Sponsors using Crowd Funding?

Question

Sponsors and Sydicators -Who all is using or has experimented with crowdfunding as a tool to raise all or a portion of your equity stack?

What do you like about whatever platform you are using and what turns you off of other platforms?

What features do you like, what do you not like?

For those who have not jumped in but are considering it what features / terms would make you pull the trigger?

I'm consulting with a group building a new CF platform with the goal of being a transparent and open market-place to connect pre-qualified sponsors with pre-qualified investors. I'm curious with the proliferation of CF platforms what everyone's experience has been?

Thanks in advance!

Danny Randazzo · Answer

great topic @Spencer Gray our group has not used crowdfunding and I've heard mixed reviews from syndicators with experience using them. I'm interested to hear what others share on this topic. @Ben Leybovich or @Joe Fairless or @Dan Handford do you know anyone who uses crowd funding?

Ben Leybovich · Answer

And this is why I allow for the possibility of changing my mind. I've also been approached by serious silicon valley start-ups trying to make private placement investments easier to trade, which, of course, involves the very difficult issue of valuation.

There are many things happening, but I am not a believer yet.

Ben Leybovich · Answer

It's a tool in the box, for sure. However, my main objection is - just because something is legal and you can do it, doesn't mean it's the right thing to do. I take issue with allowing $1000, $5000, or even $10000 investments into my deals. The way I see it if someone can't stroke a check for $50,000 they are neither successful enough to sustain a loss or sophisticated enough to underwrite the risks. A $5000 loss to that person will hurt more than a $50000 to one of my investors.

There are always risks, and outsourcing the underwriting to a platform does not solve the issue in my mind. This is my personal feeling and for now it outways the benefits. Who knows - I may change my mind in the future.

Ben Leybovich · Answer

I've never used crowdfunding. No need...

John Corey · Answer

Spencer,

I am very interested in hearing what others think. My experience has all be outside the USA. The UK in particular. From what I can see so far, the UK is much more aligned with retail investors being able to take part and the compliance burden being much lower.

John Corey · Answer

Spencer,

We can discuss in great detail when we speak by phone.

One point I want to make here for the wider audience is the idea that more people can access a deal if they could do so using crowdfunding.

In the UK, where this is possible already, what you also find is more people who do not know how to spot a good deal vs a bad deal invest. The barrier to entry is lower for the cash investors. There is nothing about crowdfunding that ensures the sponsor is up to the task. The logic is the crowd should make their own, individual, decisions. Good real estate deals are not always the easiest for people to grasp. One saving grace is a low entry. If someone can invest £100  or $100 in a deal, they can afford to lose the money while learning. Standard investment advice is to never invest more than you can afford to lose. That implies the ticket size has to be very small for the masses to follow the advice.

Spencer Gray · Answer

@John Corey Thanks for your insight! I definitely agree that CF does not nor will it replace traditional methods of syndication. I do see it as an avenue to create broader access to opportunities that traditionally have been sequestered to the country club house or other similar groups. That's all great and is the bread and butter of the industry, but there's a much larger swathe of the population that would invest in real estate if there was an easy way to access the deals.

Mitch Provost · Answer

Just a note about small investments ($1k-5k, etc.), I know very high net-worth investors that are happy to invest only $5k in a deal because it helps them spread risk to meet their yield objectives with maximum potential (i.e. not Wall Street). As we know, this business is very risky and success depends heavily on sponsors. Investors that don't know sponsors intimately will naturally feel an additional amount of risk.

Everyone is different and there are pools of investors with similar risk profiles that lean conservative. These may not be the investors for you, but they are out there and en masse have large sums of money to invest.

Dan Handford · Answer

@Spencer Gray

I have done some investigating here but never pulled the trigger as it was too expensive. So far we have not needed it and as long as we can continue to raise the funds required from our own network of investors than we will likely never consider it again.

I do see some of the advantages but they come at a cost.

John Corey · Answer

I have spent a lot of time in the space working with UK real estate crowd funding sites. In the UK, the FCA is the equivalent to the SEC. And there are no states to worry about. That said, the FCA authorisations create the right to passport into other EU countries.

There are sites which go as low as £1.00. The sites I have the most experience with are focused on equity raises (selling securities, shares or bonds). These sites tend to set a minimum investment at £100. They are single transaction raises and it would be something like a SFR project. Not a large MFR project where you need larger sums. In most cases there is an institutional lender providing the debt in front of the crowd's equity. The sponsor may or may not have cash in the deal. They definitely have control. It is assumed, subject to DD, that they have the competence.Why am I sharing this?

I think CF serves a different market than the one most sponsors operate in. More so given the history. If you are already successful with syndication, you are unlikely to find crowdfunding to be very interesting.

If you are a property investors just getting started, the idea that you could present a deal legally, attract investors, pool their funds and get on with the project is magic.

Those of us who are experienced and have invested for some time know all know that you have to start somewhere. Crowdfunding can be that place.

What I have not figured out is how well the USA SEC regulations work. They do not seem to be designed in an entirely thoughtful way. The FCA has been at it longer so maybe a better place to get ideas from. You will need to stay well within the SEC's regulations. Just highlighting that with any new business model, there are bumps in the road and details which need to be ironed out later.

Very happy to contribute to the conversation. I do want to caution people that CF will not replace syndication so best not to even expect they compare well. They can be complimentary and server different needs.

Sponsors using Crowd Funding?

Most Popular Reply