Both the new eREIT platforms and single-deal platforms focus on equity investments, but the new rules also provided for general solicitation for real-estate debt products for accredited investors. The market for these debt products has evolved quickly. Today investors can access short-term debt for res- idential homes through sites like Patch of Land and Groundfloor. Or investors can invest in short-term debt for commercial properties through ShareStates. Companies like PeerStreet and Alpha Flow offer investors a blended debt product that balances risk across multiple projects. Not all of these new platforms have made it. One early entrant, RealtyShares, publicly imploded this past fall after receiving more than $63 million in venture investment. More than likely, other platforms will follow in the months ahead. Meanwhile, the proliferation of sites has brought new pressures on existing capital markets. This past spring, our firm Camber Creek con- ducted a survey of traditional hard money lenders who reported that the influx of crowdfunding platforms was putting downward pressure on rates by creating more competition and transparency. Looking to main- tain market share, some traditional real estate investors, including publicly traded REITs like Arbor Realty Trust, have opened their own crowdfunding platforms. Looking forward, the market will likely consolidate in the long-term.

the floodgates. There are now up- wards of a dozen platforms offering these eREITs to the public. One of Camber Creek’s portfolio companies, Fundrise, was one of the first out of the gate. Other sites include Realty- Mogul and Rich Uncles. Accredited investors have his- torically been able to invest in both REITs and via sponsors in single projects, like an office building or apartment building. But sponsors were not allowed to generally solicit for these investments; they couldn’t run an ad in a newspaper, Facebook or Google to find investors. The JOBS Act changed that, endowing sponsors with the right to promote their deals to accredited investors through general solicitation. One important consequence of this new advertising ability is that it lowered the costs for sponsors of finding investors and therefore encouraged sponsors to lower their minimum investments. Now a sponsor could raise $1 million in $10,000 incre- ments, which would have previously been too costly and complicated. At the same time, online platforms made managing the investment and reporting process with a large group of investors much, much simpler. The combination of the new reg- ulatory framework and new tools launched another set of crowdfund- ing platforms, like EquityMultiple, RealtyShares, and Cadre, offering accredited investors access to high-quality, large-scale deals. Why the differentiation between accredited investors and the general public? The public policy theory is that REITs provide automatic diversification for less experienced investors, whereas accredited inves- tors are more sophisticated and can bear the loss of capital more easily and can therefore be given freedom to invest in individual projects.

The Evolution of Real Estate Crowdfunding

($300,000 for a married couple). The general public is everyone else. Before the JOBS Act, the general public could invest in real estate in one of two ways: direct ownership, like buying an investment proper- ty, or through publicly traded Real Estate Investment Trusts (REITs). The JOBS Act gave sponsors per- mission to establish a new class of REITs that are not publicly traded and that can be promoted direct- ly to potential investors through “general solicitation” i.e., advertis- ing. Unlike publicly traded REITs, which generally have thousands of properties and must comply with highly complex regulatory regimes, these new REITs and eREITS could hold much smaller portfolios and avoid the regulations associated with publicly traded entities. The Act, which then-President Obama signed into law on April 5, 2012, delegated to the U.S. Secu- rities and Exchange Commission the job of writing the regulations to implement the Act. The SEC released those rules in 2016, officially opening

by Jake Fingert and Nate Loewentheil


eal estate investing has changed more in the past

estate crowdfunding market is at a transition point as some of the ear- liest players have started to publicly flounder and new models — such as secondary markets for crowdfund- ing — start to take shape. For most of modern economic history, commercial real estate investing was the provenance of wealthy individuals, major corpo- rations and institutional investors, requiring access to deal flow, a high level of sophistication, and most importantly, significant capi- tal. The JOBS Act of 2012 changed all of that by allowing “sponsors” — namely developers or operating companies raising private capital — to publicly solicit for investment in

real estate. In practice, that means buying advertising and operating online platforms to facilitate real estate transactions that are open to the general public. To understand how the landscape has evolved, it is helpful to have a sense of the legal and regulatory framework. The JOBS Act differen- tiated between the kinds of invest- ments that could be opened to the general public and the kinds of investments that could be opened to accredited investors. Accredited investors are individuals whose net worth (excluding owner-occupied homes) is above $1 million or who have had an income of $200,000 or above for two years running

seven years than in the prior cen- tury. One key driver of this change was the Federal JOBS Act of 2012, which for the first time authorized real estate crowdfunding. This new regulatory regime has opened up commercial, industrial and multi-family markets for debt and equity investments to individuals at an unprecedented scale, democ- ratizing a market that historically was opaque and often times difficult to access for all but the wealthiest individuals and institutions. In the process, crowdfunding has brought discipline and transparency to real estate capital markets. Now the real

> Continued on :: PG 96

Jake Fingert is a General Partner and Nate Loewen- theil is a Senior Associate at Camber Creek, a Venture Capital firm focused on real estate technology and innovation.

48 | think realty magazine :: july / august 2019

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