A Little Help From Your Friends: Crowdsourcing Commercial Investments

February 10, 2015

John, Paul, George and Ringo combined their talents to become one of the most successful bands of all time. Now, commercial real estate investors are taking a cue from The Beatles and raising capital by combining investments gathered through crowdsourcing.

Legalized in 2012 by the JOBS Act, crowdsourcing allows developers to raise capital from a large number of accredited investors through an online platform. In most cases, prospective investors log in to the platform and, after confirming that they qualify as accredited investors, review listings of potential CRE investments. Interested real estate investors will then commit capital toward the purchase of a specific property. The platform combines all investments – sometimes including capital from the platform itself – into a single or special purpose entity (SPE) that will acquire or invest in the property.

If you’re considering using crowdsourcing, there are platform restrictions to keep in mind. On a federal level, crowdsourcing platforms are structured pursuant to SEC rules under the JOBS Act. Among other requirements, these rules limit the number of investors who can invest in a project, the amount of compensation platforms may require and the amount of investments that can be made. State-level restrictions may throw licensing, record-keeping, reporting, downside disclosures and more into the mix. All of these restrictions can create issues for large CRE projects, so careful consideration is required.

As a developer, the consideration needed for crowdsourcing doesn’t end with the platform. How will the venture be structured to account for the crowdsourced SPE, and what priority will that investment have? Developers should also determine what obligations they’ll have directly to the SPE investors and/or the crowdsourcing platform. Plus, the level of control SPE investors will have over the construction plans should be clearly outlined.

Lenders and investors considering crowdsourced funding see the other side of things. They should discover the nature of their security interest, if any, in the property, as well as the priority of their interest as compared to other investors participating in the development. Payment from the developers and rights in the event of a default are also major factors. Investors should be careful to ensure that projects are well capitalized and diversified to guard against failure, and due diligence should be complete.

When it all comes together harmoniously, investors and developers can collaborate to create exciting opportunities in the commercial real estate market.

Want to know more about crowdsourcing or other exciting developments in commercial real estate? Speak to the professionals at Intelica. We can help you find the right opportunity.