different classes, that will also be made clear in the offer.
Finally, if an investor does not like the offer, they can pass on it. There will be others coming along. Over time the deals which are funded become a clue to what the crowd is happy to fund."Vanessa Warwick 14 Jul at 13:40
"I hear of millions being raised in minutes.It has hallmarks of the "go go" days of easy money and many people suffered because it was too easy to get your hands on funding.It's high risk in my mind and I expect some fall out."
I think you are talking about East Eight deals. They did have a raise that was fully fiunded in 17 minutes. Over £1M in equity raised.
Peeling back the details a bit ...
The company and the principal investor are well know. There is something to be said for developing a brand and a track record.
Second, the deal did not really fund in 17 minutes from a cold start.
1. There was a waiting list of investors who wanted to participate in the next East Eight offer.
2. The campaign was released in a restricted fashion. The high level information was posted and the campaign was denoted as 'coming soon'. This means the community of possible investors has a heads up that something would be coming along. Investors could legally be contacted to see if they had an interest in the offer. Call it book building. Checking what the demand would be before anyone could pledge any funds. Anyone who was interested was directed back to the SimpleEquity website as that is the FCA approved platform. The individuals who wanted to learn more just had to register their interest.
3. Closer to when the doors would open, likely to be 24 hours or more in advance, the full documentation would be released to the public. Assuming that someone is registered with SimpleEquity, they have been approved to view deals as per the FCA guidelines. Random people can not access everything and then invest. Each person has to be checked and their suitability is tested.
So, up to this point, the deal is not available for pledges, no money is being raised. Those who are honestly interested have registered and they have had ample time to read the documents for the specific offer.
4. When the campaign is made live for pledging, people can enter their pledges if they want to invest. A pledge does not require funds to be transferred. Best that they are transferred early enough to make it work. Just not required for someone to pledge. Only people who have been vetted as per the FCA guidelines can pledge.
5. In the example, 17 minutes passed and the deal was fully funded.
6. Then starts a 14 day cooling off period. That gives investors more time to ponder their decision and to remove some of the emotion.
7. The shareholder agreement is released during of after the 14 day cooling off period. As a draft, without the list of everyone who has pledged. People can raise questions. Questions which might trigger changes to the agreement or not.
8. After about a week, the final version of the shareholder agreement is released. The investors then have about a week to sign-off.
9. At this stage, a few things happen. The shareholders will be registered with companies house. The funding will be 'complete' and funds transferred to the fund raiser. You can say that the SPV is live with the shareholders in place and the funds are in the SPV's bank account.
"Vanessa Warwick 14 Jul at 13:40
"Why does FCA regulation deter rogues? What DD do SE do on prospective projects? Having seen some of their projects, the jury is out for me for now ..."
Interesting question. The legal definition of 'rogue' is not clear. What the FCA does is what the FCA has always done. They regulate financial promotions, investments, etc. They do not regulate real estate sales and they do not regulated individual real estate deals. Giving financial advice is an FCA focus. Operating a collective investment scheme plus almost all financial promotions are regulated by the FCA. At least for the UK and when UK citizens living in the UK are being promoted to.
The FCA does not review individual collective investment schemes if they are unregistered (UCIS). They do approve, prior to offer, registered collective investment schemes (CIS).
The differences are subtle. There are some exceptions (family and friends of long standing is one; professional traders). The FCA areas are more or less a guilty until proven innocent. The public is being protected from itself. Normal yet not really well understood by many. The FCA regulations impose a blackout for financial promotions unless they are handled by an FCA approved person or FCA approved company. The public should not know they are missing out because they do not have the ability to understand what is safe or suitable. Individuals do not have the ability to make the right decision.
Crowdfunding is a way the FCA has created so the retail public can gain access in a controlled way. If they do a few deals, the FCA will consider the sophisticated and therefore exempt from some of the restrictions placed on the ordinary retail public. The FCA does like it when people become educated about investments.
As to SE ...
They are approved by the FCA to operate a marketplace under the crowd funding regulations (PS 14/4 if anyone wants to read up). The crowdfunding regulations do not set out to make the approved platforms a gatekeeper for deal quality. That is subjective. THe FCA expects the information to be transparent, open to all who are qualified (exempt or restricted retain within the 10% limit) and for the process to be managed. People must be warned about the risks. In particular, the investors cash is at risk. Total loss is possible. It is capped at what they invested as the investors are not signing for a loan or offering a personal guarantee.
So, SE does not vet deals to decide if they are good or profitable deals. They vet the fund raiser, the deal documentation and other details to make sure the investors have a complete picture. They also facilitate the process. Managing the documentation release, the movement of funds through an FCA approved custodial service, etc. They manage the communication, the process and the checks. They do not and can not offer a opinion as to the quality of the deal. They are not guaranteeing the deal or safeguarding the investor's funds after the campaign completed the funding process.
"Also, you say you have no stake in SE, but you have been involved in promoting their crowdfunding workshops, so what is the relationship there? Are you a paid for speaker?"
No. I pay my own traveling and other costs. For Exeter, that was a couple of hundred Pounds as there was a RT train and a hotel stay plus meals. When I hosted the London date for the Crowd Funding Roadshow, it is my meeting to I benefit from the ticket sales.
It is fun for me to meet people. A good meeting will draw out more people so more chance for everyone to meet (network effect). Like the Property Investors Show at the ExCel.
I have done business with people I meet at meetings. Just no way of knowing in advance.
I also learn from the meetings as people have different experiences, insights or problems they want help with. Teaching is one way to deepen your understanding of a topic. You have to understand the topic from multiple points of view.
One specific thing I have launched and will be an economic benefit is a facilitated mastermind group. Working with a group of like minded investors who want to raise money for their details or cash investors who want to better understand how to invest successfully. A classic mastermind with the added benefit of me guiding the discussion when we get onto topics which the group does not have experience with (setting the share price prior to the initial public offer, book building, learning while investing, etc). It does not matter which platform people want to use as long as it is an FCA approved platform.
In some ways, crowd funding lets me combine my investment banking experiences, my technology background and real estate. Picking and weaving together aspects of my 30+ years of industry experience into one activity. I like the space and have liked it for a very long time without knowing that it would be called crowd funding. Contributing online for decades has been a good training ground for crowd funding,
My first crowd funding experience with investing through Prosper back some time around 2006 - 2009. Before Prosper pivoted and asked for regulatory approval.
VW: " I hear of millions being raised in minutes. "
John: "I think you are talking about East Eight deals. They did have a raise that was fully fiunded in 17 minutes. Over £1M in equity raised."
£1.4, was raised from 14 investors, that is on average £100k per investor. This is far from average and had some big money from single investors going into it.
VW: "Crowd funding - too easy to raise money?"
Yes. The FCA Registered businesses that hosts these "ventures" are not properly checking the structure and ensuring the funds are secured.
The East-Eight project was a mess - the documents were not clear of the ownership, there was no cap table. I invest £1 what % share will I own was omitted completely.
In addition to raising money from bank and raising money from investors - was not clear what the project owners invested or owned of the company.
The Crowd Funding Company should have had this set out clearly. I think they are lucky that the developer will try and give investors good returns but soo easy to structure a bad deal on that platform.
Though it is the obligation of the investor to check the project details, fools and their money are easily parted.
FCA considered loan-based crowd funding as rather high risk. They consider (what this is) investment-based crowdfunding as very-very high risk. So much they used bullet points, you can tell the FCA is serious when it uses bullet points to highlight risks:
"What concerns me about this is that people are raising additional money before completing on previous projects"
Yes - the platform should weed out noobies.
Though it is the obligation of the investor to check the project details and the CV of those they are going to invest in.You mention banks have "protection" - that is not protection. That is them doing there own due diligence.
" Also, is it transparent how much of their own money the developer has invested? Does SE allow 100% financing by investors? "
No. Far from clear in many instances.
_________________________________________________________________________My posts are not financial advice, just a rambling guy passing time on a coffee break.The team at Bespoke Finance offers advice, including Limited Company Buy-to-Let , HMO Conversion and Cheap Life Insurance._________________________________________________________________________
Adam Hosker 21 Jul at 14:35
"The East-Eight project was a mess - the documents were not clear of the ownership, there was no cap table. I invest £1 what % share will I own was omitted completely."
To clarify a point ...
Which of the 5 East Eight deals did you invest in? From what I can see, none of them had a share price below £500. Most were £1,000 or £5,000 per share. The lowest share price for any of the deals on Simple Equity is £100 from what I know.
Second question. Also, not something specific to East Eight or any other offering on Simple Equity.
What do you mean by a 'cap table'? I am assuming you are somehow referring to capitalization and might be commenting on a company's capitalization. Do you mean the SPV's capitalization?
In the context of a development project, dies capitalization matter? Is it not more common to refer to GDV and other indicators when discussing a project?
Again, I do not want to focus on East Eight when talking about cap tables. I am interested in how the finance principle you are referencing to would apply to any real estate development.
@JohnThank you for your detailed answers. Unfortunately, they have not done much to allay my concerns.@AdamThank you for your detailed contribution and your first hand experience of a Simple Equity deal.
I agree Vanessa, it sounds like the Wild West of fund raising with a very high risk of investors losing money. The only up side is that for the 2 planning gain deals John is sponsoring, the investors will only lose a relatively small sum of money.
It would be interesting to hear how much the Sponsors & other interested parties invest personally in each scheme. If very little if any money then this shows how risky the deal is.
You have previously used the phrase "skin in the game" and that is highly relevant here.
What caused me concern was when one particular individual who I have concerns about raised money via Simple Equity for a very high risk project. Shortly after the money raised and the funding closed, he was all over facebook boasting how he was now sponsoring the local football team. Which no doubt cost a significant amount of money.The timing seemed too coincidental.How do investors know their money is being spent on the project and not on marketing for new investors or a flashy new watch?!
While this forum is P2P, we are talking about equity crowd funding.
The list of shareholders should be something you can find in Companies House for each SPV. There is generally a lag time between the campaign and when the details are published. Otherwise, assume the 'stakes' are way more transparent than people are used to seeing,