Crowdfunding And Working Out The Kinks

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Includes: IYR
by: Llenrock Group

About six months ago, we published a post, analyzing the controversy surrounding the impact crowdfunding was having on the commercial real estate industry. Some feared that traditional financial sources wouldn't be able to keep up with the popular method of pooling in capital from a number of different investors. Others were more optimistic, predicting that large institutions would adapt to the ongoing changes technological advancements inevitably present by adopting this structure and steal business away from start-ups.

Let's flash back real quick. Remember when the SEC passed Title III of the JOBS Act back in October? Well, it was one of the biggest rulings of the year, which allowed for non-accredited investors to enter the game of billion-dollar equity crowdfunding. What is the big deal? Prior to this, only accredited investors were able to participate in real estate crowdfunding. An accredited investor is an investor with either a minimum net worth of $1M or annual income of at least $200K, according to RealtyShares. The new ruling opened the door for real estate crowdfunding platforms like RealtyShares, and allowed for non-accredited investors to join in the fun for as little as $1k.

All the hype is not without concern, of course. David Tobin, principal at Mission Capital, told The Street that since the practice of crowdfunded real estate is so new to the market, there are still legal and liquidity concerns for investors. Tobin told The Street:

"...questions will endure as to the exact legal structure of crowdfunded deals and whether or not they should be subject to oversight by the U.S. Securities and Exchange Commission. Regarding Liquidity….marketplaces and platforms related to the secondary trading of crowdfunded investments will arise and develop, although they are not here today."

However, crowdfunding companies continue to thrive. In December, Fundrise, one of the most successful online real estate investment platforms, introduced one of the first ever non-publicly traded REITs accessed solely through the web. Fundrise CEO Ben Miller, whom we interviewed in April, noted that it only took four hours for the eREIT to become oversubscribed by 403%. Because of the overwhelming amount of traffic, the platform had to restrict access to investments until all were processed.

While Fundrise's eREIT hit a speed bump in understanding both the extent of the mass appeal it presented, turning investors a little flustered, and the rate at which the technology could process such investments, the new type of REIT is certainly the future.

In fact, real estate investment is the fastest growing segment of crowdfunding. Not only does it open the door to foreign investors, but it also is a method that young people (Millennials), who make up 30% of the U.S. population, will fully participate in.

However, things aren't all daisies and sunshine. Popular crowdfunding startup iFunding was just hit with a second lawsuit since December. Michael J. Turner, who invested a total of $100,000 in the company in 2012 and 2013 for 20% stake, claims that the co-founders refuse to recognize his stake and he is seeking to liquidate the company. In December, a small investment bank called CapStack sued iFunding after claiming that the startup had lied about funds raised for two real estate projects the bank invested in, according to The Real Deal.

Crowdfunding simplifies the process of raising capital for growing companies by putting investors at their fingertips, literally. But some crowdfunding platforms seem to be getting ahead of themselves, knowingly or not. While these platforms are revolutionizing online investment offerings, such competition may encourage a considerable growth in the amount of off-market activity, says GlobeSt.com. How are traditional firms going to adapt to these new advances?