CREFW-Summer2015

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CRE Finance World Summer 2015
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T
Joanna Schwartz
CEO & Co-Founder
Early Shares
hrough new capital raising regulations implemented
in September 2013 under the JOBS Act, “real estate
crowdfunding” has become a highly active sector of the
private finance market. According to a recent report from
Massolution, a research and advisory firm serving the
crowdfunding industry, over $1 billion of capital was infused into
the real estate space through various crowdfunding platforms
in 2014.
Crowdfunding — the practice of raising funds from a group of
people, leveraging online tools — has evolved beyond its origins in
donation-based fundraising into the world of sophisticated equity
and debt capital raising. Through so-called “equity crowdfunding,”
business owners can raise investment capital online from individual
investors who pool their funds with others to buy shares in
private ventures.
Real estate is the fastest growing sector of the emerging equity
crowdfunding market, and its attractiveness to “crowd” investors
is unsurprising. Though the JOBS Act — short for “Jumpstart Our
Business Startups” — was originally designed to increase capital
allocation from individual investors into early-stage companies, the
high level of risk inherent in startup investing has made investors
hesitant to participate in growth opportunities under the new
regulations. Real estate, on the other hand, is a more tangible
and familiar asset for investors to understand.
“When investors are presented with different opportunities on a
crowdfunding platform, I believe the majority prefer to co-invest
with a sponsor who has been in business for a long time, rather
than in a start-up business,” Jack Glottman, President of Saglo
Development Corporation, told CRE Finance World. Saglo is a
Miami-based retail shopping center investment and management
company that owns, leases and manages 800,000 SF of shopping
centers and provides third party management and leasing for an
additional 230,000 SF of commercial property in Florida. Saglo
conducted two successful $3+ million capital raises on Early-
Shares, a private investing platform that specializes in real estate
crowdfunding.
“They’re not without risk, but real estate investment opportunities
come with firm time horizons and yield projections,” Glottman
continued. “When investors can get 7-9% returns on a project that
they can invest in online, that’s a pretty appealing prospect for them.”
Crowdfunding’s appeal for investors is matched by its appeal for
capital raisers. Most real estate developers, project sponsors, and
operators are already well-acquainted with deal syndication —
the process of pooling investments from a group of investors to
finance a portion of the equity for a project. Today’s crowdfunding
(or “private investing”) platforms provide tools, resources, and
services designed to make the syndication process more efficient.
It’s crucial, however, to understand the background and nuances
of the new real estate crowdfunding market before utilizing it as
a tool for real estate capital formation or investing. This includes
gaining familiarity with the current regulatory environment, the
types of platforms in the market, and sponsors’ options for raising
capital — all of which are highlighted below.
#1: Regulations: Making the Private Market Public
The real estate crowdfunding industry has arisen thanks to the
enactment of Title II, which is one of the seven titles of the JOBS
Act. Enacted in September 2013, Title II lifted the ban on the
public advertising or “general solicitation” of private investment
opportunities.
The regulatory exemption for general solicitation is Regulation
D Rule 506(c). Prior to the rule’s implementation, all real estate
syndications were traditional private placements under the long-
standing Rule 506(b) securities exemption. 506(b) stipulated that
capital raisers (“issuers”) could only raise funds from those investors
with whom they had “substantive, pre-existing” relationships.
As such, the pool of investors for a given real estate deal was
largely limited to the sponsor or developer’s network. With general
solicitation, however, dealmakers can now solicit investments from
any accredited investor. The key stipulation is that the issuer is
required to verify that all investors qualify as accredited according
to the SEC’s income or net worth criteria — $200,000 in annual
individual income ($300,000 joint) or $1 million in net worth, not
counting the value of primary residence.
By moving the capital raising process online and broadening
issuers’ access to potential investors, 506(c) “crowdfunding” is
helping facilitate an evolution for the real estate industry. Bringing
dealmaking out of the country club and into the 21st century is a
significant change for the industry — one that may have the potential
transform the real estate finance landscape.
#2 Platforms: Powering Real Estate Through Technology
Despite the relative newness of the real estate crowdfunding market,
investors and sponsors can already choose from a multitude of
platforms to fit their needs.
Crowded Trades: Crowdfunding Enters Commercial Real Estate