Crowdfunding: Not Just for Start-Ups Anymore

Date: 04/02/2014

Move over Kickstarter. Changes in the Jumpstart Our Business Startups (JOBS) Act mean that crowdfunding is now allowed for commercial real estate. As a result, several real estate crowdfunding companies and websites have popped up to take advantage of the new pool of previously untapped financial sources.

On a recent episode of the “Commercial Real Estate Show,” my guests and I delved into the changes in the JOBS Act, outlining who is allowed to raise money and invest through crowdfunding. We took a closer look at three new online companies designed to make raising funds and group investing more efficient.

JOBS Act Loosens Restrictions

The JOBS Act has created one of the biggest shifts in how investors can access capital for real estate, said Adam Hooper, CEO of Real Crowd. In September 2013, advertising for specific real estate opportunities changed, so now companies can spread the word about raising capital for private offerings. This has allowed companies to create or utilize crowdfunding services to raise capital for investments.

The biggest challenge in raising capital today is inefficiency, but the shift in the JOBS Act has changed that, Hooper said. “Everyone has a network of investors they go to and at some point you become a victim of your own success,” the investors becoming tapped out. “We alleviate this problem by having a network of thousands thanks to crowdfunding.”

New Investor Pool to Crowdfunding?

Under the change in the JOBS Act, companies that use crowdfunding have to take extra steps when general solicitations are made to be sure potential investors are accredited.

As of now, crowdfunding is limited to accredited investors, but the SEC recently proposed Title III, which would open crowdfunding to non-accredited investors, said Jilliene Helman, CEO and co-founder of Realty Mogul.

Currently, accredited investors can invest any dollar amount in real estate via crowdfunding, Helman added. However, proposed regulations would put a $1 million cap on how much capital can be raised through crowdfunding if non-accredited investors are allowed to enter the investing pool.

“That’s a big challenge because $1 million in real estate just isn’t meaningful,” Helman said. “If you are the SEC and you ask yourself what’s the risk profile for real estate compared to crowdfunding for a small business or start-up, real estate doesn’t just walk away. Small businesses close and start-ups fail, but real estate is a physical thing.”

Most likely, the cap won’t come to pass, Helman said. “However, there will be specific regulations for commercial real estate. Regulators didn’t understand how big crowdfunding for real estate would be when they first compiled the regulations.”

New Online Sales Platforms

Real Crowd, which launched in August 2013, allows investors to view real estate they can invest in and gives real estate operators an efficient way to raise capital. While operators typically spend 40 to 60 percent of their time on fundraising and investor management, Real Crowd can reduce it to 10 to 15 percent, said the company’s CMO, Roman Rosario.

“We have investors around the country and internationally that can come to one place, view opportunities, review due diligence and make investment decisions, all through our website,” Hooper added.

Realty Mogul is an online marketplace for real estate investing that matches sponsors with accredited investors, Helman said. Realestate sponsors typically already have a property under contract and then come to Realty Mogul to raise a portion of equity capital. Realty Mogul pools investors into a single entity that makes one investment with a sponsor.

“We are usually looking for best-in-class sponsors that are focused on a specific geography and property type,” Helman said. “Historically, our investors have completed more than $100,000 in transactions before turning to crowdfunding to grow their portfolios.”

RealConnex matches partners from 10 professional groups — developers, investors, sponsors, lenders, designers, builders, engineers, advisors, brokers and insurance agents — to get transactions done, says Roy Abrams, CEO of RealConnex.

“RealConnex is going to fundamentally change how transactions get done,” Abrams said. “The old way of doing deals involves building your network and finding contacts. It’s time consuming. RealConnex aims to shrink the time spent networking and opens up a broader range of contacts than before.”