Sharks, angels, crowds and the SEC: Who killed the crowdfunding buzz?

By Michelle Harrell
Maddin, Hauser, Roth & Heller, PC

Michelle Harrell

Michelle Harrell

Crowdfunding is white hot with popularity and has emerged as a capital formation tool and a way for nearly anyone to financially support an idea, invention, cause or business. Heads were spinning with crowdfunding’s potential to disrupt established principles of capital formation. The start-up nation believed that the days were gone when only titans of industry or the wealthy few decided which ideas came to fruition.

The idea was that, if a crowdfunding campaign gained online buzz, the product, idea or cause could jumpstart from capital built upon a wave of $10 bills from everyday investors. But instead of reaching new heights, the crowdfunding speeding train has rolled over into the proverbial legal ravine. After enjoying an evolutionary period free of oppressive regulations, certain types of crowdfunding have now become subject to SEC oversight and control.

What is Crowdfunding?

Crowdfunding is an evolving method of obtaining capital through the internet, typically through small individual contributions from a large number of people, for a variety of projects ranging from innovative products to artistic ventures. Crowdfunding is an important type of bridge financing between the time when startups have exhausted their personal funds and when they may qualify for venture capital funds or traditional financing.

How Much Money is Raised by Crowdfunding?

The figures relating to the crowdfunding industry are staggering. Crowdfunding Web sites have raised more than $89 million from the public in 2010, $1.47 billion in 2011 and $2.66 billion in 2012, with $1.6 billion of the 2012 figures raised in North America. In 2012, more than 1 million individual crowdfunding campaigns were established. The crowdfunding industry is expected to grow to more than $6.2 billion in 2014. According to the “State of the Crowdfunding Nation,” more than $60,000 an hour is raised through crowdfunding as of March 2014.

The Different Types of Crowdfunding

As crowdfunding has evolved, two primary types have emerged: reward-based crowdfunding and equity-based crowdfunding. Reward-based crowdfunding involves entrepreneurs, individuals or organizations that seek funding to pre-sell a product or service, launch a business concept or perhaps support a social purpose or cause, without sacrificing equity or incurring debt. The crowdfunding backer receives some reward or benefit from the recipient, such as a sample of the proposed product. Equity-based crowdfunding provides the financial backer with unlisted shares in the company in return for the funds.

SEC Regulation of Equity-Based Crowdfunding

Because of the solicitation and transfer of equity, investment-based crowdfunding can implicate securities laws. Soliciting investments from the general public is often illegal unless the securities laws and regulations of the U. S. Securities and Exchange Commission (SEC) have been followed. In the United States, there is some debate about what constitutes a security for purposes of the securities laws in relation to crowdfunding but a general test looks at whether there is an exchange of money with an expectation of profits arising from a common enterprise that depends solely on the efforts of a promoter or third party. Any crowdfunding arrangement in which investors are asked to contribute money in exchange for potential profits based on the work of others would likely be considered a security for purposes of the securities laws. As a result, the promoter would need to comply with the securities laws, and those requirements can be quite onerous and expensive.

The crowdfunding movement faced definite obstacles to growth and functionality due to the impact and application of the securities laws. Many bills were proposed and, for an extended period, continued churning with modifications with none being codified. That is, until April 5, 2012, when Pres. Obama signed the Jumpstart Our Business Startups Act, or JOBS Act, in the White House Rose Garden.

The impact of the JOBS Act

The reviews of the JOBS Act are mixed as to its impact upon crowdfunding. Effective as of Sept. 23, 2013, Title II of the JOBS Act allows equity-based crowdfunding from accredited investors only. To qualify as an accredited investor, a person must have income of at least $200,000 a year ($300,000 for married couples) or a net worth, excluding a principal residence, of at least $1 million.

The SEC requires that crowdfunding companies take reasonable steps to insure that all investors meet the accreditation requirements. Although previously prohibited for more than 80 years by the SEC, Title II allows general solicitation and advertising (such as through the Internet and Web sites) to raise investment funds. The crowdfunding offerings are exempt from state registration. There are no per-investor limits and no limit upon the maximum amount that can be raised. Certain “bad actors” are ineligible to participate in a Title II crowdfunded offering. A company seeking to raise funds through Title II crowdfunding may register on an internet portal but is not required to do so.

In contrast to Title II, the goal of Title III was ostensibly to allow crowdfunded investments by non-accredited investors. Because non-accredited investors are often seen as vulnerable, the Title III rules and limitations are extensive. Title III of the JOBS Act enables equity-based crowdfunding but only when done in compliance with a spider-web of onerous SEC regulations.

The SEC’s proposed Title III rules were published on Oct. 23, 2013, but the SEC has not adopted its Title III rules yet. As a result, companies cannot solicit investments pursuant to Title III’s provisions. Pursuant to the proposed Title III rules, companies may raise up to $1 million maximum each year from an unlimited number of investors. However, the amount that each investor may invest is based upon that investor’s net worth and income. The investment limits apply to the total invested by the investor during any 12-month period for all Title III crowdfunding investments.

For those earning less than $100,000 a year, the limit is $2,000 or 5 percent of their annual income, whichever is greater. This effectively results in a cap of $5,000 annual investment a year for those investors earning under $100,000. For those investors earning $100,000 or more, the cap is 10 percent of income or $100,000, whichever is greater.

The company seeking investors has extensive obligations to provide information to potential investors. Also, all Title III crowdfunding must be conducted through either a FINRA-registered broker-dealer or a registered funding portal. These broker-dealers and portals face extensive reporting, registration and operational requirements. Unlike Title II crowdfunding, advertising (except to direct investors to the correct portal) remains prohibited.

After much ado about the JOBS Act and its highly anticipated “green lighting” of equity crowdfunding, the result is buzz kill. Given the burden and expense imposed by the proposed SEC rules, it remains to be seen if any companies will avail themselves of Title III.   The equity crowdfunding rules are a morass of oppressive, technical rules that prevent equity crowdfunding by those companies that need it most. The bright minds who started crowdfunding in the first place may eventually find a way to equity crowdfund with typical citizens who have a few dollars and a lot of hope to spare. We will have to wait and see.

Michelle Harrell is a litigator, shareholder and chair of the complex and general litigation practice group of Southfield, Mich.-based Maddin, Hauser, Rother & Heller, P.C.

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Cassidy Turley: Positive news in U.S. office and industrial markets

by Dan Rafter

The national economy is getting better. It doesn’t always feel like it, but it is. And the upward economic trends are bolstering the U.S. commercial real estate markets, too.

That’s evident in the third quarter office and industrial reports from Cassidy Turley. Both reports are filled with plenty of positive news about these important commercial sectors.

Check out the videos below for the news.


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Cassidy Turley: Cincinnati industrial, office sectors keep improving

cincinnati industrial 2

Source: Cassidy Turley

by Dan Rafter

Cassidy Turley had plenty of good news for the Cincinnati region in its recently released third-quarter Cincinnati market snapshot. According to the report, the overall vacancy rate of 5.55 percent in the industrial sector remains at a near-record low level.

The report also found that year-to-date office investment sales have already surpassed the total number of these sales for 2012 and 2013 combined.

Industrial absorption at the end of the third quarter totaled 4.36 million square feet. That puts the market on-pace with the 4.54 million square feet absorbed from the same period one year earlier.

According to Cassidy Turley, 11 industrial investment sales of $1 million or more took place across the Cincinnati market in the third quarter.

“The Greater Cincinnati industrial sector has now experienced 13 consecutive quarters of positive net absorption,” said Jarrett Hicks, senior research analyst in Cassidy Turley’s Cincinnati and Dayton offices, in a written statement. “Full-year 2014 net absorption will meet or exceed the 5 million square feet reached in 2013.”

In the office sector, 101,606 square feet was positively absorbed during the third quarter of 2014. This brought the overall vacancy rate in this sector down 22 basis points from the end of the second quarter. The current office market vacancy is 22.36 percent, still too high but steadily coming down.

In more good news for the industrial sector, Cassidy Turley reported that eight projects totaling more than 900,000 square feet were delivered across the Cincinnati market in the third quarter, including a 649,119-square-foot speculative, modern bulk warehouse in Monroe, Ohio. Net absorption for the quarter was 778,433 square feet.

Cassidy Turley officials predicted that another round of speculative industrial construction should begin in the Cincinnati market in the middle of 2015.

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Marcus & Millichap gets into the spirit of Halloween

by Dan Rafter

Halloween is a big deal for the brokers and staffers at Marcus & Millichap’s office in Oakbrook Terrace, Ill. And we have the photos to prove it.

Just take a look at the decorating job that the staffers here turned in. You’ll see why we think this is the scariest real estate office in the Midwest.

(If you think your office is scarier, send us the photos and we’ll print them, too.)


Posted in Chicago Commercial Real Estate, Illinois, Illinois real estate | Leave a comment

Liberty Property Trust betting on strength of Twin Cities industrial market

A rendering of Dayton Distribution Center 1.

A rendering of Dayton Distribution Center 1.

by Dan Rafter

Officials with Liberty Property Trust have faith in the industrial market in and around Minneapolis/St. Paul.

On Oct. 20, Liberty Property celebrated the ground-breaking of Dayton Distribution Center I, a 247,004-square-foot spec distribution center in the city of Dayton, Minn.

The building is expected to be complete by the spring of 2015. And Dave Jellison, vice president and city manager for the company, said that he and his fellow officials aren’t worried about filling the space once the new center opens for business.

“A number of people have contacted us about the space,” Jellison said. “There is real good activity in the Northwest marketplace right now. So far, we have seen strong interest in this building. We are confident that we will find the right tenants.”

Dave Jellison

Dave Jellison

Jellison’s confidence is not misplaced. The industrial market in and around the Twin Cities today is a strong one, with plenty of demand for modern distribution-center space.

And that’s exactly what Liberty Property Trust is delivering with the Dayton Distribution Center.

Jellison says that prior to the last 18 months, there was little new construction in the industrial sector for five or six years. That has left plenty of pent-up demand for industrial space, he says.

“A lot of companies are now looking to upgrade the quality of their buildings,” Jellison said. “They want buildings with higher clear-heights in good locations. The Northwest market is a good example. There are many companies that have chosen to put up new buildings there.”

Industrial advantages

Jellison said that the Dayton Distribution Center will have several advantages in the market. First, Liberty Property Trust has committed to hitting LEED-certified standards with the new distribution center. Secondly, the new building will be located right off Interstate-94, a strong location. Potential tenants will be able to clearly see the building from the highway.

And thirdly? The building will boast the modern amenities that tenants expect today.

Dayton Distribution Center 1 will feature 32-foot clear heights, trailer storage and a deep truck court. Liberty is pursuing LEED for Building Design and Construction: Core & Shell Development at the Silver level for the project.

Ed Farr Architects is the architect for the project. Anderson Engineering of MN, LLC is the civil engineer, and R.J. Ryan Construction is the general contractor.

Working relationships

Jellison said that officials with the city of Dayton were key to making the new distribution center a reality. The city has a reputation for being pro-business, and it showed during the planning phase, Jellison said.

The warm weather early this fall helped, too, Jellison added.

“We were really working hard to get the plans done, to get everything approved with the short construction window we have in Minnesota,” Jellison said. “We wanted to get our first lift of blacktop in before the Thanksgiving holiday. We are working to hit that deadline. Getting the blacktop done is crucial to delivering the building by April or May of next year. We are working hard, fast and furious with the good weather this fall to keep everything moving forward.”

Liberty officials are so committed to the distribution center that it has already started work on plans for a second potential development in the complex, Dayton Distribution Center II, a 76,978-square-foot facility. The company estimates that construction on this project, if it becomes a reality, will start in the middle of 2015.

Jellison said that Liberty now owns enough land for a second phase, the smaller distribution center. But this land can also be used for extra trailer storage if the users of Dayton Distribution Center I want it.

But if Liberty Property Trust does decide to move forward with the second smaller center? It appears that there will be plenty of interest in it.

“We have already had one prospect contact us about that building,” Jellison said. “So we know that the interest is there.”

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Transwestern: Making a success out of Dakota Landing

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by Dan Rafter

The Bakken region of North Dakota is booming, what with rigs pulling a seemingly endless stream of oil from the earth here. And with a boom comes new residents both permanent and temporary. It’s easy to think that anytime a new hotel, supermarket or convenience store opens here, it will automatically succeed.

But that’s not always the case.

Just ask Michael Houge, vice president of the investment services group in the Minneapolis office of commercial real estate company Transwestern.

Bakken Properties, LLC opened the Dakota Landing long-term stay hotel in Williston, N.D. – the heart of the oil-producing Bakken region – in the early fall of 2013. The 240-room hotel would seem to be a perfect fit for the area: All those workers called in to help remove the oil from the ground here would need a place to stay.

But for months, this hotel had far too many vacancies each night. So Houge and his team at Transwestern were called in to market the property.

“The hotel came into the market a bit late,” Houge said. “If you had built a hotel in Williston two years earlier, it would have been an easy sell. It could have just sat there and it would have leased up in no time. Both corporate users and oil-company tenants would have been happy to lease its rooms on a long-term basis.”

This wasn’t happening at the Dakota Landing. But that’s changed. Today, the hotel’s rooms are booked. Often, its managers have to turn visitors away because there are no vacancies.

What’s changed? The team at Transwestern rolled out some old-fashioned marketing. And soon the workers and visitors to this region knew all about the Dakota Landing.

Making a change

The biggest challenge that the owners of Dakota Landing faced? They opened their hotel too late, both in the year and in the market.

First, there was the timing of opening the hotel in early fall. By this time of the year, much of the activity around the oil industry grinds to a halt. The drilling continues, of course. But everything that happens around that drilling – the construction and infrastructure work – wraps up until the warmer weather returns. Winters in North Dakota, after all, can be brutal.

At the same time, the young real estate market in Williston slowly began to mature. Two years earlier, there were precious few options for workers when it came to housing. By the time Dakota Landing opened, though, the housing market in Williston and its surrounding areas now offered more options for workers. Dakota Landing got lost in these options.

“They hit the market in October when the season starts to slow down. They had done very little advance marketing before opening the hotel,” Houge said. “You can talk about something, but in North Dakota if you don’t have it open already, people just consider it talk. They see a lot of projects promised that never become reality. It’s a bit of a big hat, no cattle situation. People don’t trust until something is actually coming out of the ground.”

Dakota Landing also lacked an affiliation. The hotel was not part of a chain such as Sheraton or Marriott. This meant that the owners couldn’t take advantage of the marketing power of a larger chain.

Houge viewed all of this as a challenge. He and his team began making phone calls to promote the property. They send PDFs highlighting the hotel’s benefits to local decision-makers. They offered discounted rooms for people to rent.

And in March? These results began paying off. It’s not rare for the hotel to be 100-percent full today. At the time that Houge and his team members received their assignment to market the hotel, it rarely broke the 20-percent full mark.

“Part of the reason is good marketing,” Houge said. “We really focused on getting people to try the hotel. And once they tried it, they liked it and came back. It appeals to the middle of the market.”


The big difference between Dakota Landing and typical hotels in its price range? This hotel focuses on amenities that appeal to the workers who are making the region’s oil economy boom.

For instance, the hotel features an indoor boot room with sinks. This might seem like a minor amenity. But it gives workers a chance to clean themselves and their clothing before they enter the hotel. It’s an appreciated amenity.

The rooms themselves are large with 40-inch flat-screen TVs. The hotel’s food service offers two meals a day. It also provides packed bag lunches and a limited room service menu.

There’s an onsite fitness center, pool and lounge with bar. The hotel offers laundry services and onsite security.

“There is a lot to recommend about this hotel,” Houge said. “The price point is appealing. We are not overpriced like a lot of our competitors in the area. Guests get a lot of bang for their buck. The rooms here are big. We have good people working here, too. It’s a very good experience for our guests. It’s not just salesmanship that brings the guests here. They stay here because it works very well for them.”

And the owners just took what might be their last step to long-term success in the region: They affiliated with a major hotel brand. Earlier this fall, the owners affiliated with the Ramada chain. As of the writing of this story, construction workers were changing the hotel’s signs and colors. The property’s new name will now be Ramada Dakota Landing.

Houge now says that the Dakota Landing is positioned to succeed in this booming region. And he’s looking forward to seeing all those rooms rented on a near-nightly basis.

“The Bakken area is so important to the country right now,” Houge said. “So many businesses are here because of the black stuff being pumped out of the ground. We have archeologists here who have to walk every square inch of a drilling site to make sure nothing of archeological significance will be disturbed. We have people setting up electrical connections and wireless antennas. People from every state in the country are working here. The region is fueling our entire economy. Being part of it is wonderful.”

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Cassidy Turley report: Columbus office market continues to improve

Construction continues on the new home for Columbia Gas in Columbus.

Construction continues on the new home for Columbia Gas in Columbus.

by Dan Rafter

The office market has been a sluggish one in most Midwest cities. But in Columbus, at least, this sector is showing steady improvement.

That’s the takeaway from Cassidy Turley’s third-quarter Columbus office report, which found improvements in both vacancy rates and net absorption in the third quarter in Ohio’s capital city.

“The Columbus office market is alive and well,” said Robin Mitchell, research analyst for Cassidy Turley’s Columbus office, in a written statement.

How well is the market performing today? Mitchell said that as of the end of the third quarter, the Columbus office market had absorbed more than 330,000 square feet in 2014. That figure matches the office absorption for the entire year of 2013.

The city’s Northeast submarket had a strong showing, absorbing almost 70,000 square feet in the third quarter. A key deal here was Zulily’s lease of 34,000 square feet at Columbus’ Tech Center III.

Columbus’ downtown market, though, saw even more activity in the third quarter, absorbing nearly 120,000 square feet. Excel Inc.’s lease of an additional 22,000 square feet in the quarter was a boon to the downtown market. And Excel’s deal came after the company had already leased 26,000 square feet in downtown Columbus in the first quarter of the year.

At the end of the third quarter, Columbus’ office market had a vacancy rate of 15.6 percent, the lowest since before 2008. The Northeast submarket’s office vacancy rates stood at 13.03 percent, down from 14.48 percent in the second quarter.

Today, almost 900,000 square feet of construction is underway in the Columbus office. This is the most construction activity in this sector since 2008. New expansion projects are now in progress at such key office complexes as Waters Edge, Westar and New Albany Tech.

The biggest project in the office market is The Columbia Gas Building. At 288,000 square feet, it is the largest building under construction in the Columbus market. Construction should wrap on this building in the fourth quarter of this year.

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