So, you want to start a real estate crowdfunding (RECF) platform.
This article is intended to serve as a basic guide.
- 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 others’ deals? 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 defines what laws you must comply with, and dictates what license(s) you must obtain. I generally don’t think its wise to try to do everything under the sun. First, your legal costs may go through the roof. Secondly, its 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 of technology. Many of the RECF platforms out there today would like to command a tech multiple, but in reality, function moreso 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 hockeystick 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
It’s great that RECF platforms are hot right now, but remember—you’re still selling a security, and securities laws really aren’t the type of laws one should take lightly. I see a number of RECF platforms with no in-house counsel, outside counsel, documents that don’t actually reflect the deal, and eyebrow-raising interpretations of securities laws. I’ve even seen platforms that have copied and pasted the privacy policy or terms of service of another platform on their own site—without changing the other platform’s name. For those who don’t understand privacy law, this presents a potentially huge liability to the extent the privacy policy does not reflect the platform’s actual practices. I’ve also seen websites claiming “zero risk” and “guaranteed returns” which is probably the best way to give your attorney a heart attack (ironically, that issuer actually had in-house counsel).
As a securities attorney, I’m obviously biased, but I think its 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.