Real estate is a huge driver of growth in the crowdfunding space, and it plays an important role in furthering crowdfunding’s exposure in the global narrative. Real estate investing can provide a nice balance of safety and return, and these investments are backed by tangible assets that someone can see and walk through.
In short, investing in a building or a home is easier to understand for many than investing in a startup or early-stage company. The general public is going to have to be introduced to equity crowdfunding somehow, and real estate crowdinvesting sites like Realty Mogul may be a great entry point.
Realty Mogul CEO Jilliene Helman will be included on a panel discussion in Palo Alto on November 13th with representatives from CircleUp, VentureHealth and Crowdfunder. Ahead of her thoughts at that event, we caught up with Helman to talk about the proposed rules and how they may affect the real estate crowdfunding vertical.
Crowdfund Insider: First, in a general sense… what was your overall view of the proposed rules, if you can distill 500-plus pages into an “overall view?”
Jilliene Helman: It’s a step in the right direction to open up private offerings to all investors, but it feels overly burdensome with a host of regulations that may not end up protecting investors. The costs associated with complying with the regulations and the small size of the offerings under the proposed regulations will limit non accredited investors from taking advantage of economies of scale that institutional investors are afforded.
Some have called the auditing requirements (and especially those above the $500,000 funding threshold) too onerous for issuers. Do you agree or disagree?
Agree. If it costs $20,000 to do an audit, that is $20,000 that is going to come out of an investor’s return, not $20,000 that is going to come out of the issuer’s pocket.
On that same topic, we’ve reported on some state-level crowdfunding exemptions with much higher auditing thresholds. Specifically, Michigan doesn’t require audits until $1 million is raised. How do these state-level exemptions affect the luster of the proposed rules at the federal level? Do you expect these proposed rules to drive increased participation at the state level despite the limited pool of potential investors?
I hope not. I think having state specific rules and federal rules will be confusing for issuers and investors. One of the reason Reg D 506 is so popular is that it is a federal exemption, so the specific states have to abide by it, although they can charge a notice fee for blue sky filings. I hope the federal regulations will be eased in the final rules to mirror some states, like Michigan, that allow for lower auditing requirements.
Under the proposed rules, issuers would be able to run crowdfunding offerings alongside other exempt offerings. This presents some interesting scenarios for the future of small business funding in the US. Any bold predictions for how that plays out? How does this change the current funding landscape re: accelerators, incubators, state grants, angel & VC investment, etc.
If the auditing requirements remain in the final rules, I can see how some issuers would limit their non-accredited fundraise to $500,000, and do a simultaneous Reg D 506 accredited raise to avoid that auditing requirement but at the end of the day, this business is about scale. It’s nearly impossible to scale $500,000 offerings. I think a lot of people will jump into this market, but unless and until those limitations on a per offering basis are raised, I don’t think it has a meaningful impact to VCs, accelerators, incubators, etc. I think it does have a meaningful impact to business that do not require a lot of capital, like small businesses and very early stage startups however.
Why does the proposed 21-day cooling off period present a challenge for real estate specifically?
In real estate, the faster you can close and if you can pay “all cash”, the better shot you have at closing a transaction. For some of our loans, for example, we have 3-5 business days to close. A 21-day cooling off period means a company like ours needs to limits the types of transactions we can invest in. There is also the issue of documentation – for some real estate transactions, the documentation, like an operating agreement, is in flux until a few days before close due to updates from the lender or updates during due diligence. This poses the same challenge that I mention above about limiting offerings. I don’t think this exists the way it does for real estate for small businesses or startups as the fundraising deadlines are not as set in stone the way purchase contracts for real estate are.
What else in the rules stands to affect the real estate space specifically, either positively or negatively?
Offering size is the biggest negative and I fear that investors will have to bear the regulatory costs and not benefit from economies of scale. A $20 million real estate project is a very regular occurrence where a $20 million raise for a small business is much less common.