Since the early 1930s, a firm that wants to sell securities to the general public had to register with the SEC, a process that is too costly and time consuming for many small firms. But the law has a few exceptions, and the Millers discovered one of them.
They learned they could raise money from anyone as long they qualified with the SEC and registered with the localities in which they wanted to raise cash — the District and Virginia, in their case. Nearly a year later, they got the necessary approvals.
In August, they launched the Web site Fundrise and began offering shares in the H Street property, which they had purchased for close to $1 million, Miller said. Within three months, they raised their $325,000 target from 175 investors.
The company has since used the Web site to gauge interest in a deal at 1539 7th St. NW, and they plan to use it again to raise money for a D.C. government parcel they are developing at 1300 H St. NE.
This concept is not entirely new. For years, crowdfunding has been a popular way to seek financial support for a new album, a smartphone app or even a worthy cause. Contributors get a token reward — maybe a T-shirt — or nothing at all for their donations.
But they have not been allowed to earn a profit or buy a security unless a company gets approval from the SEC or the states.
A few states have passed regulations to allow crowdfunding, and others have proposed doing so in recent months — including North Carolina, Washington and Nebraska. A state can set its own crowdfunding rules within its borders, with certain restrictions. Targeted investors, for instance, must reside within the state.
This month, California upped the ante. It allowed Oakland-based Mosaic to raise money online from California residents interested in funding solar projects — $100 million worth of them.
Under this arrangement, investors lend money at a fixed rate and get paid back monthly based on the project’s revenue. Investors ponied up $152,700 in less than six hours to pay for solar panels on the roof of San Diego’s Ronald McDonald House.
“It took us awhile to set up the regulatory structure,” said Billy Parish, a Mosaic founder. “We’ve been tracking what [the SEC] is doing. But in hindsight, it was a good decision to not base our business model on that. We pursued a strategy that allows us to get out ahead while the federal rules are being put together.”
Still, federal regulators will ultimately shape the crowdfunding space.
Jobs Act details
The law Obama signed, called the Jobs Act, limits how much people can invest in a crowdfunded project based on their net worth and income. The funds would have to be raised through a regulated portal that would make sure the income limits are observed and that investors receive educational materials about the company. It’s up to the SEC to flesh out the details of how it will all work.
Heath Abshure, head of the North American Securities Administrators Association, said there is more to worry about than exposing unsophisticated investors to outright fraud. He is also concerned about the lack of an exit strategy for investors who want out.
“Very few of these small companies succeed, and the securities themselves are extremely speculative and highly illiquid, meaning that once you buy them, you may not be able to sell them,” Abshure said. “How will you sell a security in a cupcake store or a hardware shop?”
Meanwhile, some industry observers say the restrictions Congress has built into the crowdfunding law may simply be too costly and onerous for many small businesses.
Under the law, companies must hire firms to audit their operations, depending on how much they intend to raise, a huge expense for a small business, said Steve Bradford, a professor at the University of Nebraska College of Law. The firms must also issue reports to investors and the SEC, which significantly adds to costs, he said.
And top company officials can be held liable for false statements or other lapses, even if they are not intentional, a departure from the norm, Bradford said.
“Given the lack of sophistication that most [company officials] will have as they enter the crowdfunding arena and given how complicated the disclosures are, that’s a real risk,” he said.
Lubens is not worried about the broader policy debate.
Last week, he received his first dividend: a mere 50 cents. When Maketto opens, he expects the dividend to grow. Until then, he is enjoying the psychic rewards.
“Last weekend, my mother and brother were in town and we were having dinner on H Street,” Lubens said. “It was just so cool to point out the building and say: ‘I own that.’ ”