Today's Q&A From The Patch comes from a session held by BiggerPockets: The Real Estate Investing Social Network. The topic centered around crowdfunding, particularly how it works, the benefits, and the future of this young industry. The questions were asked and fielded by many industry leaders in the real estate and crowdfunding industry.
Q: What about crowdfunding interests you?
A: I work for a crowdfunding company, Patch of Land, so my interest is pretty high and we are raging along at breakneck speed. Crowdfunding real estate has the ability to open this market up to more investors, which will lead to developers and RE professionals being able to complete more projects. I believe it will ultimately lead to more wealth for those investing, and economic growth for those involved on the ground floor. I also believe very strongly that it will be a source for the overall improvement of communities in America. It's the democratization of real estate investing and an opportunity that cannot be ignored. What do you think?
Q: Benevolent crowdfunding vs. Institutional crowdfunding?
A: There is delineation in crowdfunding, with rewards and donation being most appropriately called 'crowdfunding'. Crowdsourcing is more appropriate when speaking about collective crowd wisdom, or sourcing information without an exchange for anything in return.
Securities crowdfunding under Title II of the JOBS Act is better termed crowdfinancing or crowdinvesting. And within that, can be further broken down into equity and debt.
Peer investing or peer-to-peer lending also is a term, and this has been available pre-JOBS Act through Prosper and Lending Club and represents the debt based transactions.
Whatever terms are being used, 'crowdfunding' is the most known; few people other than those
in the still nascent industry, use crowdfinancing or crowdinvesting but that is changing.
When the JOBS Act was created, the term crowdfunding was described with this acronym:
Capital
Raising
Online
While
Deterring
Fraud &
Unethical
Non-
Disclosure
Q: But can crowdfunding in real estate really work? What are your thoughts on this topic?
A: Crowdfunding in real estate is not only working - it is the fastest growing and biggest (by funding) of all the industries using the Crowdfunding Title II exemption 506c. Crowdnetic is a company that tracks crowdfunding and their quarterly report shows real estate leading by 3x over the next closest industry
The marketplaces in the industry leading the charge in real estate are Fundrise, Realty Mogul, Patch of Land, RealCrowd, iFunding. Each has a niche - equity, debt, residential, commercial. Carlton Group is a proprietary portal that allows an initial investment of $1million - not really crowdfunding. The true crowdfunding portals have much lower minimums, as low as $1000 or even $100.
Related: Download Patch of Land's Top 10 Crowdfunding Questions
Q: I've been looking at these crowdfunding website for a while now and have considered using it as another source of funding for either my flips or income properties but I'm still on the fence about it. I'm just not sure how they get around securities laws. The Jobs Act says they can only market to accredited investors but I've seen some that have public offerings. The SEC doesn't allow general promotion and marketing of securities so I'm wondering what the legal implications are.
A: It's not a matter of getting around the laws, rather, working within them. The SEC does allow general solicitation under Title II rule 506(c), however an investor must verify their accreditation before they can invest. It's an added measure of security that an issuer (in this case the crowdfund portal) must take to ensure they are only accepting money from accredited investors. I hope this clarifies things a bit, and let me know if you have more questions. Make sure, when you are looking at portals, that you work with the leading ones who are working WITH regulators. A few are also registered or partnered with broker-dealers, which isn't a requirement, yet it does provide an added level of security that investments are being reviewed with even more SEC compliance in mind. I've heard that hundreds of these portals may pop up so doing due diligence is necessary. BP is a great place to start!
Q: Do you know if crowd-funding real estate will be available to non-accredited investors? Do you think its feasible? I know it is working well now but this is only with accredited investors.
A: There is still speculation about when retail crowdfunding will be passed. The SEC is working through nearly 600 pages of comments on the Title III piece, but the problem with it is that, if and when it is passed, an issuer can only raise $1mln and the legal costs including providing audited financials is not going to be worth it for most companies. Imagine needing only $250K for your rehab loan and it costing $30K to file! However, there is hope in Title IV, known as Regulation A+ and we hear through the grapevine that there will be news about when this will be enacted, sometime this summer. So unfortunately it is still in limbo. Some companies like Fundrise are doing Regulation A but they themselves have said many times that it is so onerous it almost isn't worth it. The other way is to file with an Intrastate (non Federal SEC) filing allowing for all investors in that one particular state, to invest. Again, the bureaucracy around this prohibitive, but possible.
I would love to see the definition of accredited investor change; for it to not be contingent upon whether someone makes $200K a year. That means absolutely nothing in terms of whether that person is better able to make an investment decision than someone who makes $150 or even $100. Wouldn't it be great if it could be based on knowledge of investments, current investment holdings or other quantifiable factors? I wouldn't mind taking a test, and actually, this wouldn't be a bad option for most people, as it would be a better indicator of whether they know what they are getting into, and whether they should be investing in anything risky at all. That's my hope, aside from a quick ruling on Regulation A+
We hope you enjoyed this Q&A From The Patch. For more information about crowdfunding please see Patch of Land's FAQs. If you have any follow-up questions or thoughts you'd like to share on this topic, feel free to leave us a comment and let us know what's on your mind.
