The Real Estate crowdfunding industry (alternatively referred to as Property Crowdfunding) is moving quickly as awareness increases around the globe and favorable legislation is proposed and pushed forward. We put together a high level overview of recent activity including our thoughts, insights, and opinions and we encourage groups to reach out that would like to learn how we can assist them with their own initiatives.
Industry Direction - like any sector that heats up, there is an abundance of misinformation, hype, and a sense of urgency in many cases. While early movers like fundrise.com (raised a $31 million Series A, lead by Renren, right around the time we spoke initially) and realtymogul.com (raised a $9 million Series A, lead by Canaan Partners at the end of March) are disrupting the market and creating awareness for an efficient online offering/transaction model. They are ultimately what we call intermediary platforms, bringing investors and third party issuers together and there are many shortcomings in terms of the quality of the deals they have access to (it depends how many firms are willing to post deals and give a commission to the platform and then how many of those deals are good quality). That being said, these companies are doing a great job to help pioneer an emerging industry and while their exposure may be more impressive to some than the actual dollars transacted, they are young companies and that will likely change.
More established firms with existing investor networks and access to high quality investment offerings are entering the space or exploring how to enter. The common goal is to grow their institutional and accredited investor networks by leveraging the online model, and create efficiencies in their business via process automation (when possible). There won’t be one big winner in “Real Estate Crowdfunding”, the industry will remain fragmented but the ability for solicitation is game-changer for firms with strong track records.
US Regulation - a lot of people refer to crowdfunding only in the context of non-accredited investors but in our opinion any syndication is technically crowdfunding. For the non-accredited investors to benefit from the new legislation, accredited investors need to adopt the model. Angel List is a great example because many high profile and savvy tech investors actively use the platform. If they allow non-accredited investors in the future that would be great.
Title II – Rule 506 (b) and Rule 506 (c) are the compliance of interest to US groups. Rule 506 (c) allows for solicitation so if your legal team is OK with it, its great.
Title III – the compliance of interest to everyone with even a slight consideration to allow non-accredited investors. Many groups aren’t interested in $300 investments but many that don’t qualify for accredited status still have money i.e., $50,000 commitments. Depending on your deal sizes this may or may not be an interesting option.
Financial Transactions - all companies are different, the offerings are structured different, and how they monetize their investment opportunities are different. There is a lot of confusion whether groups need to be a broker-dealer to operate a platform and take transaction fees. Approaching your platform concept with the assistance of a securities lawyer can help determine the best methods to handle the financial transactions from the platform. Many groups are doing debt deals and not equity participation.
Depending on the structure of a deal and the company’s status with the SEC (for US based) there are different payment services available for very low transaction fees. Whether you require escrow or not presents other considerations.
International - international awareness and demand is growing. Many groups are looking at international growth by accessing investors looking for US assets. Platforms like Eureeca.com in the Middle East are fairly well known and provide a good reference point to investors from those areas. Depending on your investor profiles (and compliance) the international aspect may or may not be of interest but it opens the possibilities.
The industry is dynamic, exciting, and disrupting an industry with more efficient processes, powerful investor tools, and the ability to leverage online exposure.
As a software provider for real estate crowdfunding platforms, we are fully entrenched in this space and hopefully we can educate others and contribute to the growth and success of many companies.
Stay tuned for more updates in the coming months!
