How Series Limited Liability Companies Allow Investors To Fractionalize Alternative AssetsEquity Crowdfunding
What if you could buy a stake in The Mona Lisa as a dairy farmer outside Des Moines, Iowa?
If you’re wondering if that’s possible – it’s not.
If you’re wondering how that could be possible, it’s through a series limited liability company running an equity crowdfunding campaign under Regulation A of the Securities Act through its own online platform.
A series limited liability company is a special form of LLC that exists in many states and allows you to form separate series under a single LLC. Each series can have different members (i.e., owners) and different assets and each series is treated as a separate entity for tax and liability purposes. Each separate series that is formed under a series LLC can be formed immediately without the need to file anything with the secretary of state.
Series LLCs are useful for allowing investors to spread their investment among multiple types of assets (i.e., diversify) instead of having to invest in just one asset. By using a series LLC, you don’t have to go about creating multiple LLCs to act as parent companies and subsidiaries – you only have to form one LLC and separate series for the assets you want to silo off.
While series LLCs were originally invented in the ’90s as a way to help those working with mutual funds to not have to make multiple filings with the SEC for all their different classes of funds, they have recently shown their viability for simplifying asset protection for real estate developers controlling multiple real estate assets.
Now, where does the art and the crowdfunding come in?
Let’s say you create a series LLC to buy and hold several different investments, like a few separate pieces of modern art. You could issue membership interests in the series that holds the assets, which equates to selling fractionalized interests in the assets, through a Regulation A offering that is filed with the SEC and sell interests in the assets to investors all over the world through an online platform that ultimately may allow those same investors to trade their interests in one asset for those of another asset.
That’s exactly what our client, Otis, does. By using this series LLC structure, coupled with the relative facility of Regulation A, Otis is able to make alternative assets like modern art and collectibles both accessible and affordable to the general public and less speculative since an investor who wants to participate in the art and collectibles market can now diversify a small sum of money over several assets instead of having to purchase the entire asset with a relatively larger sum of money.
In this way, Otis makes it affordable for Joey, who works at a grocery store out in Dayton, Ohio, to buy a fractionalized interest in something like a Kenhinde Wiley painting, or a pair of $50,000 Nike Sneakers, or even Supreme skateboards.
Here’s another example we’re working with at Bevilacqua PLLC that deals with real estate. Compound Projects will offer fractionalized interest in a series LLC that owns a single condo in a place like New York or Miami and allows investors to participate in the potential future rental income and appreciation from that individual property.
Or a third client of ours, RealT, who offers fractionalized interest in properties like multifamily and single-family homes, but sells the stakes via digital security tokens powered by the blockchain. Talk about a winning futurism bingo card for 2020: crowdfunding, digital securities, and blockchain, oh my!
It’s not just our clients though – all sorts of companies are using series LLCs to sell fractionalized stakes in all sorts of alternative assets.
Fractionalized investing in alternative assets as a whole is on the rise for multiple reasons – chief among them mistrust of the stock market and less capital required upfront for entry into an otherwise non-accessible asset class.
When the barrier of entry is lowered to invest in high-value assets like art and real estate, why wouldn’t local mechanic Mike want to try his hand at investing in a commercial property at a $200 stake?
One thing to keep in mind about series LLCs is that each series could have its own managers, members, contracts, and liabilities – just as if they were actually their own separate LLC. No matter how they are divided up, each series will ultimately be protected from the risk of each other series, segregating the risk without having to set up new entities.
If you are interested in learning more about how to set up a series LLC or other methods of capital raising, please contact Lou Bevilacqua at 202-869-0888 (ext. 100). You can also reach us at our general information email at firstname.lastname@example.org.