Crowdfunding is nothing new; it was prohibited in 1933 as an antidote to the Great Depression and revived in 2012 as a cure for the Great Recession . Indeed, post-civil war America was built on crowdfunding during an era when the entire financial system rested on a foundation of investment from ordinary Americans who could freely invest, without limitation, in anything they wanted to by buying stocks and bonds through syndicationsâthe crowdfunding of the day.
The earliest syndicates were created by the financial institutions that dominated the American landscape. The financial titans of the late nineteenth and early twentieth centuries syndicated the issuance of stocks and bonds to the general public through expansive hierarchies of distribution channels to finance the railroads, the steel industry, and all the infrastructure development in America. Corporate principals and the financiers who assembled the syndicates that provided the necessary capital created deal structures that almost eliminated risk to themselves by pushing it onto the general public. Issuers in Americaâs early crowdfunding landscape hid financial arrangements from public view, manipulated markets, had no limitations on how they advertised, or to whom, or what they did or did not disclose, which meant that those least able to shoulder the burden of risk were those who unwittingly did. Indeed, prior to the Securities Act of 1933, there were no restrictions on how much anyone could invest, how wealthy they were, or what they needed to know before making an investment.
However, this unrestrained marketing of securities by issuers and their consumption by investors contributed to an exuberance for stocks that ended in 1929 with the biggest financial crisis and stock market crash the world had ever seen. To ameliorate the risk of this happening again, policymakers sought to protect investors by regulating how those in need of capital could solicit investment from the general public. Four years after the stock market crash that led to the Great Depression , Congress shut down crowdfunding , passing the Securities Act of 1933. The Act created a sharp dividing line between public and private sectors. Companies could solicit investments in their shares from the general public, but now they were subject to extensive disclosure requirements that ensured they provided everyone with the same information they would were they soliciting all they needed from one influential sophisticated investor . To âgo public,â issuers would now have to submit to stringent regulations restricting how they advertised and what they said, and would be subject to tight oversight and strict disclosure and reporting requirements.
There were exemptions from these regulations, however. The Act continued to permit capital raising by companies without such onerous restrictions under two conditions. One, a pre-existing relationship was necessary between the person or entity raising the money and the investor ; and two, the investor must be wealthy enough to withstand the loss of their investment.
Real estate deal sizes, too small to warrant the kinds of public offerings contemplated by the Securities Act, caused developers to gravitate instead to utilizing the regulatory exemptions , preferring to raise capital only from wealthy investors they already knew. Consequently, as legislators had been primarily focused on restricting investor solicitation by companies and financiers and had not specifically targeted the real estate industry when they passed the 1933 Act, the effect of their actions was to push capital formation in real estate into exclusive private enclaves of wealthy, well-connected investors . As the decades went by, these closed circles became wealthier, and as the cost of real estate development increased, the minimum requirement to invest in a deal increased proportionately, as well. This further distanced those without substantial wealth from the opportunity to participate.
That said, the 1933 Securities Act precipitated a relative calm for financial markets as it was intended to do, and it wasnât until 2008â2009 that the threat of systemic failure once again loomed when stock and real estate markets nearly collapsed and liquidity almost completely dried up. Outdated over time and anachronistic in the Internet age, repercussions of the 1933 Act were being felt by folk in all walks of life and strata of society. In the eyes of some, corporate America had come to dominate every aspect of daily life and small companies and entrepreneurs had little or no access to the capital they needed for growth, squeezed out as they were of mainstream capital markets by a financial elite. They were kept out of public markets because no one was championing their causes to the general public. Entrepreneurs were stymied by regulations generations old that precluded them from going to their own customers to invite them to invest in their companies.
Anxious to resolve the worst financial crisis since the Great Depression , and one that threatened to be just as bad, Americaâs politicians began drawing upon insights from their constituents. The 1933 Securities Act had done its job, they learned, but circumstances nearly 80 years on were different, and the consequences of leaving the Act untouched for so long were beginning to have broad deleterious effects across the economy. This was most starkly thrown into light during the Great Recession that started around 2007. Liquidity had been sucked out of the markets, companies were struggling to regain their economic balance, and legislators were looking for ways to not only bring vigor back to the markets but also step back from the precipice of systemic collapse.
The legislators reflected upon the restrictions laid down in 1933 and, in a variety of different ways, set about writing new deregulatory bills that would facilitate capital formation to make the process more relevant for the time. At the sharp end of the research needed to craft effective legislation were the staff of these politicians; the ones who took input from and advised the advocates and who wrote the bills. These public servants scoured the country for experts in finance and capital formation and the message they heard most clearly and loudly was a demand for crowdfunding . Constituents and experts alike were talking about a financing tool that could leverage the power of the Internet through digital marketing and social media to raise small amounts of capital in large volumes from the masses. Together with their political masters, a coterie of civil servants set about crafting language that would form the foundation upon which bipartisan legislative agreement could be negotiated and agreed upon.
While Congress was busy trying to find ways to bring liquidity through crowdfunding back into the markets to help small companies, some in real estate had been hankering for the opportunity to raise capital from the general public for years. Their motivation was at the same time as prosaic as it was practical; they needed money to capitalize their deals, and they had a keen awareness that those precluded from investing in real estate nevertheless had a strong desire to do so.
These pragmatic visionaries were less concerned about legislative change than they were about the immediate capital challenges they faced every day. Consequently, as legislation started wending its way through the halls of Washington , the real estate voice was not heard; its industry leaders were too busy finding deals and constructing buildings to consider lobbying for regulatory change. Instead, some of them set about finding creative ways to utilize existing regulations to achieve the democratization of real estate investing. They had come up against a bottleneck for raising capital and the pressure was building to find ways beyond the restrictions of the 1933 Act.
A series of unrelated capital formation bills started to gain traction in Congress that ultimately were all tied together to form what was called the JOBS Act , an acronym for Jumpstart Our Business Startups . The most important feature of the new Act was that it dialed back the restrictions laid down in 1933 prohibiting issuers from soliciting people they did not know. This unlocked the door to open advertising to the general public , technically called âgeneral solicitation.â In the pre-1933 world, people were typically solicited to buy shares in companies through magazine and newspaper advertisements or through word of mouth via the syndicates and dealer networks that supported the syndicate structures. However, in 2012, advertising meant that while the Internet could be used, it came with the corollary that if anyone wanted to take advantage of the new regulations, all the digital marketing and e-commerce tools using the Internet would have to be learned. For real estate, this gave birth to a brand new industry at the intersection of real estate and tech ; one where the ancient, staid world of real estate merged with the latest, fast-moving world of online digital marketing and e-commerce.
When the JOBS Act passed, those real estate leaders who had already been seeking ways to achieve the goals the Act aimed at were the first to recognize the opportunity it presented. What set these early adopters apart is that they recognized the new laws of the JOBS Act would be a boon for real estate finance even though the Act was authored to benefit small companies rather than with real estate in mind. Not only that, every one of them also immediately realized that the opportunity required a sophisticated tech solution. The pioneers of the new tech-enabled real estate finance industry partnered with tech experts who complemented their real estate skills or, in the case of those whose background were in tech , someone who had the real estate skills they lacked.
Their visionary leadership carved a pathway that enabled a completely new industry to emerge; one where companies marrying real estate with technology gave rise...