In pre-millennial times, investing in private projects or companies was only within reach for a tiny group of wealthy individuals.
Fast forward to 2022.
Not only are investment opportunities more easily accessible than ever before, but younger investors are leading the way in delivering capital to new markets. The driving force behind this shift? Millennials.
As older generations continue to reach retirement age, more and more millennials (the largest workforce in U.S. history) are reaching their peak earning potential. They are saving more, investing more, and generally more concerned with financial security than in previous years.
And yet, times are also tough right now. The stock market is uncertain, crypto is imploding, and the cost of living is sky-high across most regions in the United States (looking at you, inflation). Here’s some good news:
There has never been a better opportunity to build and diversify your investment portfolio.
If you’re reading this article and you’re a millennial (and even if you’re not!), today I’m going to tell you about a non-traditional asset class that will change the way you look at investing. I’m talking about Reg CF.
By the time you finish reading this, you should have a firm understanding of what this asset class is, why it’s worth exploring as an investment, and how you can start investing in Reg CF with Vicinity.
Let’s dive in.
What Are Millennials Investing In?
Before covering all things Reg CF, it will be helpful to take a brief look at what millennials are investing in. In this section, we will answer some common questions regarding millennials and investing, including:
- How many millennials invest?
- What are millennials investing in?
- How should millennials invest?
Recent data shows that nearly 90% of millennials hold some kind of investment, with cryptocurrency edging out stocks and other traditional asset classes as the most popular investment for millennials.
One important takeaway from the data is that although most millennials are investing, almost half of them feel they’re not entirely sure what they’re doing. In other words, although investment opportunities are more accessible than ever before, financial and investment literacy remains a top concern for younger investors. Keep this fact in mind as we review the benefits of Reg CF later in the article.
So, we know that most millennials are investing, and we know how they are investing—but what could they be investing in? What options are available for this demographic to build a solid investing strategy?
Given the recent performance of traditional asset classes, there is a huge opportunity for millennials in our post-pandemic world to diversify their portfolios with alternative investments… and no, I’m not talking about NFTs, meme stocks, or doubling down on crypto (RIP FTX).
Here at Vicinity, we believe that Reg CF investments offer millennials a chance to invest across different asset classes, spread out their risk, and develop a diversified investment portfolio.
Let’s look at what exactly we mean when we say “Reg CF.”
What Is Reg CF?
Reg CF, short for “Regulation Crowdfunding,” is an exemption from securities laws that allows private companies to raise capital from the public.
Yes, you’ve heard of “crowdfunding” before. But, it’s important to clarify the 3 main types of crowdfunding available:
- Donation crowdfunding: giving money as a gift to fund a project, with no expectation of receiving anything in return. GoFundMe is an example.
- Rewards crowdfunding: supporting a project with your money, with the promise of receiving something later, usually related to an end product of the project. Examples include Kickstarter and Indiegogo.
- Investment crowdfunding: also known as “crowdinvesting,” this is where Reg CF (and Vicinity) sits.
The first two types of crowdfunding are rather similar.
Each is about interchanging spare dollars and cents in the name of altruism… and maybe, just maybe, a minor stake in the action. Musicians hoping to release their first album, home inventors coming up with the next big thing, a high school football team looking for a new set of bleachers, etc., etc.
Crowdinvesting is based on a different concept. It’s a form of investing codified by U.S. law that grants investors access to previously unavailable investment opportunities and empowers them to invest as a “crowd.” Under specific circumstances, people can invest where they previously couldn’t.
So while in “homespun” crowdfunding you exchange your money for a non-monetary (even non-physical) reward, in Reg CF offerings, you’re investing your money, and can gain proper returns.
Not only has Reg CF democratized investing, but it is experiencing massive growth—more than $1.1 billion worth of investments since 2016.
Reg CF offerings can only be published on SEC-registered platforms like Vicinity, which open access to private investments to anyone. But while most platforms focus on start-ups, Vicinity brings mid-market real estate and other ventures to your door, so you can start diversifying and building a local portfolio.
Benefits of Reg CF for Millennial Investors
The Financial Industry Regulatory Authority (FINRA) says it better than anyone: “a vibrant market is at its best when it works for everyone.” Not only has Reg CF done exactly that, but it presents millennial investors with a number of attractive benefits when compared to traditional asset classes.
General Benefits of Reg CF
While the most obvious benefit of Reg CF for millennials is its accessibility (i.e., anyone can now invest in assets that were previously exclusive to high-net-worth investors), there are many additional benefits to Reg CF investing that deserve some recognition, including:
- Sense of community: investors have the opportunity to interact with other investors and issuers directly on the platform. Where else can you talk to the owner of the company you are investing in or learn from other investors? This is a specific feature of Reg CF and is a required component of any SEC-registered funding platform. This helps drive financial literacy as millennial investors can ask questions, get answers, share a vision, and help vet an investment opportunity together.
- Clear information: Reg CF platforms are required to highlight the risks, potential earnings, and other details concerning each offering. Issuers are happy to share what they know about their projects, so it’s all at your disposal as an investor and you can make an informed decision.
- Investor protection: with other investment assets (stocks in a public company or crypto, for example), you could easily, and unwittingly, throw in and lose significant sums of money. Reg CF has built-in rules that limit investment amounts to better protect investors.
- Low barrier to entry: while each offering stipulates its investment range, minimum investment amounts are usually quite small compared to other asset classes.
- Early birds: Reg CF offerings are typically projects that are still relatively young, so you get a chance to join towards the beginning and accompany the growth.
How Reg CF May Help Recession-Proof Your Portfolio
In these times of high inflation, rising interest rates, and uncertain public markets, it might seem like the best strategy for investing in a recession is to hold on tight to your dear dollars.
But even in the face of economic uncertainty, when some traditional asset classes are dropping in value, Reg CF offerings can potentially result in a positive return on investment.
Because Reg CF offerings are investment opportunities that impact their communities.
In other words, these are opportunities that can create jobs, push local economies forward, bring people together, tend to have a low correlation to other asset classes (i.e., little carryover of market volatility), and are unlikely to be impacted by the next Elon Musk tweet.
And the best part?
These are opportunities that fly under the big-market radar. No matter how good a local deal is, it is unlikely to get swarmed by gold-rushing institutional investors (more on this below).
Especially now, riding the daily rollercoaster that is bonds, funds, or crypto investments can do more harm than good, both to your wallet and your anxiety. On the other hand, investing in a Reg CF offering–especially local mid-market real estate–can give you peace of mind, above-market returns, and a physical end product that benefits your local community.
Reg CF can do a lot for you, but remember to review all the risks, and never invest more than you can afford to lose.
Types of Reg CF Investments
When you invest in Reg CF, you invest in a specific offering. And Reg CF offerings come in various shapes and sizes.
Below are the most common Reg CF offering types, together with a brief description. For more information on each, take a look at our article on the topic.
1. Stock or Membership Units
You invest in and become part owner of a corporation or limited liability company—actual ownership percentage in a company.
As an investor, you become a member, and you hold a membership interest. This gives you potential profit sharing, and increased value in the event of a sale.
2. Convertible Note
A convertible note is an unsecured loan that converts to ownership in the future.
The note converts, or becomes due, at a set maturity date or “triggering event”. If not repaid in cash (which can often be difficult for an early-stage venture), the note converts to equity at a pre-set target price.
3. Term Loan
Generally speaking, a term loan provides borrowers with cash upfront in exchange for specific borrowing terms. When it comes to Reg CF, this offering is similar in structure to most common consumer loans (car, student, etc.), but here, you’re the lender. You invest in a venture that will pay you a set percentage (interest) on your investment for the duration (term) of the loan.
4. Revenue Sharing Note
A revenue sharing note, rev share for short, is a debt structure that works like a royalty payment.
Pretty straightforward stuff: after you invest, you receive a percentage of the project’s revenue until you’re paid back a “multiple” of your investment.
Payments depend on the amount of revenue—if the offering you invested in keeps revenue high, you’ll be repaid in no time.
Types of Reg CF Investors
Another common question we get from millennials interested in Reg CF is the difference between accredited, non-accredited, and sophisticated investors.
In the early 1980s, the Securities and Exchange Commission (SEC) drew a formal distinction between accredited vs. non-accredited investors. This distinction allowed individuals considered “accredited investors” to buy securities before they went public, providing high-net-worth investors access to higher-risk (and higher return) projects.
Later, the SEC added the category of “sophisticated” investors.
These individuals, although not formally “accredited,” demonstrate sufficient experience or knowledge to understand the more technical aspects of an investment opportunity. While this investor category is considered more of a gray area, these individuals, like accredited investors, have traditionally engaged in more advanced types of investing.
Ref CF has leveled the playing field by allowing non-accredited investors to participate in offerings previously reserved for accredited and sophisticated investors. In this section, we are going to take a brief look at all three designations. For a more detailed breakdown, check out our article on the topic.
An accredited investor is an individual or institution that the SEC has approved to invest in certain types of securities, which are both high-risk and high-return, in the private market.
To qualify as an accredited investor, one must:
- Have a professional license that certifies accredited investor status.
- Earn an annual income of $200,000 (or $300,000 for couples) for the past two years.
- Have a net worth of $1 million (excluding primary residence).
After you pick your jaw up from the floor, it’s time for the good news: Reg CF cuts these limits down, providing almost anyone the opportunity to invest.
Here is where most of us mortals stand, since only 10% of Americans are accredited investors.
Non-accredited investors, of course, are those who don’t meet the criteria we mentioned above. And yet, that doesn’t prevent them from investing through Reg CF.
In fact, Reg CF encourages non-accredited investors to get in on the action. Investment amounts, risk, and potential returns vary for each offering, but opportunities are always within reach for non-accredited investors.
Although the Reg CF exemption imposes some investment limits on non-accredited investors, these limits have the best interests of non-accredited investors in mind (we’ll get into these rules in a bit).
In the accredited vs. non-accredited comparison, the category you belong to has historically been all about numbers. In contrast, the sophisticated investor nuance looks at how much an investor knows about the trade.
The definition (and implications) given by the SEC is still a bit hazy. A sophisticated investor is one who “has sufficient knowledge and experience in financial and business matters to evaluate the merits and risks of the prospective investment.”
In other words, you know what you’re getting into when you invest—what you can lose and gain. So, in reality, both accredited and non-accredited investors can be sophisticated investors (which is just a fancy way of saying “knowledgeable”).
This shift from income and assets to knowledge forms the foundation of Reg CF as an investment asset. Through SEC-registered platforms like Vicinity, Reg CF is not only empowering people with “normal” income to invest but also making sure that investors have all the resources they need to be fully informed and knowledgeable (a huge win for millennials).
Reg CF Rules That Millennials Should Know
Now that we are familiar with the types of Reg CF investors, it’s important to take a brief look at the impact these investor categories have when the time comes to invest.
If you are a non-accredited investor, the following rules apply. Within a 12-month period:
- If your annual income or net worth is less than $124,000, your investments can’t exceed $2,500 or 5% of your annual income or net worth, whichever is greater.
- If your annual income and net worth are equal to or more than $124,000, your investments can’t exceed $124,000 or 10% of your annual income or net worth.
Accredited investors, on the other hand, have no limits as to how much they can invest.
How Millennials Can Invest $1,000 in Reg CF
Thanks to Reg CF, gone are the days when you needed millions to invest and turn a profit.
If you are just getting started with Reg CF or Vicinity, you’ll find our focus is on mid-market real estate. Not only are the minimum investments achievable, but, as we mentioned earlier in the article, many argue that it has a low (and in some cases, negative) correlation with other major asset classes like the stock market.
In other words, if you lose money on traditional investments, there’s a chance you can lower your portfolio volatility with mid-market real estate.
So, how exactly does one invest $1,000 in mid-market real estate via Reg CF? Let’s take a look at how you can do exactly that on the Vicinity platform.
Step 1: Create an Account
Vicinity is an SEC-registered platform that brings you Reg CF deals. Not just any deals: mid-market real estate deals in your backyard. Let’s say, in this example, you live in and are looking to invest in North Carolina.
To start your Reg CF investing journey with Vicinity, we suggest that you take some time to go over what the platform has to offer, especially when it comes to what we believe in and how we can help you invest.
Next, we recommend that you create an account on the Vicinity platform before you begin browsing available investment opportunities. While you can review our investment opportunities prior to opening an account, you will not be able to interact with fellow investors and ask issuers any questions or clarify any important information.
Step 2: Go Through the Deals
Now that you have an account and are familiar with the platform, browse through our available deals.
Head to the Vicinity marketplace and see which deals are currently accepting investments.
Each deal will provide you with an overview of the opportunity, including the business model of the project, the investment summary, and the stakeholders involved in each project. You can check out each opportunity’s dedicated forum to ask any questions you may have or review questions that have been previously answered.
You should also review some of the previous opportunities that have been successfully funded to get a better feel for whom we work with, the neighborhoods we impact, and the potential investment returns and risks you can expect.
Step 3: Find a Deal That Works for You and Make Your Investment
Now that you have your account up and running and you have reviewed available investment opportunities, it’s time to figure out which deal is right for you.
Say you live close to McDowell County, NC. You know the area, you know the people who live in it, you know what the area offers, and what’s missing.
Do you enjoy the outdoors? What about adventures on the go? How about a targeted Internal Rate of Return (IRR) of +20%? Well, the North Cove Leisure Club may be interesting for you to make your very first $1,000 real estate investment. And this is just one example from one vicinity that we work with.
To learn more about investing on the Vicinity platform, check out our library of how-to videos.
Taxes for Investors: What Forms You Should Expect
So you’ve made your first investment on the Vicinity platform–what comes next? Well, whenever you make some money, inevitably, taxes come right behind (hey, at least you’re making money!).
The taxes that you pay on a Reg CF investment will depend on the type of financial entity that you’re investing in—typically an LLC corporation or a C-Corporation. All deals published in Vicinity specify what type of entity they are, and most investors will receive a Form 1099 or a Schedule K-1 tax form.
If you make a debt investment in an LLC or C-Corp via the Vicinity platform, it will generate interest income taxed at the same rate as your other ordinary income. You’ll have to report the income that you make from this investment to the IRS using the Form 1099. Although there are several 1099 forms, you’ll probably receive Form 1099-INT.
If you make an equity investment in an LLC (most likely in the form of a membership interest in the company) via the Vicinity platform, you should receive a Schedule K-1 tax form. This form is issued once a year, usually by March 15, and is used to report to the IRS incomes from investments in a partnership or LLC. The purpose of the Schedule K-1 is to report on each member’s share of an organization’s gains, losses, and other distributions.
For a more in-depth review of taxes for investors, see our article dedicated to the topic.
As a final note, you should know that Vicinity (and all other Reg CF platforms) cannot give you tax advice. All tax forms and documents will be provided to you by the relevant parties, according to your investments.
Vicinity: Bringing Millennials and Investing Together
Reg CF has been a game changer for millennials looking to invest. Now that you know the Reg CF basics, it’s time to take the next step and start building and diversifying your investment portfolio.
At Vicinity, we are here to support you on your local investing journey. Our platform is more than just an investment tool. It’s a community of like-minded individuals across all investor and issuer demographics that are dedicated to financial freedom.
We firmly believe that the best way to invest is to begin close to home with what you know—the opportunities in your backyard. If you’re ready to make a difference in both your community and your portfolio, sign up with us today.