TOPSHOT – The Manhattan skyline is seen at sunrise from the 86th floor observatory of the Empire … [+]
AFP via Getty Images
In the past years, crowdfunding has gained traction for certain real estate investments. While some platforms are available to all investors, others require individuals to meet certain criteria to participate. The SEC divides investors into two categories: non-accredited and accredited. In my previous article, I discussed the differences between these two, along with some considerations for platforms that accept non-accredited investor funding.
In this piece, we’ll look at crowdfunding for accredited investors. One of the well-known players in this space is CrowdStreet, which has funded more than 750 deals with over $4 billion invested. CrowdStreet requires a minimum investment of $25,000 for most deals.
CrowdStreet recently hit headlines when investor funds went missing. On August 11, Bisnow reported investigations by the DOJ into Nightingale Properties, which allegedly diverted nearly $40 million of equity raised on CrowdStreet into accounts controlled by its CEO. In light of the missing funds, CrowdStreet co-founder Tore Steen left his role as CEO of the company. In a statement published by Crowdfund Insider, CrowdStreet stated that the investments on its platform “are illiquid, with significant risks. These risks are clearly disclosed to investors both when they sign up on the CrowdStreet platform, when they complete a new account agreement, and when they make an offer and fund a specific investment.” The platform has also announced new enhancements, including escrow account funding, individual accreditation verification, and operational improvements aimed to increase investor protections.
Despite recent events, crowdfunding platforms continue to have a presence in the investment world. Another platform open to accredited investors is EquityMultiple, which requires a starting investment of at least $5,000. It focuses on commercial real estate, with opportunities including equity, preferred equity, and senior debt investments. PeerStreet allows accredited investors to start with minimums of $1,000 for debt investments.
Before we go further, I want to point out that it’s essential to consult an attorney before delving into crowdfunding. There are complex regulations in this space, and you’ll want to make sure that everything from the disclosures you provide to the way you file is in line with the SEC requirements. In addition, clearly there are risks involved, and carrying out research and due diligence will be increasingly important amid today’s rising interest rates and higher costs of debt.
Who Qualifies as an Accredited Investor
Individuals who have a net worth of more than $1 million (not including their primary residence) can qualify as accredited investors. Those who have earned $200,000 as a single filer or $300,000 as a couple during the previous two years, with an expectation to continue to make the same going forward, are also included in this category. Households that meet the criteria to be accredited investors are able to invest in certain products and vehicles, including real estate.
As I’ve mentioned previously, when raising capital for an acquisition, you’ll often be reaching out to individuals who could contribute $25,000 or more. In recent years, crowdfunding rules have changed—specifically the JOBS Act of 2012 created avenues for non-accredited investors to participate in fundraising. While some crowdfunding platforms do cater to all investors and accept contributions starting at low figures such as $50, it’s also true that platforms for accredited investors often are looking to fund larger projects.
Factors to Consider before Trying Out Crowdfunding
Crowdfunding platforms are as unique as individual investors—you’ll find that the minimum investment, fees, and listings differ from one site to another. The way that investors are managed through crowdfunding can vary too. Some platforms allow you to own the communication with investors after you raise the money, while others have limitations. You’ll want to find out who is overseeing the investor relationship and how that fits into your business plan.
Like other types of real estate investments, track records and reputation matter. It can be valuable to compare and evaluate different platforms to see how they have performed in the past. The number of years they have operated and the amount of funding they have raised can be a determining factor. Following several platforms over time and paying attention to their social media presence may be helpful as well. Look for the total number of investors and the historical annual returns, along with opportunities to reinvest. Read through reviews and see what others are saying about the sites through online channels. Check how much information is available on the platform: Are there educational resources available? How are opportunities vetted? What can investors expect? Are there ways to communicate and interact personally?
If you’re attempting to raise money for a real estate investment for the first time, relying on crowdfunding might get complicated. In some cases, it could serve to supplement the capital you’re already bringing to the table. However, you’ll want to keep in mind that with so many rules involved, you’ll need to work with professionals including an attorney to make sure you’re proceeding correctly.
Ultimately, you may opt to work with a partner who has experience on these platforms when starting out. Or you might find that your deal team prefers to connect directly with investors, reaching out personally and raising funds on an individual basis. After you’ve carried out several successful deals and are looking for ways to diversify, you might revisit crowdfunding options. Overall, the best opportunities tend to come to those who have an insider’s edge, and that typically requires building relationships and developing a team over time.
