Crowdfunding Platforms Must Work Hard In 2018 To Achieve Legitimacy
The concept of online crowdfunding, which allows groups of both accredited and non-accredited investors to help raise capital for projects, is no longer the fad it once was in commercial real estate.
Companies like RealtyShares, CrowdStreet, RealtyMogul and Fundrise have managed to separate themselves from scores of competitors that crowded the market when crowdfunding gained momentum a few years ago.
While these startups are showing signs of staying power, questions remain regarding how the businesses are vetting their offerings, their transparency and how they are growing in scale in order to remain long-term players in the industry. In addition, aggressive competition from institutional investors has made it increasingly difficult for some startups to compete.
Sharestates CEO Allen Shayanfekr said once crowdfunding became in vogue, tech entrepreneurs flooded the marketplace to establish platforms without realizing that crowdfunding, at its foundation, is simply another way of syndicating money for deals.
When crowdfunding first became popular, entrepreneurs flooded the market. By 2015, there were more than 140 real estate crowdfunding platforms in the U.S. Today, only a handful stand out above the rest.
“The true players in crowdfunding realized it wasn’t as simple as setting up a website. Tech folks didn’t understand commercial real estate, syndication, reporting requirements, what questions to ask and how to source deals,” Shayanfekr said. “The best syndicators quickly realized solid reporting is essential."
Unlike traditional syndication, where a group of investors pool together financial resources to invest in properties bigger than they could afford or manage on their own, crowdfunding as a syndication tool is more micro-transactional and impersonal. Barriers to entry are also narrowing as the leading industry platforms mature, grow in scale and are recognized as legitimate.
Shayanfekr said crowding platform Sharestates originally focused on raising equity before shifting its focus to safer asset classes in debt. Sharestates has completed 850 transactions totaling over $750M. Shayanfekr said the firm raises between $50M and $60M for offerings monthly.
“We’re past the inflection point where we’re consistently hitting numbers,” he said.
Crowdfunding: A Post-Recession Economic Driver
As the U.S. struggled with high unemployment and weak consumer confidence after the Great Recession, former President Barack Obama announced the $447M American JOBS Act of 2011. One of the key components of the JOBS Act involved loosening regulations on small businesses that wish to raise capital, including through crowdfunding, while retaining rules for investors' protection.
TriPoint Global Equities founder and CEO Mark Elenowitz said the JOBS Act removed the restrictions on Regulation D general solicitations. Prior to the act’s passage, a firm could only market a solicitation offer if it had a prior relationship with the investor[s]. Title II of the JOBS Act, which covers Reg. D offerings, allows a company to market an offering across the country without violating state Bluesky laws. But there are restrictions: Investors in Reg. D offerings still need to provide proof of income for accreditation.
Elenowitz sees the biggest impact of the JOBS Act on online crowdfunding in Regulation A offerings, which are covered under Title IV. This is where non-accredited investors can deploy capital. TriPoint created a path for a Reg. A company to trade on national securities exchanges, and has been doing due diligence on e-REITs, which have used Reg. A offerings to raise funds. Fundrise raised $100M in 2016 with its first two e-REIT offerings. But Elenowitz said not all crowdfunding platforms are Fundrise.
“Fundrise seems to have figured it out. But there are some other upstarts where we found discrepancies, yields that didn’t make sense to an investor or a manager who had a bankruptcy in the past,” Elenowitz said.
The Inherent Risk Of Investing Through Startups
The success of companies like Sharestates and Fundrise has done little to alleviate concerns about crowdfunding's long-term success. There are still questions about high site minimums and too few investment offerings to diversify, a lack of transparency by sponsors and crowdfunders not doing enough due diligence on their offerings.
Northstar Commercial Partners Director of Equity Danny Mulcahy is skeptical of the amount of due diligence many crowdfunding portals are doing with their real estate offerings, outside of what is already required for Reg. D offerings. Where crowdfunding platforms typically conduct sponsor-level due diligence, many are not evaluating the asset itself.
Mulcahy said investors must recognize the risk that comes with engaging with crowdfunding platforms, as they are still startups. He believes crowdfunding portals should not be seen as the ultimate authority when making an investment decision.
“Most of these sites are still startups. They’ll be hard-pressed not to take a sponsor that is willing to pay them money up front. They’re still operating at a loss. Investors might feel sites are vetting at a level that they aren’t,” Mulcahy said.