Crowd-financing for P3s – How does it work?

Following up on a paper written by Morteza Farajian with the VDOT P3 office, he and I co-authored a paper that introduces an implication framework for the P3 crowd-financing model. This paper highlights similarities between crowd-financing models being implemented in the real estate industry and applications to P3s, and then describes the current regulatory framework for crowd-financing and specific considerations for P3s. We also provide an outline of how crowd-financing would be implemented for P3s, including discussions of investment type, SEC exemptions, and crowd-financing platform interaction. Here are some of the highlights:        P3 developers are typically selected by a public agency sponsor through a competitive RFQ/RFP process.  The public agency may include a requirement or preference for some portion of the capital to be raised through investment crowdfunding in the RFQ/RFP documents.  Or, the developer may include investment crowdfunding as part of their proposal to drive public engagement and enhance economic benefit to the community. Sometimes a P3 developer can make an unsolicited proposal to a public agency for a P3 project.   In this scenario, the P3 developer would include crowdfunded capital as part of their proposal to help garner political support and reduce the chance of public resistance. Once the P3 project is awarded, then the private developer works with an investment crowdfunding platform that specializes in infrastructure P3s, such as, to develop and run an investment crowdfunding campaign.  The developer will define the amount and type of capital to raise, provide offering memos, and determine campaign duration.  For 506(c) offerings, the amount of capital that can be raised is unlimited; for Regulation A+ the current limit is $50 million, and intrastate offering limits vary by state.   The type of capital is very flexible and can be equity, preferred equity, mezzanine debt, convertible notes, and corporate notes.  The length of the campaign is determined by the financial close schedule, but typically lasts 3-6 months following award of contract prior to financial close. The investment crowdfunding campaign itself is run very similar to a donation based campaign as used on popular sites like Kickstarter.  Retail investor traffic is driven to the crowdfunding platform through the use of public agency outreach, social media, traditional media, Search Engine Optimization (SEO) and partnerships with complimentary crowdfunding sites.  A teaser summary is posted on the site that can be viewed by potential investors that includes summary commercial terms and a video describing the project.  Investors visiting the site can browse by project type, geography, security type, IRR, etc. to find an offering that fits their investment objectives.  The site will also offer comparison and analysis tools to help investors determine which projects are right for them. Following investment and financial close of the P3, the crowdfunding platform will act as an ongoing engagement tool for the investors.  The platform will distribute all financial statements, disclosures and construction/O&M updates issued by the SPV.  The platform will also facilitate all disbursements of returns to investors and allow investors to track the performance of their individual investments or portfolio of projects.  Any secondary market for existing securities will also be facilitated by the platform allowing investors to buy and sell securities as their individual liquidity needs require.  Again, this ongoing interaction between investors and the P3 project provides high levels of transparency and public oversight, making sure the developers incentives are aligned with crowd investors over the long-term.

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