Business publications and financial advisors are hailing it as a new paradigm in the world of commercial real estate, but the term “crowdfunding” is actually kind of a misnomer. A better term for how Commercial Real Estate (CRE) investment firms are using the internet to grow and engage with their investor bases would be online fundraising or online real estate syndication.
In commercial real estate, “the crowd” does not refer to a disorganized or anonymous horde of people. Rather, as we at CrowdStreet frequently tell the CRE investment firms we work with, the crowd may comprise firms’ established circles of friends and family investors, as well as the community of investors we have built. In other words, the emerging online investment model is simply an expansion of the ways firms have always done business. What we do is help CRE firms speed up their processes, attract more investors, and reduce overhead.
How? The JOBS Act made it all possible.
How the JOBS Act Changed CRE Investing—and How It Didn’t
To understand the rise of online fundraising, consider the statute that legalized it. President Barack Obama signed the Jumpstart Our Business Startups Act (or JOBS Act), into law in 2012. At the time, the United States was still recovering from the 2008 financial crisis, and the JOBS Act—passed with bipartisan support—was one of a number of measures the government took to encourage swift economic growth and avoid another recession.
In broad terms, the JOBS Act increases US companies’ ability to raise capital through the distribution of securities. When pundits discuss the JOBS Act, they are usually referring to three Titles in particular:
- Title II opened up new channels for companies to generally solicit (i.e. advertise securities) to investors, provide they are verified as accredited: individuals with a net worth of at least $1 million, or an income of at least $200,000 per year.
- Title III, also known as Regulation Crowdfunding (Reg CF), allows any investor—regardless of net worth or income—to participate in an equity raise. However, under Reg CF, firms can only raise an annual maximum of $1 million from this group.
- Finally, Title IV offers another structural option, Reg A+, through which companies can raise up to $50 million from a pool of accredited and non-accredited investors. Title IV is divided into two tiers: Tier I offerings can raise up to $20 million in a 12-month period; while Tier II offerings can reach the $50 million maximum, but each non-accredited investor is prevented from expending any more than 10% of their annual income or net worth—whichever is greater.
Individuals in the Title II category by and large resemble the kinds of investors active offline, and because they are less inhibited by annual financial caps, typically represent the most attractive group to CRE firms. Thus, firms who use marketplaces like CrowdStreet tend to primarily interact with the same kinds of investors they have grown accustomed to speaking to in person or over the phone.
The Advantages of Online Versus Offline Fundraising
Investors who participate in online syndication are not fundamentally different than the ones in a sponsor’s address book, except in two critical ways:
they may be located anywhere in the U.S., and they can be reached online.
Instead of painstakingly finding and vetting individuals through personal connections, firms can immediately solicit accredited investors on an online marketplace. Instead of managing relationships and sensitive data through spreadsheets, firms can track, communicate with, and scale their networks with automated investor management tools.
Many leading platforms operationalize much of the investor acquisition and verification workflow, from packaging the deal to generating documents and collecting signatures. While automation reduces overhead associated with unnecessary back-and-forth, investors who need a personal touch or have additional questions not covered by a listing are still only an email or phone call away.
We will explore the benefits of online fundraising in further detail in upcoming articles in this series. For now, here are a few considerations to keep in mind when shopping around for an online fundraising platform:
3 Keys to Make the Most of Online Fundraising
- Consistency: Investors expect to come into contact with the same branding and messaging regardless of where they see a CRE offering—online or off. Consistent does not necessarily mean “flashy,” but In commercial real estate, the sponsor is an individual or company in charge of finding, acquiring and managing the real estate property on behalf of the partnership. The sponsor is usually expected to invest anywhere from 5-20% of the total required equity capital. They are then responsible for raising the remaining funds and acquiring and managing the investment property’s day-to-day... More should exhibit the same level of professionalism and reliability online that they would show to someone who walked into their offices.
- Flexibility: An online fundraising marketplace needs to provide sponsors with enough control to structure a deal and communicate with investors on their own terms. When assessing online syndication options, take note of whether the platform is limited to Reg A+, Reg D 506(b), or 506(c); or if it offers functionality built for business needs that may change over time.
- Security: CRE investors want to see solid marketplace performance and return on investment but, above all, they are looking for peace of mind. Our data shows that investors value verifiable sponsor track records and reliability. Choose an online fundraising marketplace that emphasizes building relationships with investors over time.
Next Up: How to Use Online Fundraising to Increase Your High Net Worth Investor Base
Once they feel comfortable with online fundraising, CRE firms start to realize how easy it is to acquire investors at rates that would have seemed impossible before. In the next article in this series, we will look at how online fundraising can enhance marketing and lead targeting.