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CRE Finance World Summer 2015
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At their core, most platforms offer largely the same tech-driven
features and benefits. For deal sponsors (“issuers”), platforms
help streamline capital formation through deal monitoring tools,
transaction management functionality, privacy controls, and access
to a database of registered investor users. For investors, they
provide transparent access to all of the tools and the information
needed to review, evaluate, and invest in a variety of opportunities.
Yet that doesn’t mean all platforms are created equal. Beyond the
technology benefits, platforms vary across seven key variables:
1. Focus: Does the portal concentrate on a specific type of real
estate asset or a particular geographic region?
2. Due Diligence: Does the platform vet its deals? If so, how?
What are its investment selection criteria?
3. Products: Does the platform offer debt or equity investment
opportunities?
4. Regulatory Profile: Does the platform operate as a registered
broker-dealer or just an intermediary?
5. Service Range: Does the platform help issuers craft their
investment offerings or is it self-service?
6. Deal Structure: Do investors receive notes or make direct
investments into the deals on the platform? Or, are investments
pooled into a special purpose fund?
7. Portal Compensation: Is the platform paid via profit participation,
points, or a flat fee?
Issuers and investors should research a platform to understand its
niche in the overall market before investing or pursuing a capital
raise. The most reputable platforms — among them EarlyShares,
RealCrowd, Fundrise, and several others — offer a wealth of educa-
tional materials and resources to help you make the most of their
products and services.
#3 Capital Raises: Options for Streamlined Syndication
Given the vast number of real estate crowdfunding platforms
on the web — now estimated at over 100 — there are variety of
fundraising vehicles available to developers and sponsors to help
them capitalize on the crowdfunding trend. Investors and issuers
alike should understand the different options, since they can
impact the structure of the investment offerings.
Private Raise-506(b): Leverage technology to conduct a tech-
powered private placement
Many platforms offer issuers the option to utilize their transaction
management and deal tracking tools without making the deal
public (and thus incurring the legal requirements that come with
initiating a 506(c) raise). With a private raise, sponsors can leverage
the benefits of technology without having to go through the investor
verification process. Issuers simply invite members of their existing
networks to view and invest in their deal(s). The drawbacks:
no marketing exposure beyond their existing network, and no
investments from new audiences.
Direct Crowdfunding: Raise funds publicly and directly from
accredited investors
In this model, an issuer posts a deal to a platform — triggering
506(c) — and accepts investments from members of his or her
network and new investors who contact the issuer through the
platform. The sponsor publicly syndicates a portion of the debt or
equity (usually between $1 and $5 million) and accepts 5-40 new
investors into the deal (on average, depending on offering size and
minimum investment). Typically, the platform takes care of investor
verification and furnishes the sponsor with documentation for his
or her records.
‘Fund’ Crowdfunding: Raise capital into a fund and share profits
with your platform
This option is largely the same as the one above, but involves
slightly different structure. The platform will pool all investor
commitments into an LP or LLC and then use the fund to invest
directly in the issuer’s deal. As such, the sponsor only has one
new investor in the offering: the fund. Some platforms pre-fund
the deal by underwriting it up front and syndicating it to investors
after the fact. Others open the fund directly to investors and close
the offering once the target goal is reached. The platform typically
acts as the fund manager and shares a percentage of the profits
after investors receive their take.
No matter which approach appeals to you, it’s a smart move for
all constituents in the real estate market to familiarize themselves
with the concept of crowdfunding, given its growing popularity
and its potential to fundamentally change the way real estate
dealmakers do business. Now is the time to act, because the real
estate crowdfunding industry is expected to grow to more than
$2.5 billion in 2015.
The Three Keys of Real Estate Crowdfunding