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Crowdfunding campaigns have changed lives. Can they change business?

A man holding a credit card at a laptop

When the story of James Robertson, the Detroit man who walked 21 miles to his factory job every day, made national headlines, America’s heartstrings unraveled. The result was a record-breaking fundraising campaign on GoFundMe.com, pulling down nearly $350,000 in donations that bought Robertson a new car and set him up with an apartment in a safer part of town.

As seen in the Motor City, “crowdfunding”—raising money from a widely dispersed pool of donors or investors, usually on the Internet—has created a whole new avenue for causes, charities, startups and even bigger companies to raise capital. But can it work to lure investors for skyscraper-sized projects? Sure enough, crowdfunding is already being used to fund some commercial real estate projects. But with billions of dollars at stake, risks abound.

Crowdfunding has exploded in recent years and is raising the bar in equity funding for private companies: the overall crowdfunding industry is estimated to grow to nearly $10.9 billion in total funding in 2015, up from $1.5 billion in 2011 according to Forbes. Given those figures, the real estate industry has been keeping its eyes on this newfangled source for capital.

“Crowdfunding is a great and efficient way to reach the masses.”

Jake Kelley, Senior Vice President of JLL’s Capital Markets Group

Equity crowdfunding exploded after gaining legal legitimacy in 2012 with the passage of Title II of the JOBS Act. The new regulations, set by the Securities and Exchange Commission, encompass real-estate deals in addition to corporate fundraising. They also fix income and net-worth thresholds for investors to ensure they’re financially stable enough to back crowdfunded deals. Since then, a slew of real estate crowdfunding sites, including CrowdStreet, based in Portland, Ore., Loquidity in Grand Rapids, Mich. and FundRise in Washington, D.C. popped up as middle-men connecting investors and sellers for smaller-sized deals.

Crowdfunding proponents say such platforms provide access to capital for scrappy companies that might not have connections in the investment community, and provide a valuable service to investors who want to fund smaller companies or projects, but otherwise wouldn’t be able to find them. “It’s giving people who might ordinarily not have the opportunity [to invest] to get in and experience it,” Matthew Baumann, co-founder of Crosstown Capital Partners in Chicago, told the Chicago Tribune.

The platforms are designed for individual high net-worth investors, and typically draw less than $1 million in funding, according to Jake Kelley, Senior Vice President of JLL’s Capital Markets Group. “You’re not going to get the massive institutional investors quite yet because it’s still a new platform with tremendous risk,” Kelley says. “Crowdfunding is a great and efficient way to reach the masses; but for any sizeable raise, we’ll see it as a small part of a bigger deal.”

While raising $1 million barely registers in a world where skyscrapers sell for $1.3 billion it doesn’t mean crowdfunding is irrelevant: RealtyMogul, one of the most successful CRE portals focused, raised $1.5 million for the Hard Rock Hotel in Palm Springs, drawing 85 investors with a minimum investment of $10,000.

Still, investors should know the risks. For one, Kelley says crowdfunding sites tend to attract less established entrepreneurs who work on smaller, more localized projects. Kelley says it’s very important to be comfortable with the sponsor’s experience and track record, as well as that of the crowdfunding platform offering the investment.

It’s also important to realize that crowdfunding deals are more like private investments in small companies, and as such they’re generally illiquid. “These aren’t publicly traded REITs, so investors aren’t in control of when they get out,” he says.

But perhaps the biggest risk of crowdfunding is the one that’s always on real estate investors’ minds—the threat of a downturn. “This platform came onto the investor scene after the recession,” Kelley says. “We don’t know if it has the infrastructure, the structure or the foundation to sustain what’s to come in the economy—good or bad.”

But if you’re looking for smaller projects to invest in, crowdfunding sites can be a good place to find them. In fact, Illinois State Representative Carol Sente (D-59) filed legislation in February that would allow Illinois companies to sell stock through crowdfunding, which proponents said would increase access to capital.

Crowdfunding campaigns might be the answer if you want to make a big impact on a smaller-scale cause, like Mr. Roberston’s new life in Detroit. For billion dollar skyscrapers? Time will tell.