$63 Million Dollars Magically Stolen at CrowdStreet

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$63 Million Dollars Magically Stolen at CrowdStreet

Caroline Gerardo
Lender · Washington DC · Member since 2015 · 2k+ posts · 2k+ votes

CEO steals the money? Your investment in a syndication 100% at risk?

CrowdStreet, a real estate investment platform, was hit with a SEC news report claiming that $63 million in customer cash went missing. The funds were from an office project in Atlanta that was reported in 2022. The claim was due to a securities offering on CrowdStreet by an issuer that eventually went bankrupt. After the story was published, CrowdStreet said it was replacing its chief executive officer.

The property development company raised millions of dollars through crowdfunded offerings to acquire commercial properties is being investigated for fraud as $63 million is now missing, much of it funneled into the accounts of the CEO and related entities. I am not pointing a finger at Tore Steen CEO or Nightingale Properties Elie Schwartz CEO. The problem stems from deregulation.  

Everyone was so jubilant that securities laws loosened up the qualification gates BUT the problem is in the vetting. I questioned "loosey goosey" accreditation standards going back to the 2013 JOBS Act. If you invested in these projects your money is 100% at risk. Will our government step in? Shrugs?

CrowdStreet like others failed to use professional escrow accounts. An escrow account provides a layer of security for investor funds. Instead of the funds going directly to the issuer, they are held in a separate account managed by a neutral third party (the escrow agent). This reduces the risk of misappropriation or misuse of funds. An escrow account is not the cure all, it's just an extra person to say: "no you cannot use that money to buy a Ferrari."

Another important factor in the success of these platforms is the humans who are choosing the investments. Do they have boots on ground actual experience purchasing, managing, and finding tenants for the type and location of the real estate they advertise?

Have you invested in #crowdfunding? How is it going now that rates are eight percent?

#SEC #accredited #investor

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Bryan Hancock
Investor · Round Rock, TX · Member since 2010 · 8k+ posts · 4k+ votes
3y

Why is it that anytime something bad happens, there is fraud, or some other nefarious situation that there is a renewed call for the gov-mint to protect LPs from being able to take additional risk in search of additional reward from their investments?  The JOBS Act didn't change the definition of an accredited investor and people who invest are big boys and girls that should either do THEIR OWN diligence or find people to help them to vet opportunities properly.  

Escrow agents are not a panacea either.  At some point a closing will happen for the securities offering and you have to trust the operator to operate the project.  The more senior sponsors are unlikely to want to have funds doled out in tranches for their offerings and thus the funds will reside in an operating account.  One can ask about policies, procedures, auditing, who is doing their accounting, or any manner of things to attempt to thwart the downside risk.  Fundamentally many of the issuers are smaller though and there is a reason that the returns being offered are higher than what one would receive from a more liquid securities market.  More return is directly correlated with some type of other risk; be it liquidity risk, execution risk, or many other risks.  

There is no such thing as a free lunch.  Those calling for the government to protect investors from being able to place their capital where they see fit should direct their energy elsewhere.  If LPs don't know what they're doing they should either make a lot smaller bets, hire competent individuals to help them, or do both.  

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  • Bjorn AhlbladPro Member
    Investor · Shelton, WA · Member since 2017 · 6k+ posts · 6k+ votes
    3y

    Another unhappy REI story. The devil is always in the details at every turn and no matter what segment of REI you care to choose.

    Very elegant 1960's 250GT. Is that your ride Caroline?

    0Reply
  • Caroline Gerardo
    OP
    Lender · Washington DC · Member since 2015 · 2k+ posts · 2k+ votes
    3y

    @Bjorn Ahlblad old friend's car not mine. I'm not that flashy more of a 70's Dodge Challenger in black LOL

    4Reply
  • Lane Kawaoka
    Rental Property Investor · Honolulu, HAWAII (HI) · Member since 2011 · 4k+ posts · 2k+ votes
    3y

    It seems like there's been quite a bit of drama surrounding the Nightingale situation where they ended up taking off with the funds. CrowdStreet or any other Crowd funding site they are just a broker dealer, acting as a middleman. It's clear they should've had better oversight on keeping the money in escrow and releasing it properly. But in the end, it was a shady move by Nightingale.

    This situation really highlights the false sense of security some of these crowdfunding platforms can give. They market themselves as doing thorough due diligence, but let's be real, they're not the ones in charge. They're just the middlemen, with no real stake in the game. It makes me lean more towards working directly with operators, sponsors, and general partners.

    Why? Well, for one, it cuts out the unnecessary middlemen who just end up inflating fees, eating into the pockets of passive investors like us. Plus, when you work directly with the folks running the show, you have a clearer picture of what's happening on the ground.

    0Reply
  • Obed Calixte
    Real Estate Agent · St Petersburg, FL · Member since 2019 · 320 posts · 182 votes
    3y

    This is a very unfortunate situation for the investors involved. I am glad this was shared as I was not aware of the situation and now it reinforces my efforts in ensuring I do even further due diligence into all investments -- no matter how "low risk" they may seem.

    1Reply
  • Chris SeveneyBusiness Member
    Moderator
    Investor · VA · Member since 2015 · 21k+ posts · 19k+ votes
    3y

    @Lane Kawaoka

    I agree. Right now nightingale is under investigation not crowdstreet but what this is showing is firms like crowdstreet are tech firms not real estate firms in my opinion.

    We saw what happened to peer street as well.

    Tech firms disguising as real estate firms shoukd raise caution to investors to not only thoroughly vet every deal but also understand their position in the deal - debt, equity??

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    0Reply
  • Bryan Hancock
    Investor · Round Rock, TX · Member since 2010 · 8k+ posts · 4k+ votes
    3y

    Why is it that anytime something bad happens, there is fraud, or some other nefarious situation that there is a renewed call for the gov-mint to protect LPs from being able to take additional risk in search of additional reward from their investments?  The JOBS Act didn't change the definition of an accredited investor and people who invest are big boys and girls that should either do THEIR OWN diligence or find people to help them to vet opportunities properly.  

    Escrow agents are not a panacea either.  At some point a closing will happen for the securities offering and you have to trust the operator to operate the project.  The more senior sponsors are unlikely to want to have funds doled out in tranches for their offerings and thus the funds will reside in an operating account.  One can ask about policies, procedures, auditing, who is doing their accounting, or any manner of things to attempt to thwart the downside risk.  Fundamentally many of the issuers are smaller though and there is a reason that the returns being offered are higher than what one would receive from a more liquid securities market.  More return is directly correlated with some type of other risk; be it liquidity risk, execution risk, or many other risks.  

    There is no such thing as a free lunch.  Those calling for the government to protect investors from being able to place their capital where they see fit should direct their energy elsewhere.  If LPs don't know what they're doing they should either make a lot smaller bets, hire competent individuals to help them, or do both.  

    2Reply
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