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Crowdfunding is an innovative, internet-based method to raise money to finance various projects. The necessary funding is contributed mostly in small amounts and by a large number of people.

European Crowdfunding Regulation defines crowdfunding as the "matching of business funding interests of investors and project owners through the use of a crowdfunding platform".

Crowdfunding can be divided into two broad categories:

• the facilitation of granting of loans (a.k.a. loan-based crowdfunding);
• the placing, without a firm commitment basis, of transferable securities and admitted instruments for crowdfunding purposes issued by project owners or special purpose vehicles (a.k.a. equity crowdfunding).

SPV is a widespread English abbreviation for the term “Special Purpose Vehicle”, which means a company established for a sole purpose (e.g. the execution of a real estate development project).

Crowdestate is using SPV-s to structure real estate crowdfunding projects by interposing an SPV between the Project Owner and the investors. During the crowdfunding offer, the investors would subscribe the shares of an SPV (admitted instruments for crowdfunding purposes), and then the SPV would use the raised capital to acquire shares in the Project Owner.

The purpose of the interest auction is to provide the Project Owner with an interest rate as close as possible to the market rates.

An interest auction is a Dutch auction-based marketplace where the Project Owner determines the maximum interest rate offered to investors, and investors participating in the auction submit bids regarding the interest rate during the crowdfunding offer. The final interest rates of the loans and the list of lending investors shall be determined at the end of the crowdfunding offer.

Example

The Project Owner has published a crowdfunding offer through Crowdestate, within which the maximum target amount of loans is EUR 450,000, and the maximum interest rate of the loans is 12%.

Investors submit the following loan offers, which shall be ranked from the lowest interest rate to the highest:

1. EUR 150,000, with a 10.0% interest rate;
2. EUR 200,000, with a 10.5% interest rate;
3. EUR 150,000, with an 11.2% interest rate;
4. EUR 200,000, with an 11.5% interest rate;
5. EUR 100,000, with a 12.0% interest rate;
6. EUR 150,000, with a 12.0% interest rate.

Investors made loan offers in the total amount of EUR 950,000, which is larger than the maximum target amount of loans requested by the Project Owner.

The fulfilment of the total loan amount starts with the offer with the lowest interest rate. Loan offers A and B shall participate in the crowdfunding offer in full, in the total amount of EUR 350,000. Offer C participates in the remaining part of offers A and B (i.e. in the amount of EUR 100,000), and the loan offer made by investor C in the amount of 50,000 euros remains rejected.

Loan offers D, E and F are deemed to be unsuccessful and are thus rejected.

All successful loan offers shall bear the interest rate requested by the last successful investor (in this example - 11.2%, offered by investor C).

A secured loan is the safest and, thus, the least-yielding type of capital. The loan is secured against collateral, which is usually a mortgage on the assets of the company or some other type of collateral. Secured loans are always repaid as the first priority.

An unsecured loan is a layer of capital between equity and secured loans. They are riskier than secured loans but also more profitable. Unsecured loans are repaid to the owner of the capital after all secured debts have been repaid.

A Mezzanine is a hybrid capital (subordinated loan or preferred equity) that lies between equity and secured loan. It has a lower risk than equity – mezzanine financing is repaid before equity but after all loan obligations have been fulfilled. In addition to the usual interest, bonuses that depend on the profitability of the project may be added to the mezzanine capital.

Equity is the capital placed in the company by its owners. The owners are paid the last after all other liabilities have been redeemed.

Rental - Investments in cash flow projects.

Development - Investments in property development projects (the construction and sale of buildings).

Speculative - Risky early-stage real estate investments where the main parameters of the development project are known, but they might change significantly during the implementation of the project (e.g. the zoning process, its duration, as well as potential building rights).

An annual rate of return is the profit or loss on an investment over a one-year period, expressed as a per cent of investment principal.

A capital loss is an accounting measure that describes the difference between the acquisition cost of an investment and the principal value of the investment.

A capital loss arises when an investment is acquired on the secondary market at a price higher than the residual value of the principal of the investment.

LTV is an acronym for "Loan-to-value", which is the ratio of a loan to the value of an asset expressed in percentage terms. 

For example, if a property is worth 50,000 euros and the amount of the loan is 40,000 euros, then the LTV is 40,000 ÷ 50,000 = 80%.

An ultimate beneficial owner is a natural person who, taking advantage of their influence, makes a transaction, act, action, operation, or step or otherwise exercises control over a transaction, act, action, operation, or step or over another person and in whose interests or favour or on whose account a transaction or act, action, operation, or step is made.

In the case of companies, an ultimate beneficial owner is a natural person who ultimately owns or controls a legal person through direct or indirect ownership of a sufficient percentage of the shares or voting rights or ownership interest in that legal person, including through bearer shareholdings, or through control via other means.

Direct ownership is a manner of exercising control where a natural person holds a shareholding of 25 per cent plus one share or ownership interest of more than 25 per cent in a company.

Indirect ownership is a manner of exercising control where a company which is under the control of a natural person holds or multiple companies which are under the control of the same natural person hold a shareholding of 25 per cent plus one share or an ownership interest of more than 25 per cent in a company.

In the case of a trust, civil law partnership, community, or legal arrangement, the ultimate beneficial owner is the natural person who ultimately controls the association via direct or indirect ownership or otherwise and is such associations’:

• settlor or person who has transferred the property to the asset pool;
• trustee or manager or possessor of the property;
• person ensuring and controlling the preservation of property, where such person has been appointed, or
• the beneficiary, or where the beneficiary or beneficiaries have yet to be determined, the class of persons in whose main interest such association is set up or operates.

A politically exposed person is a natural person who performs or has performed prominent public functions and with regard to whom related risks remain.

At least the following persons are deemed to perform prominent public functions:

1. head of State or head of government;
2. minister, deputy minister or assistant minister;
3. member of a legislative body;
4. member of a governing body of a political party;
5. judge of the highest court of a country;
6. auditor general or a member of the supervisory board or executive board of a central bank;
7. the Chancellor of Justice;
8. ambassador, envoy or chargé d’affaires;
9. a high-ranking officer in the armed forces;
10. member of an administrative, management or supervisory body of a state-owned enterprise;
11. director, deputy director and member of a management body of an international organisation.

Middle-ranking or junior officials are not considered politically exposed persons.

A person who, as per a list published by the European Commission, is considered a performer of prominent public functions by a Member State of the European Union, the European Commission or an international organisation accredited on the territory of the European Union is deemed a politically exposed person.

Local politically exposed person means a person specified above who is or who has been entrusted with prominent public functions in Estonia, another contracting state of the European Economic Area, or an institution of the European Union.

Family member means the spouse, or a person considered equivalent to a spouse of a politically exposed person or local politically exposed person; a child and their spouse, or a person considered equivalent to a spouse of a politically exposed person or local politically exposed person; a parent of a politically exposed person or local politically exposed person.

A person known to be a close associate of a politically exposed person means a natural person who is:

1. known to have joint beneficial ownership of a legal person or trust with a politically exposed person;
2. known to have close business relations with a politically exposed person;
3. the beneficial owner of a legal person or trust set up in the interests of a politically exposed person.

LTC is an acronym for "Loan to Cost", which is a ratio used in real estate development and construction to compare the amount of the loan used to finance a project with the cost of building the project.

For example, if the project costs EUR 1 million to complete, and the crowdfunded loan amount is EUR 750,000, the loan-to-cost (LTC) ratio would be 75%.

A crowdfunding project is a business activity for which a project owner seeks funding through a crowdfunding offer.

Crowdfunding offer means any communication by a crowdfunding service provider, in any form and by any means, presenting sufficient information on the terms of the offer and the crowdfunding project being offered so as to enable an investor to invest in the crowdfunding project.

A project owner is any legal person who seeks funding through a crowdfunding platform.

Cash drag refers to the negative impact of excess cash on an investment portfolio’s financial performance. In other words, cash drag is an opportunity cost - instead of being invested in return-generating assets, part of your portfolio is held in cash.

The easiest way to minimise the cash drag is to use Autoinvest to automate your investment activities.