In the 1960’s they used to have this big bulky thing called 8-Tracks. It was the hot item back then…the sort of item you’d impress your date with! Fast Forward to 2016 and welcome to iTunes and Spotify. No cassette, no tape. As long as you have access to Wifi, you will have unlimited music at your fingertips. So, what has changed? You still listen to music! But yet everything has changed. It’s about how you go about getting there.
In our Commercial Real Estate Capital space, over next 10 years, blind pools of capital will be the 8-Tracks of the industry. “Crowd Funding” will be the Spotify. My business partner and R2Crowd co-founder Chad Gemmell presented at the Land & Development conference in Toronto today on a “Capital panel”. Alongside with him were 4 other distinguished and experienced panel members representing some of the largest “traditional” and very large lending institutions.
While I was listening to different perspectives, I was amazed at the level of misinformation, denial and push back from the “Traditional Sources”.
Here are the top 5 myths that I would like to bust for commercial real estate investments via a “crowd funding portal”:
1. Crowd Funding is $50 to $100 raises. WRONG.
Average size is $10,000 to $50,000 per investor. Eventually in the long run the amounts invested will get smaller but not in the near future.
2. Crowd Funding is unregulated. WRONG.
The wild days of the past when unregulated individuals were able to raise capital from unsophisticated investors are long gone. Any type of Debt and or Equity raise now is HEAVILY regulated by OSC and others. 4 main “exemptions” (exemption from a full blow prospectus that is) are available for capital raise with each having its own very strict requirements: AI, OM, Crowd Funding and Friends & Family exemption. Each of these now a days have a very rigorous forms of KYC, AML, Risk Suitability etc checks in place.
In the CRE space, most of the portals rely on either AI or OM exemption and they also need to have an Exempt Market Dealer license. To get such a license costs upwards of $50,000.00 and over 6 months sometimes. Rigorous in person interview by the securities commission is just a small part of the process. Police checks, business plan, working capital requirements, experience and many more items are part of Regulators’s due diligence.
This is not early 2000’s anymore when unscrupulous agents were able to get in and take advantage of unsuspecting consumers.
3. Crowd Funding portals use “Crowd Funding Exemption”. WRONG.
Almost all of the known Crowd Funding portals are NOT using the “Crowd Funding exemption”. They are using Accredited Investors and Offering Memorandum Exemptions. The very same exemptions that are used by the blind pools!
4. Crowd Funding portals can raise unlimited amounts from general public. WRONG.
Securities regulators have taken a VERY conservative view of the Crowd Funding regime and have limited the maximum raise amount per project of $1.5MM. They have further put an investment maximum of $2,500 per investor transaction amount to a max of 4 times for a total of $10,000 per Year. Hence, most of the portals are instead relying on the AI and OM exemptions.
5. Investors are incapable of making their own investment decisions via Crowd Funding. WRONG.
Would you rather invest $50,000 of your hard earned money through a blind pool that has a heavy management fees and platform expenses, discretionary power on where to invest, to halt dividends, make bad decisions, have conflicts of interest?
Would you rather invest that $50,000 into 5 different projects of your liking diversified across product types, geography and property type? Would you rather do all of your due diligence yourself online without the pressure of a nasty salesperson or your Financial Advisor exerting influence on you because he/she makes better commission on a “Blind Pool A” vs “Blind Pool B”? Would you rather go into a Blind pool with no direct security VS. going directly into asset level Limited Partnerships?
The answer is clear and that is why Online CRE portals in the US have raised $3B in 2015 and soon going unto $6B this year.
To compare property secured investments via CrowdFunding to CDO’s and CDS’s that got US in trouble in 2008 is not only an Apples to Oranges comparison but simply blasphemous.
Finally, is there risk? Yes there is. However, it’s about risk mitigation and making a balanced risk adjusted return. Crowd Funding is not some magic concoction or financial alchemy but simply an efficient and scalable way of distributing the investment product using technology. BUT the underlying risk is no different than the risk in any other CRE investment such as a REIT or a blind pool. However, given the asset level security and due diligence, it’s simply more measurable and predictable!