Crowdfunding ~ Part 2
Crowdfunding, at its roots, is a form of Syndication ~ it is a method of raising capital by combining a lot of smaller investors into one large project. Crowdfunding relies primarily on social media and crowdfunding platforms to leverage networks for greater reach and exposure.
With over 100 real estate crowdfunding sites, it becomes challenging to separate the good from the bad. Many of the Crowdfunding platforms suffer from a lack of experienced real estate professionals, poor investor protections, inadequate volume, and hidden fees. Picking the wrong platform could be an expensive mistake. Ultimately it all comes down to how well the platforms vet the deals.
Another potential pitfall with crowdfunding is that in order to mitigate some risk, it might be necessary to invest in multiple deals at the same time. That requires a lot of time and effort to keep track of everything.
Investors should be aware of the two most common crowdfunding models. The first is the Regulation A+ model, where companies can raise up to $50 million in funds from anyone. The downside to this model is that because investors are providing capital before the platform finds and invests in the underlying transactions, they relinquish the upfront transparency that allows them to assess the full scope of the benefits and risks associated with a potential investment.
The other model, 506(c) allows accredited investors to access investment opportunities in specific assets. Compared to the Reg. A+ model, this offers a heightened level of transparency to investors since there are details about the sponsor’s track record, the business plan, underlying market fundamentals and specifics about the property itself; all prior to a capital commitment. This affords investors added peace of mind, as they’ll know exactly how their money will be deployed. However, as in the past, investors must be accredited under Rule 508(c). Also, there is typically a minimum investment level.
For real estate crowdfunding, it is essential that investors trust their money to real estate professionals who understand the nuances of the real estate market. That means investors must choose the platforms that have the best sponsors, are totally transparent and are managed by professionals experienced with various real estate classes across multiple economic cycles.