UP TO $1 MILLION DEALS VIA INVESTOR CROWDFUNDING
Photography by Jonathan Garza
Raising capital can always be a challenge, but recent developments are making it easier. Investment crowdfunding has been around in Texas for the last year, and recently, the Securities and Exchange Commission approved investment crowdfunding across the United States. What that means is that investors can put up as little as $500 for real estate and small business projects. No longer do investors have to be accredited, and prove a high net worth.
A recent speaker series event in San Antonio featured speakers with a variety of backgrounds. Nathan Roach, the founder and CEO of MassVenture, started an investor crowdfunding platform just last year. Shravan Parsi invests in real estate, building large apartment complexes and commercial developments. Loren McCall-Campbell of Brass Real Estate Funds is responsible for development of new opportunities related to the EB-5 Foreign Investor Program.
Roach pointed out that crowdfunding is nothing new. “Any time you pass the collection plate at church, that is crowdfunding,” he said.
What is new is investment crowdfunding – where investors can get a return on their investment. Most people are probably familiar with crowdfunding platforms like Kickstarter or Indiegogo. Those are rewards-based crowdfunding opportunities. Investors in rewards-based ventures will get a sample of the product. Roach said the virtual reality gaming platform Oculus Rift raised over $1 million through crowdfunding, and eventually sold to Facebook for $2.1 billion. Crowdfunders who put up $1,500 got an Oculus Rift virtual reality headset and a thank-you note.
“If you have a product that appeals to a consumer market, then that kind of crowdfunding is already a great vehicle,” Roach said. But it’s a tougher sell for something like a company that provides services or tangible assets, because they don’t have a product to take to market.
“But if you have investment crowdfunding available, you can get the same buy-in from the crowd and from people who want to be a part of this in growing their local businesses, and local economy, but you don’t have to have the latest whiz bang tech gadget,” Roach said. “That’s one of the greatest opportunities for crowdfunding.”
In real estate, for example, one can invest in a REIT, but Roach said by the time an asset gets into a REIT, most of the opportunity for investors has already been realized. But investment crowdfunding can provide a return “whether they are building a project ultimately for sale or designed to be held with a cash flow, or whether it’s something that is designed to accelerate business like a company building new facilities who’s looking to expand,” he said. The sweet spot for internal rate of return is between 12-18 percent for most investors.
Roach said the Texas approach to crowdfunding is simple, and therein lies its strength. Any individual in Texas may invest up to $5,000 per project in a crowdfunded
investment, and the company can raise up to $1 million in equity every 12 months. “While it’s not a huge amount of money, it is a strong catalyst for projects to get them started,” he said. “When you add in the bank financing on top of what’s been raised via crowdfunding, you’re typically looking a $5-$10 million dollar deal.” He added that the new federal regulations extend crowdfunding from Texas to the entire country, and fundraising caps might go up to $5 million.
The real estate field is an especially ripe area for crowdfunding, said Shravan Parsi. Besides the platforms Roach mentioned, there are now Realty Shares, Realty Mogul and FundRise. The advantages for a company like Parsi’s are several, he said. First, it’s another stream of capital. Second, because crowdfunding can take non-accredited investors, Millennials are expected to get in in a big way. “When it comes to Millennials, they do everything online,” Parsi said. “Now they can invest in real estate online.”
Parsi said his company is trying to be very selective when picking partners. He is teaming with MassVenture on a $10 million luxury condominium project near downtown Austin. “We want to carve out $200,000 to $250,000 of liquid capital and have MassVenture raise that capital for us, allowing for smaller investments at $500,” Parsi said.
If there is a disadvantage, Parsi said it’s that crowfunding tends to be a slow process. “For developers, we get the deal under contract and close it in less than 45 days,” he said. But a crowdfunding venture could take 45 days just to get online and start raising capital. “By then, we’re ready to close the deal,” he said.
Another change coming to crowdfunding is the acceptance of foreign investors. Loren McCall-Campbell of Brass Real Estate Funds said the EB-5 program is a visa set-aside program that lets foreign investors invest money in a project, keep it there for a number of years, and then gain permanent residency. Although it started slowly 25 years ago, it’s been picking up lately, and in the first through third quarters of 2015, has brought in $3.25 billion in foreign investments, with another $6 billion in the pipeline.
But the problem for EB-5 investors is that it requires $500,000 – ten times as much money as a Chinese investor is allowed to take out of China (9,000 of the 10,000 EB-5 visa set aside each year come from China). “If somebody wants to do a smaller placement, crowdfunding is a way to do it,” McCaul-Campbell said. “And it is happening.” She said 70 percent of residential real estate closings in Miami last year were from foreign investors.
She repeated Parsi’s contention that Millennials will drive crowdfunding. “Millennials like diversification and they want to invest in things they believe in, and they like the ease of investing on an iPad,” McCall-Campbell said. She said Millennials want to know they are doing something mostly right and contributing to the betterment of their community, so features such as geothermal, a solar parking canopy and water reclamation are good marketing features. Because of that, Roach said deals that have some kind of social benefit or social interaction are a natural fit for crowdfunding.
In 2020, the first Millennials will reach their peak earning years, and will bring $2 trillion of liquid assets. “When they all have hit park earning years, it will be $7 trillion,” McCall-Campbell said. “I’m hoping with what I do in real estate, that that will grow and be a lot larger and allow for more people to get involved.”
The growth in crowdfunding does not mean the banks are left out. McCall-Campbell said a relationship with a bank is a necessary tool, because things change during a deal, and it’s important to stay flexible. Roach said the caps currently in place on crowdfunding mean a combination of crowdfunding, private equity and banking is needed to complete even a moderately-sized deal. But he added, it’s important to understand when to use it and when not to use it. “If you have a banking source that’s coming in at a significantly lower cost of capital, use that,” he said. “Unless you’re looking for the PR or marketing aspects or community support that crowdfunding provides, use your lowest cost of capital first.” Crowdfunding is not typically the lowest cost capital, Roach said, because MassVentures charges platform fees – a percentage of the funds raised.
All the speakers expect crowdfunding to get bigger. “We are early in this process of investor crowdfunding,” said McCall-Campbell. “it’s the way investments will go and it will lead to a big herd behind it.”