How the Biggest Change to Crowdfunding in Years Affects Investors

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Hey there, BP! As you probably have noticed, crowdfunding has become a buzzword in our industry. More and more projects are being funded — at least in part — with the aid of crowdfunding. I just read that crowdfunding initiatives raised $34.4 BILLION in equity in 2015. WOW! For those who don’t know, the regulations around crowdfunding changed last month, and I am very excited about it.

How Crowdfunding Works

The way crowdfunding works is that a deal sponsor submits a project to a third party platform called a funding portal. That funding portal reviews projects and offers up those that they feel would be a good fit for their investor base. The projects that were selected were typically enormous projects needing ten of millions of dollars of investments. This could include shopping malls, big development deals, and large rental acquisitions. You rarely see smaller projects requiring less than $2 million in equity on these sites.

Related: 7 Elements to Look for in a Real Estate Crowdfunding Portal

Until recently, the only investors who could participate in these projects were “accredited” investors. An accredited investor has a net worth of at least $1 million, excluding the value of their primary residence. Or they could have income of at least $200,000 yearly for the prior two years (or $300,000 combined income if married), with the expectation to make the same amount each year. These investors were allowed to invest large portions of their available cash into these deals. It was assumed that to attain their financial stature, they had to have had some semblance of financial knowledge.

How Changes to Crowdfunding Affect Real Estate

In my humble opinion, what we do as real estate investors provides great value to those who invest their hard earned money with us. Until recently, the only place an investor could go to put their money to work was Wall Street. Although there are plenty of good options there, there are not enough to provide real diversification. Crowdfunding and the recent changes to it allow for access to our investments by more people. We grow our businesses and they get more options to build their wealth. It’s a real win for both.

Related: 4 Crowdfunding Benefits All Real Estate Investors Should Consider

In today’s video, I sit with Jeremy Browner, a licensed attorney in the State of North Carolina. He is well versed on crowdfunding and the recent changes to the regulations. We discuss what has changed and how it affects our industry! Enjoy!

Investors: What do you think about the changes to regulations surrounding crowdfunding? Will you participate in this growing trend?

Let’s talk in the comments section below!

About Author

Matt Faircloth

In 2005, Matt founded The DeRosa Group along with his wife, Elizabeth. At the time, the two person company owned and managed two assets – a single family home and a duplex. Over the last nine years, they have grown the company to a 12 person team owning and managing over five million dollars in residential and commercial assets throughout the central NJ and Philadelphia area. One of DeRosa’s mantras is “to make money while making a difference.”

24 Comments

  1. Tom Keith

    Thanks Matt, I agree with you that Crowdfunding is finally open to most any real estate investor. Helps those who cannot be the boots on the ground or the money behind them. Here they can be part of this world and grow what they have to get a leg up. Tom

    • Matt Faircloth

      Hey Tom,
      I’m glad you enjoyed the video. I find that there are two parts to an investment equation. One is the Deal Provider – the person that goes out and finds, coordinates, negotiates, supervises, and brings the deal to fruition. The other is the Cash Provider – the person that brings the $$ to the table to make it all happen. Sometimes this is the same person. In deal syndications it’s not, and crowdfunding has allowed for those Deal Providers to put well-vetted opportunities out there for Cash Providers to get involved in. It has given a brokerage space for those with cash and no time to partner with people with deals, not enough cash, and plenty of time.

      Thanks again for the comment!
      Matt

  2. Earl minnis

    Have you guys heard the old saying ” a fool and his money are soon parted”? That will be the end story on crowdfunding. You can not let people control a million let alone 10’s of millions or more of money that they have not earned and expect a positive outcome. These are relative young and inexperienced people who are playing a new game. The outcome will not be pretty.
    The crowdfunding people have a fleet of attorneys who’s only job is to protect their clients, the syndicator. Unless the investors have a fleet of the same to protect them they will be screwed. You should be aggressively advising anyone from investing in these intities unless you are willing to personally stand behind these companies. I doubt you have the personal funds to do that.
    This is wrong what you are doing and in essence telling inexperienced and uninformed people this is the new flavor of the day and OK to invest in. I could go on and on why this idea is crazy.
    You probably ask from where do I speak? Forty plus years of buying and selling well over 2000 houses and lending 10’s of millions of my personal funds on real estate. Started at 20 with basically nothing. Earl Minnis

  3. Matt Faircloth

    Hey Earl,

    Good to hear from you. I saw you made the same, if not identical, comment on another blog post and on the forums. I’m glad you decided to bring the conversation here also!

    First let me congratulate you on your successes in real estate. Staying in the game and completing as many deals as you have over the years is quite impressive. I and I’m sure others on BP would love to hear how you did it and what you learned along the way. I am not sure how much actual Crowdfunding you have done yourself or research on the subject, but I would love to hear where you have learned about it as your opinion on the subject seems to be very strong, Do you care to share on that?

    I’m not sure if you watched the video but this article was about the changes to the rules around Crowdfunding that were just made last month. This article was not intended to be a promotion for or against Crowdfunding, just an attempt to make investors more aware of the change in the rules.

    As I’m sure you know, deal syndications have been around forever. Formations like this are how large purchases and developments of some of our country’s greatest real estate assets have been funded. Until the recent changes, all Crowdfunding was doing was giving Accredited Investors more options for deals they already had the rights to do. Nothing has changed aside from taking a conversation that was already happening and put it online.

    I also respectfully wanted to challenge you with a question – what’s the difference in doing a crowdfunded deal versus buying a stock? They are both equity investments in companies that you will never know all the financials or vet out completely. Can you sue your stock broker if they sell you a stock that crashes? Can you sue the CEO if he runs the company into the ground? As a deal syndicator myself I would submit to you that we have much more to lose than a CEO of a company you can just as easily buy on Wall Street.

    I’m hoping my friend Jeremy can jump in on this one also but it’s my understanding that the attorneys for the Crowdfunding portals are out to defend the portals’ interest, not the sponsor. I would be willing to bet that if a deal that Realty Mogul or another site like it went south, Realty Mogul would jump in and go after the sponsor also. These Crowdfunding portals are neutral parties, providing a brokerage service between the sponsors and the investors, very similar to a trading platform like Etrade.

    I look forward to continuing this very important conversation and hope that some others jump in to join us also.

    Take care!

    Matt

    • Earl minnis

      Matt, what happens when a deal goes sideways and you have money involved? You now have many many partners who you do not know. Kind of like a boat without a rudder or captain. Not a good thing. It would be a nightmare on many fronts . It’s not necessary for people to take these kinds of risks.
      I am not particularly an advocate of Wall St. either. I don’t own stocks. I bought 100k worth of Washington Mutual during the downturn and got a check back for I think 160.00 when they went belly up.
      Back to crowdfunding. Nobody truly knows the people who run these deals, only what they tell you.
      I believe if you don’t know what your doing investing your money you are way better off making no return than investing in something you are not 110 percent up on and know ALL the players intimately, which in a CF situation would be next to impossible.
      I did not watch the video. There is nothing anybody could tell me on this subject that would change my mind. Investing with people I don’t know and in an unsecured position is not my cup of tea and I don’t think should be the average persons unless they can afford to throw their investment away, which is not your average person especially the people you are conversing with on this BP site.
      I worked to hard to get where I’m at to Intrust 5 cents to anybody who does not have at least half the experience I have. l hope this gives an overview of my investment philosophy. I have seen many scams over the years and many people “make it” just to make dumb decisions and then loose it all. I did not want to be one of those and so far my common sense approach has worked extremely well. Their is no way to get great returns without a lot of work,knowledge, experience and sacrifice. Just like the old saying ” there is no free lunch”. Earl Minnis

  4. John Bierly

    Matt,
    I am also somewhat skeptical about how much the change in regs will really change crowdfunding, and am speaking as an accredited investor who has participated both in current RE crowdfunding (Realty Shares, Realty Mogul) and also in the general partnership of several RE debt funds. Simply put, opening investments up to smaller investors means more relationships to manage that bring fewer dollars to the table per relationship. Almost any fund manager (RE, Hedge, whatever) will tell you that they would prefer to operate with a few larger investors rather than numerous ones that barely meet the minimum investment threshold. If successful, most would rather increase the minimum investment in their next offering than increase the number of investors.
    John Bierly

    • Matt Faircloth

      Hey John,
      I’m glad an experienced Accredited Investor chimed in. I think you may be right. Just because the SEC says that smaller businesses and deal providers can get on board to present to smaller investors doesn’t mean that it will happen. It’s really up to the funding portals. If they see a way to make money with these deals, they will run with it. If they do, there are plenty of investors and deal providers in the wings that will fill the space up, in my humble opinion.
      Matt

  5. Greg Horn

    Aloha Matt!

    Thanks for a great article! I hear you and commend you on your foresight with crowdfunding in Real Estate. I’ve been involved in the crowdfunding industry for a handful of years now and am excited to see it taking off in the Real Estate sector.

    In my humble opinion, crowdfunding is the way that we’ll be investing in many different things in the future. There are already so many successful examples of crowdfunding for new ideas, established companies, non-profits and Real Estate.

    Non-accredited investors have become accustomed to investing in projects via crowdfunding since its inception on Kickstarter. These investors generally understand that they’re taking a gamble by investing in a new product or new company because they believe in the vision and see the track record.

    Does it always work perfectly and safely, of course not. What investments do? I hear the detractors and their points about the potential pitfalls, but I know they won’t stop the crowdfunding freight train from taking Real Estate along for this ride.

    If anything, in my opinion, all the due diligence that the Real crowdfunding platforms force syndicators to do will HELP the investors in the long-run. Today, you’re trusting the numbers that your buddy puts together and then you’re on your own as an investor to do the due diligence on those numbers. Sure, there’s personal relationship and trust in there and I get that. However, combine the due diligence that the platforms perform with the fact that successful syndicators will have to be so open and transparent about their track record and the crowd will force them to be good.

    Yes, there will be deals that go south. There are deals that go south every day. However, in the long-run, I feel that crowdfunding will be a fantastic vehicle for ALL investors to invest in Real Estate in ways that give them fabulous returns to secure their future.

    Thanks Matt!

    • Matt Faircloth

      Hey Greg,
      Thanks for the comment. As you have a background in the industry I appreciate your opinion.
      I love that you called it the “Crowdfunding Freight Train”, that’s very accurate. If you look at the growth of crowdfunding since it’s inception, it’s a good description. I think that our society is looking for more access and ease, for every activity. That goes for simple things like shopping for groceries or getting a ride on Uber, to the heavier lifts like investing in stocks or alternatives. People want things to be easy and at their fingertips, with just enough rules to prevent unfair play. It’s the wave of the future, whether you like it or not.
      I really appreciate your thoughts!
      Matt

  6. Greg Horn

    Also, Matt and Jeremy, a question: it sounds like currently there isn’t an upper-limit on the size of a deal if you’re working exclusively with accredited investors, but there is an upper-limit of $1M if you’re working with a blend of investors. Did I understand that right?

  7. Is this the OBAMA administrations answer to having made thru regulations small IPOs almost impossible, time
    consuming and an accounting opportunity only for the Big (E&O insured) CPA firms? Thoughts/Comments/Remarks?

    • Matt Faircloth

      Hey Jim,
      I do know that the concept of Crowdfunding was first created in the JOBS act created by President Obama during the financial crisis. Jeremy would have to jump in on what else was included in the JOBS act and what the effects of it have been.
      Matt

    • Jeremy Browner

      This act was a bi-partisan effort by Rep Patrick McHenry and Rep Frank Barney through the JOBS Act. Equity Crowdfunding by non-accredited investors is in Title III of the act. The Republicans really like this idea and the Democrats believe it will be rife with fraud. This exception will try to bring the primary stock market or IPO market to main street.

      I am hopeful that the market will determine the good from bad investments and the fraud will be minimal.

  8. John Vasilakis

    I am a hard money lender and flipper and have been investing in 6 real estate crowdfunding platforms over the last 2 years. In a hard money deal, you can have hundreds of thousands of dollars invested in one or two properties, which requires you to constantly watch the progress of the work and the borrower’s effort so he/she doesn’t walk when the going gets tough. With crowdfunding, you can invest as little as $5K in any one project in all 50 states and even in commercial properties as well. The information is provided to assist you in doing your own due diligence (that’s two people doing the due diligence – the underwriter and you) that same that you would on one of your own hard money deals. However, you don’t have to monitor the borrower and you have a very small investment in one project. Take that several hundred thousand dollar deal and spread it out over 50 crowdfunding projects and you’re risk is substantially diminished, as well as diversified around the country. As a result, I don’t hard money lend anymore and get 10% to 11% interest on my investments. Less effort, better returns and less risk.

    • Matt Faircloth

      Hi John,
      Thanks for the comparison of hard money to equity investments in CF. I appreciate the contrast and pointing out the time requirements as you see them. I also would underscore your reference to the diversity of investments that Crowdfunding offers. If one hard money loan goes south, it will take very long to collect that investment via foreclosure.
      also, I should say that it’s good to hear another perspective on this from a successful hard money lender. thanks for hopping in!
      Matt

  9. Earl minnis

    To John, why are you spending a bunch of time watching projects that you lent on. I have 12,000,000. out in hard money currently and pay no attention except that I get my payments. If not I foreclose. Collect more interest on the default interest or finish the foreclosure and get paid off at the trustee sale or wind up with the property and make more money. A totally secured investment at 50 to 65 percent of value that unless an act of nature happens . I generally get 11 to 12 percent . Paid monthly. This is not the case in CF. Earl Minnis

    • Matt Faircloth

      Hey Earl,
      I have done a few private loans myself both as a borrower and a lender and I would side with John – I want to ensure the health of my investment, even if I’m covered by perceived equity in Loan to Value.

      I could see how you can take a more hands-off approach and wait for the checks to come as a signal of the health of your loan, but that’s only if you are not lending on construction projects. I have found that projects with construction draws need to be watched like a hawk to ensure that they are moving on timeline, on budget, and that the money being sent is actually being used in the project. I know there are private services that can do walkthroughs for you, but I have found first hand that it pays to keep your finger on the pulse!

      You made taking the property back when it’s in default seem very easy, so I will assume that you are in a state that allows a Deed in Lieu of Foreclosure. That can speed things up a bit, but you are still waiting for months and potentially years (as you would in some states) to get your collateral, all the while it’s subject to disrepair and dilapidation.

      The bottom line is that everything has a risk. Hard money lending has a long list of risks. If it didn’t then you would have more competition at lower rates. There are contingencies you can put in place to mitigate those risks but at the end of the day, the business you are participating in has risks also. Your borrowers may just go belly up, the equity you thought you had dries up in another market crash, an unforeseen environmental issue like an underground tank may cause litigation that kills your collateral, or the state may decide to put an oil pipeline right down the middle of the house and compensate your borrower for 50% of your perceived value. You just never know.

      I would submit to you that although you have made it very clear that Crowdfunding is not an investment for you, it has proven itself to be a good investment for others who are making in the mid teens or above on their money.

      Sound fair?

      I should say that although we differ on opinion I appreciate the dialogue, so thanks for the comments and for your passion on the topic.

      Matt

      • Earl minnis

        Yeh Mat your right- I do not do any kind of construction loan financing because of the pitfalls you mentioned and many more. I am a strict equity lender.
        Your mention of a deed in Lieu of foreclosure. This is totally different than holding a trustee sale and being issued a trustees deed. A deed in lieu is a deed from the property owner. A foreclosure in Calif. does not take years unless a BK is envolved and the owner again starts making payments, otherwise it is a 3 month 21 day process.
        Your list of risks are pretty far fetched. Borrowers going “belly up” are just fine-I foreclose and get paid or wind up with the property and make more money. I don’t lend on properties that could have environmental issues or that could be in the path of any sort of pipeline.
        You said to Greg “people want things to be easy and at their fingertips”. This is not reality. Yes, people “want it” but that is not reality. Nothing that is worth anything in this day is easy, nor has it ever been. There is no free lunch.
        Have done 100’s of hard money deals-lost a very few dollars in the last downturn. Most guys doing what I do lost their shirt?
        Can you even fathom what will happen in the next downturn with CF’s.
        I stay in control of all of my loans. I service them all
        One last point. I was told many years ago by Jack Miller and John Schaub that when you allow somebody else to manage your properties or your money you are allowing them to manage your financial future. I nor anybody should allow anyone else to manage their financial future. If you do you are responsible for the results with no impute. Again, a fool and his money will soon be parted. Please look up John Schaub. Every person on this BP site could learn a ton from this man and a few of his friends. Take care, Earl Minnis

  10. Tom Keith

    Matt, here I am again, thanking you for a good blog that helps enlighten folks on the changes in crowdfunding. I don’t remember where you invented CF or told anyone they had to invest in this vehicle. I am not going to tell anyone that they have to do as I do no matter how strong my opinion is concerning the issue. Crowdfunding to me is a way to invest in projects that meet my parameters and risk concerns, previously allowed only to investors with LARGE stacks of money, and these investors were the only ones that received the benefit of the investment. I was able to look back on past jobs, plans, ideas and capabilities to make my decision and much like every other investment, past results do not prove future results will be same. That is in every investment of every kind and any person doing the investment knows this up front. I liked the idea of vetting the group performing on the investment, it’s surely not like vetting every single person, geography, Enviromental, and political issue when trying to decide on a company, stock or even worse a mutual fund. In those cases you cannot even remotely research and understand what makes them be what they are. If you desire to invest you do your own due dillegence and trust and I guess hope for good returns.

    In closing, I think, but not stating or declaring, that if some investors like to put their Millions to work then I should be able to put my thousands in same investment. It is my choice not yours or anyone else that has a preconceived idea on what is a good investment. For once, changes can possibly benefit the little guys not tromp them into oblivion. Thank You, Tom

    • Matt Faircloth

      Hey Tom,
      Thanks for the comment. As you said, I didn’t invent it, nor do I get anything (not even a free toaster LOL) if any of you do a Crowdfunding deal. I am unattached. I am however certain that Crowdfunding will absolutely change the space of real estate investing, whether any of us participate or not.
      My main point of the article and the video is that the field has been (almost) leveled between high net worth investors and the rest.
      Thank you again!
      Matt

  11. Glen Fagin

    Crowdfunding (aka Syndication) via online internet portals will for SURE change the entire RE investment industry! How many times have you walked down a street and saw a very nice multi family apartment building/condo/multi use property that you “wished” you owned a piece of? Well before Internet Crowdfunding, you had to personally KNOW the principle in the project in order to become an “investor” and now you DON’T! I have 50% of my entire net worth tied up in private placement “crowdfunded” deals from various online platforms. And so far…they have all been performing GREAT !!! Letting your money just sit in your checking or savings account or CD’s is just pure torture for me…my money needs to be WORKING for me…not the other way around! By the way…I have since retired from the “working world” at the age of 46 after spending 23 long and hard years in the highline retail car business. No more W2 jobs for me….

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