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CRE Finance World Summer 2015



The Three Keys of Real Estate Crowdfunding Understanding New Capital Formation Options

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


“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


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