A bad actor is an issuer or any associated person that has been convicted of, or is subject to sanctions for, violating certain laws, and is therefore illegible to offer securities. We run bad actor checks against every issuer we work with.
“Cash-on-cash return” measures the annual return made on a property, in relation to the down payment.
For example, a rental property that costs $100,000 in full might be purchased with a 10% cash down payment of $10,000. Cash-on-cash measures the annual income made from the rental property (say, for example, $150,000 in income from rent receipts in a given year) over the initial investment (in this case $10,000).
Crowdfunding is a method of raising money through the collective effort of friends, family and the general public, often through the internet.
This is the Financial Industry Regulatory Authority, an independent, not-for-profit organization. Learn more about them at finra.org.
A term used to describe Internet sites that are allowed to offer and sell securities under Title III of the JOBS Act, also know as Regulation Crowdfunding. Funding Portals act as crowdfunding intermediaries. Small Change is a Funding Portal.
An interest rate tells a borrower how much it costs to borrow money from a lender. It is usually expressed as a percentage of the principal. When the borrower is a low-risk party, they will usually be charged a low interest rate; if the borrower is considered high risk, the interest rate that they are charged will be higher.
Internal Rate of Return (IRR)
The Internal Rate of Return (IRR) is a way to measure the profitability of an investment. IRR is expressed as an interest rate that makes the “net present value” – a measurement of profitability that’s calculated by subtracting the present values of cash outflows from present values of cash inflows – to zero. The bigger the IRR, the better. There is no guarantee that any of the projects offered will produce a positive IRR.
Limited Liability Company
A limited liability company, commonly known as an “LLC,” is a way to organize a business that provides the protections of a corporation with the flexibility and tax efficiencies of a partnership.
All tax items such as profits and losses of an LLC are “passed through” to each member of the LLC.
A “minority investor” means that other parties will have complete voting and managerial control over the company. Investors will typically be “minority” investors of companies on the platform.
A non-accredited investor is an investor who does not meet the Securities and Exchange Commission’s Regulation D accreditation criteria. (See ‘Accredited Investor.’)
Non-accredited investors can participate in Regulation A+ and Title III (Regulation Crowdfunding) offerings.
PITI is an acronym that refers to the components of a mortgage payment. Principal is the money used to pay down the balance of the loan; interest is the charge paid to the lender for the privilege of borrowing the money; taxes refer to property taxes and insurance refers to the insurance on the property.
A promoter is someone that an issuer employs – an employee, public relations firm or some other type of third party – to promote an offering on our platform. For example, a promoter might talk about the offering in one of our chat rooms.
Rate of Return
A rate of return is the gain or loss on an investment over a specified time period, expressed as a percentage of the investment’s cost.
All offers to sell securities in the United States must be registered with the SEC and state regulators or meet an exemption from registration. Regulation D (“Reg D”) refers to three rules – Rules 504, 505, and 506 – that provide registration exemptions. You can find the SEC’s full definition here.
A return is the gain or loss of a security in a particular period, usually quoted as a percentage. The return consists of the income and the capital gains on an investment.
The Schedule K-1 is a tax document issued to an investor, which reports the tax items, such as income, losses and dividends, for each investment.
Sealed Bid Auction
A “sealed-bid auction” refers to a type of auction in which all bidders submit a sealed bid to the auctioneer. This means all submitted bids are hidden to other bidders and no bidder knows the offered amount of other auction participants. After the auctioneer unseals the bids, the highest bidder is usually the winning offer of the bidding process.
Securities and Exchange Commission (SEC)
The Securities and Exchange Commission (“SEC”) is a federal commission created by Congress to regulate the securities markets and protect investors. The mission of the U.S. Securities and Exchange Commission is to protect investors, maintain fair, orderly, and efficient markets, and facilitate capital formation.
A security is a share of stock, a promissory note, a bond, or any other instrument offered by an issuer on our site.
An “equity security” is just like the common stock of a corporation. You become an owner of the company and the value of your interest fluctuates with the fortunes of the company. As an owner, you generally have the right to share in any profit distributions made by the company, and you also share in the appreciation in the value of the company. When a company dissolves, the owners of the equity securities are paid last, after all the creditors.
Preferred Equity Security
A “preferred equity security” is just like the preferred stock of a corporation. Typically, the holders of the preferred equity security have a right to receive distributions before the holders of the regular equity securities.
A “debt security” is just like a promissory note or bond. You do not become an owner of the company, but instead, you are a creditor.
“Hybrid securities” have characteristics of both equity securities and debt securities, like a cross between a dog and a horse.
“Convertible securities” start out as one kind of security but can be changed – i.e., converted – into a different kind of security. For example, a company might issue a debt security that can be converted by the holder into common stock at some specified time. Sometimes the conversion is triggered at the option of the holder, sometimes at the option of the company, and other times upon the occurrence of a specified event.
Any kind of security can also be a “callable security,” meaning it can be “called,” or redeemed (bought back) by the company.
Soft costs refer to expenses that are necessary to complete a development project, but are not construction costs. These include architectural, engineering, financing and legal fees, as well as other pre- and post- construction expenses.
Regulation Crowdfunding allows a company looking for capital to:
- Advertise to investors everywhere, using the internet, and
- Raise up to $1 million of capital every 12 months,
- From everybody, including non-accredited investors,
- At a much lower cost than has ever been possible before.
Conversely, Regulation Crowdfunding allows:
- Everybody, including non-accredited investors, to
- Find great companies and buildings from everywhere, using the internet, and
- Invest in those great companies and buildings
Unrelated Business Income Tax (UBTI)
Unrelated business taxable income (UBTI) is tax on income received from unrelated business activities of an otherwise tax-exempt entity. It’s used to prevent tax-exempt entities from engaging in businesses that are unrelated to their primary purposes.
For example, let’s say an investor users his or her Individual Retirement Account (IRA) to open a pizza parlor. The income from the pizza parlor is considered UBTI and is taxable, even though the money is flowing into a tax-advantaged account, the IRA.
UBTI is reported on IRS Schedule K-1 and sent to each investor every year. If an investor receives more than $1,000 of UBTI in a year, he or she usually must file additional paperwork with the IRS.
A stock, membership unit or any other security representing an ownership interest.
This occurs when the demand for an offering of securities exceeds the total number of shares issued by the company.
This is a minimum return to investors that must be achieved before any other profits are shared.
This is the addition of interest to the principal sum of a loan or deposit. In other words, it is interest on interest.
Also called an offering memorandum, this it the legal document that states the objectives, risk and terms of an investment.
Individual Taxpayer Identification Number (ITIN)
A tax processing number issued by the Internal Revenue Service. It is a nine-digit number that always begins with the number 9 and has a 7 or 8 in the fourth digit, example 9XX-7X-XXXX.
IRS Form W-7
Application for IRS Individual Taxpayer Identification Number
Triple Net (NNN)
With a triple net lease (triple–Net or NNN) the tenant pays all real estate taxes, building insurance, and maintenance (the three “nets”) on the property in addition to any other normal fees such as rent and utilities.
What if I’m a first time developer?
If you believe you have a great project but don’t have the requisite developer experience, we can help. Just say complete this form and we’ll let you know how we can help with our consulting services.
IRS Form W-8BEN
Certificate of Foreign Status of Beneficial Owner for United States Tax Withholding and Reporting
A company trying to raise money from investors on our site, by selling its securities.
An income tax to be paid to the government by the payer of the income rather than by the recipient of the income. The tax is thus withheld or deducted from the income paid to the recipient