CREFW-Summer2015

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CRE Finance World Summer 2015
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Crowdfunding: Join the Crowd or Disperse It?
With new developments to crowdfunding taking place, the reactions
of traditional lenders in CRE to crowdfunding will be quite interesting.
As the traditional CRE lending space is currently constituted,
investment banks, state chartered banks, and other regulated
lenders will likely have a difficult time competing with the speed of
closing and cost of funds that crowdfunding is capable of providing.
Moreover, the arrangers in the crowdfunding space are likely to
draw a younger, more “entrepreneurial” type of borrower and/or
investor that is not as likely going to be drawn to traditional lenders
given their rigors and institutional nature. Conversely, the types of
products that these borrowers are seeking through crowdfunding
are not assets that lenders in CRE traditional lending typically
finance. Yet crowdfunding’s basic proposition of utilizing technology
to draw in capital that would not otherwise be available is not so
dissimilar from the rise of securitized lending several decades ago.
If lenders in CRE traditional lending are going to take advantage
and otherwise co-opt the crowd, their optimal strategy would likely
be to acquire a current crowdfunding lending platform. This would
probably be an easier endeavor administratively as opposed to such
lenders building their crowdfunding platforms from the ground up.
Crowdfunding may provide an expedient financing source for smaller
projects of short duration. In this sense, crowdfunding may have
already carved out its niche from traditional CRE financing. Although,
regulatory concerns for the financial safety of unsophisticated
internet investors may temper that analysis.
Conversely, for larger, more complex financings where efficient
servicing is required and demanded, crowdfunding does not seem
poised to challenge traditional lending. For borrowers seeking
an easier end-user experience or requiring a sophisticated CRE
lender, crowdfunding as currently constituted is unlikely to provide
a particularly attractive debt strategy. Moreover, even if it were, it is
likely that regulators would view any crowdfunding arrangements
with scrutiny. The uncertainty surrounding crowdfunding may dissuade
institutional borrowers from using crowdfunding, as stability in
lending is valued greatly by these borrowers. So in the larger CRE
financings, there is no need to disperse the crowd because the
crowd is unlikely to gather in the first place.
1 Drake, David. “CROWDFUNDING: IT’S NO LONGER A BUZZWORD”.
.
2 Brian Crecente (24 August 2013). The Veronica Mars Movie Project:
movie-project?ref=discovery.
3 Catherine Clifford (19 May 2014).
article/234051?newsletter=true “Crowdfunding Generates More Than
$60,000 an Hour (Infographic)”. Entrepreneur. Entrepreneur Media, Inc.
4 See,
5 Pub. L. No. 112-106, 126 Stat. 306 (2012).
6 See, e.g., 158 CONG. REC. S1781 (daily ed. Mar. 19, 2012) (statement
of Sen. Carl Levin) (“Right now, the rules generally prohibit a company
from raising very small amounts from ordinary investors without significant
costs.”); 157 CONG. REC. H7295-01 (daily ed. Nov. 3, 2011) (statement
of Rep. Patrick McHenry) (“[H]igh net worth individuals can invest in
businesses before the average family can. And that small business is
limited on the amount of equity stakes they can provide investors and
limited in the number of investors they can get. So, clearly, something
has to be done to open these capital markets to the average investor[.]”).
7 Section 4(a)(6) imposes the following limits on investments from any
investor within any 12-month period: (i) the greater of $2,000.00 or 5%
of the investor’s annual income or net worth, if the annual income or net
worth of the investor is less than $100,000.00, or (ii) the greater of 10%
of the investor’s annual income or net worth (not to exceed an amount
sold of $100,000.00), if the investor’s annual income or net worth is
greater than $100,000.00
8 (Release No.33-9470)
33-9470.pdf.
9 As of the date of this article, Alabama, Maine, Michigan, Texas, Washington,
Wisconsin, District of Columbia, Idaho, Indiana, Massachusetts, New
Mexico, Oregon and Pennsylvania have either adopted or proposed rules
and laws similar to the Crowdfunding Proposed Rules.
10 Solomon, Steven, S.E.C.’s Delay on Crowdfunding May Just Save It.
funding-may-just-save-it-2/?_r=0.
11 See CFR §230.501 and §230.506.
Crowdfunding: The Future of Commercial Real Estate Lending or Just a Voice Lost in the Crowd?