So, you want to start a real estate crowdfunding (RECF) platform. This article is intended to serve as a basic guide to launching a real estate crowdfunding platform in the United States.
Decide on what you want to do
There are many different types of crowdfunding platforms. You need to first make some business decisions as to what kind of platform you want to form:
- Will this be a personal platform for your own deals, or will the platform raise funds for deals from other parties? If the latter, you may be brokering or dealing, and may need to obtain a license.
- Will you be selling equity or debt securities? What type of debt will you be selling? What will it be secured by, if anything? What type of equity will you be selling?
- What type of real estate will you be raising funds for? Will the properties be residential properties? Commercial? Rehab? New development? Is there a geographic scope involved? You should have a specific business plan in mind.
Your particular business plan and activities define what laws you must comply with, and dictates what license(s) you must obtain. I generally don’t think it’s wise to try to do everything under the sun.
First, your legal costs may go through the roof. Secondly, it’s not easy to be a master of everything. Those who specialize in syndicating multifamily don’t necessarily understand the mobile home business; rehabbers don’t necessarily understand the nuances of new construction/raw law deals.
Similarly, your investors have a certain appetite—usually for the type of asset they know how to evaluation, and may not want to invest in deals they don’t understand.
Figure out whether your business plan makes sense (and spend wisely)
Tech development is not cheap. Those hoping to raise angel or VC capital for a real estate crowdfunding platform have, in my humble opinion, missed the boat by a couple of years. Today there are thousands of real estate crowdfunding platforms; the ones funded by venture capital were first movers. If a platform can show some very compelling reason why they are different or will be more successful than the rest, they may still have a chance, but I personally haven’t seen any unique RECF platforms for a while now.
That said, if venture funding isn’t available, it doesn’t make sense to spend a lot of money on technology. Many of the RECF platforms out there today would like to command a tech multiple, but in reality, function more so as technology-enabled brokering or origination shops. For the vast majority of RECF platforms, their value is is not in their technology, but their ability to fund or originate deals.
Thus, it often makes sense to find more cost-efficient tech solutions. Some RECF platforms simply post their deals on a website and slap an “invest now” button on the website. Others choose to license technology from an ever-increasing list of white label crowdfunding platform providers.
That said, some may question whether it even makes sense to start a personal RECF platform. I believe there still is tremendous value, so long as ones’ goals are in order. While these smaller, personal platforms will never have the marketing spend of the venture-backed platforms, many of our clients have started personal RECF platforms to increase their ability to attract and find new investors (perhaps not in a hockey stick fashion like the venture-backed portals, but growth nonetheless).
Ten years ago, few real estate companies had websites; now, the lack of a website reduces ones’ credibility and legitimacy. I believe personal RECF platforms may one day be the norm for sophisticated, volume syndicators.
Remember that you’re selling securities, and act accordingly
As a securities attorney, I’m obviously biased, but I think it’s important to invest in compliance and legal counsel, and frankly have no idea how people could get in the business of selling securities without understanding securities law.
Amy Wan, Esq.CIPP/US, is a Senior Contributor to Crowdfund Insider. Amy is a Partner at Trowbridge Sidoti LLP (CrowdfundingLawyers.net) where she practices crowdfunding and syndication law. Formerly, she was General Counsel at Patch of Land, a real estate marketplace lending platform. While there, Amy pioneered the industry’s first payment dependent note that is secured pursuant to an indenture trustee and designed to be bankruptcy remote, and advised the company on its Series A funding round. In recognition her work at Patch, she was named as a Finalist for the Corporate Counsel of the Year Award 2015 by LA Business Journal. Amy also brings extensive experience in legal innovation and rethinking the delivery of legal services. She is the founder and co-organizer of Legal Hackers LA, and was named one of ten women to watch in legal technology by the American Bar Association Journal in 2014.