Can the Security and Exchange Commission’s (SEC) new crowdfunding rules prove a boon for real estate?
Jilliene Helman sure hopes so.
After years of working as an investment advisor and wealth manager, “I sort of started seeing this pattern. Our wealthiest and most successful clients were all real estate investors,” she says. She’s now hoping to bring a taste of that success to the masses.
Crowdfunding is a mechanism which leverages the power of the Internet to help get new projects off the ground using contributions from hundreds or thousands of small investors. In a mere four years, Internet startup Kickstarter has become a multi-million dollar company by riding a tidal wave of other people’s money, becoming the go-to platform for creative types like artists and designers looking to fund their next album or create a new iPhone case.
But while Kickstarter is aimed at funding single projects, many observers are just as excited about crowdfunding’s potential to help launch new companies – and now, thanks to new rules loosening the reins of financiers, entrepreneurs like Helman are hoping to bring that same model to real estate.
For decades following the Great Depression, the SEC kept a gimlet eye over the investment world, requiring that investors in certain risky asset classes be “accredited” – that is, that they met certain high net worth and/or income requirements. Accredited investors were presumed to be sophisticated and familiar enough with investing that they understood the risks they were taking, while companies looking to offer stock or other securities to the general public faced much greater scrutiny and stricter regulations.
Last year, however, Congress passed the Obama administration’s JOBS Act, which loosened many of those restrictions, paving the way for new companies to use crowdfunding to generate equity. Helman’s company, California-based Realty Mogul, is planning to use the model to fund new commercial and residential developments.
Wider Market
“Non-accredited investors haven’t had the opportunity to invest in these private investments for 80 years,” said Helman. “To date, we’ve been limited to accredited investors. We’ve invested about $8 million over the past seven months, but that’s all been with accredited investors. So with this new law, we’ll be able to open that up to a wider market.”
Helman’s firm provides both direct equity to larger projects and maintains portfolios of loans secured by real estate.
“Our loans could be as small as $100,000 or $150,000, or even smaller than that. Sometimes we’ll have a pool of $8 million in loans, but we can provide access to an investor on a loan by loan basis,” she said.
For larger projects, she’s hoping to use so-called “simultaneous offerings,” which allow both accredited and non-accredited investors to invest in the same project.
That “will allow us to bring some economies of scale into the process. You could do a $10 million capital raise, and have $9 million come from accredited investors and $1 million from non-accredited investors,” she says.
That’s particularly important in the real estate sector, because unlike investing in a new company, where $1 million can be more than enough to get off the ground, commercial real estate investments generally require significant capital.
“For us, if we want to invest in a $20 million project that needs $6 million to $8 million in equity, that’s a very different animal,” she said.
There may still be bumps in the road ahead. The SEC’s new rules on crowdfunding won’t be finalized until early next year, and they may yet revise some of the requirements. For now, the SEC is requiring offerings which solicit more than $500,000 from small investors to undergo a full financial audit, a process which can take weeks and cost tens of thousands of dollars, impacting profit margins and potentially rendering some of the deals Realty Mogul specializes in unsuitable for smaller investors.
In addition, the kinds of equity investments Realty Mogul specializes in are riskier and less liquid than investing in stocks and bonds. In a downturn such as the one the real estate market recently experienced, projects might be subject to delays, making it tough for investors to pull their money out and potentially putting it at risk. Many investment advisors suggests that those looking to diversify their retirement portfolio by putting some money into real estate do so through real estate investment trusts (REITs) which are often publically traded and therefore easier to withdraw from should the need arise. Given investor’s fresh memories of the great crash, it remains to be seen whether enough punters will flock to crowdfunding to make it a viable investment channel for real estate.
But Helman isn’t worried about attracting interest. “I have investors calling me every day wanting to know when they can get in,” she said.
Email: csullivan@thewarrengroup.com
