Crowdfunding in commercial real estate

The practice of raising funds or monetary contributions from a large number of people for a particular project is nothing new. “Crowdfunding,” as it is called, has a long history which spans back long prior to the invention of the internet. Like many industries, however, the internet opened up a whole new world of crowdfunding opportunities. Back in 1997, fans of the British rock band Marillion raised tens of thousands of dollars to fund the band’s U.S. tour all via donations on the internet. This was one of the first publicized instances of crowdfunding.

Fast-forward to 2017, and almost everyone has heard of some of the more popular consumer-facing crowdfunding sights such as Indiegogo, Kickstarter and others. These websites have funded thousands of projects both big and small through their standard rewards systems and non-equity fundraising. However, entrepreneurs seeking an infusion of equity into their proposed projects were strictly limited by SEC rules and regulations regarding solicitation of investors and accreditation restrictions. This is, until the Jumpstart Our Business Startups Act was signed in 2012. This legislation gave real estate investors the green light to begin funding real estate projects using crowdfunding platforms, and millions of investor dollars, not otherwise available to developers, have been raised ever since.

There are many different real estate crowdfunding sites, each with slightly different formats, which have significantly changed the real estate market over the years. And while this changing way of investing has afforded developers more options for financing projects, it has also allowed smaller investors a way to actually invest in commercial real estate. Commercial real estate has historically been considered an exclusive market because it usually requires a relatively large investment. These crowdfunding sights allow such small investors to get in on the action.

However, investing in real estate projects via crowdfunding is not without its inherent risk. Successful real estate investing involves careful analysis and due diligence. Just because the vehicle by which one can make an investment has become much more simple and accessible via the internet, the process of properly evaluating an investment is more important than ever when investing through a crowdfunding website.

In general, investing in people you don’t know is obviously risky. Who is the lead investor? How do you know if he or she has a good eye and has made good projections? What is the developer’s experience? These are all questions which need to be asked on any prospective real estate purchase, whether through conventional means or a crowdfunding website. Although some of the more popular crowdfunding websites provide meaningful information about the investments they target and the credentials of the involved parties, the process for evaluating such an investment doesn’t change and a prudent investor should seek the assistance of experienced real estate counsel as much, and probably more, when investing through a crowdfunding website.

This Chuhak & Tecson, P.C. communication is intended only to provide information regarding developments in the law and information of general interest. It is not intended to constitute advice regarding legal problems and should not be relied upon as such.

Client alert authored by: K. Shaylan Baldwin, Principal

This alert originally appeared in the Spring 2017 Real Estate Focus newsletter.