The concept of crowdfunding has been around since the dawn of civilization. Think about the priest passing around the bucket in church, communities coming together to help a member in need, or the example that is probably most familiar to us all – taxes!
The difference is, this time around we’re using the term to indicate the possibility for anyone (the crowd) to participate in contributing to an investment (funding). This term implies that the individual is expecting a return on their investment, and the novelty was first made legal with the introduction of the JOBS Act of 2012 and expanded even more so when Title II went into effect in 2013.
This, for the first time since the Great Depression and the laws enacted in 1934, easily allowed the crowd (or at least accredited investors) to participate in funding offerings other than a full-blown, very expensive IPO.
The investments are offered called Reg D 506(C), named after the clause that allows such offerings to be marketed to people online. These days you can invest in almost anything, from a company trying to cure cancer in Silicon Valley to a real estate property in Wichita Falls, all done with just a few clicks of a button. It has grown to a multi-billion, international industry, and millions of people have taken part in these offerings with – no surprise – mixed results.
To understand where the industry is today, let’s consider the real estate crowdfunding sector. This is one of the biggest and most important sectors because it deals with the opportunity to invest in real, tangible, often profitable assets rather than invest in ideas that require future development, and may or may not be a boon.
Generally speaking, investors flock to real estate investment opportunities more than any other sector. The idea of owning a small portion of a large real estate project is more appealing to people than buying their own investment property that requires dealing with the notorious three T’s – Taxes, Tenants and Toilets.
Since 2014, dozens of crowdfunding real estate platforms have emerged.
Names like Fundrise, RealtyMogul, RealtyShares, Patch of Land, CrowdStreet and Cadre showed up on accredited investors’ Facebook and LinkedIn feeds.
As these upstarts were maneuvering to capture more market share in the growing industry, some did better than others.
RealtyShares, once the largest platform in the world with thousands of investors and almost a billion dollars worth of funds invested, ceased operations last year under pressure from its venture capital shareholders. The entire operation was later taken over by my company.
Among the more promising moves recently was Goldman Sachs dipping their feet in the water with a capital investment in Cadre. As the industry continues to evolve, more mergers and acquisitions will continue to unfold, just like Darwin always suggested would occur in any evolutionary process.
So where is the industry going, and what can we expect in 2020 and beyond? I suggest focusing on three core aspects and the trends in each to analyze the situation:
The technology behind the industry, as in many others, is the key to growth and change. As internet access, online banking, data visualization, graphic information systems, blockchain, and encryption technologies continue to evolve, it will become easier, cheaper and faster to operate these kinds of platforms.
Consider blockchain alone – the ability to tokenize a real estate investment position and essentially turn it into a line of code that you can hold, sell, buy and move instantly makes a huge difference. Before blockchain, you had to sign the paperwork, make copies, pay registration fees, keep the documents in a safe, insure the safe in which the paper is in, deal with theft, forgery, fire, and so on. Technology makes everything better –you can own one percent of an office building in California and hold that position on your iPhone, backed up on the cloud.
The regulatory aspect is key to success. Politics aside, everyone can benefit from the proper regulation surrounding real estate, and striking a balance is a challenge for the legislature that needs to consider two opposing forces. On the one hand, every hardworking American deserves a chance to participate in lucrative investments, and the double-digit returns shouldn’t be limited to wealthy people alone to fuel the cry that “the rich only get richer”. On the other hand, many people invest without reading the proper documents, knowing the rules, or even understanding what they actually invested in. At IRM, the professional team members have to spend hours explaining to everyday customers why a second position lien is more dangerous than senior debt, and why their investment can possibly fail. The regulator is correct to limit some of those people from investing in products that they don’t understand and can’t afford to lose. The market will always take advantage of customers like that, and we need laws in this country to protect the citizens from themselves.
Lastly, with time, people get used to new things. When planes first came out, few people were brave or wealthy enough to travel on them. These days, we don’t give it a second thought before we hop on fully loaded Boeing 777 and fly 15 hours to the other side of the world. We mostly focus on the free movies and lousy food.
The same can be assumed for the crowdfunding industry – it will get better, it will get safer, it will get faster and more efficient. People will take it for granted, participate with their post-tax capital or retirement accounts and continue to feed this new and exciting financial sector.
In 2020 and beyond, expect to see more mergers and acquisitions in the crowdfunding space, as companies mature and others run out of cash. Expect to see more of it in the news, and more big names jumping in the pool.
Jeff Holzmann is CEO of IRM. IRM is owned by RREAF Holdings and iintoo Investments. The company took over the management of RealtyShares’ portfolio. Today, IRM claims over $1.5 billion in combined assets from RealtyShares. Holzman has over 25 years of senior executive management experience in digital technology, digital advertising, venture capital investments, aviation, and real estate industries, mostly with large, publicly traded companies and with a strong focus on consumer-facing products.