What Do Investors Need to Know About Crowdfunding?

Crowdfunding platforms have exploded recently, with experts expecting $2.57B raised this year. And while we have discussed what investors should look for in a platform, we’ve yet to tackle why you should be looking at crowdfunding in the first place.

To get a grip on crowdfunding’s advantages, potential concerns and future, Bisnow sat down with partner RealtyMogul.com’s CTO and co-founder, Justin Hughes (pictured).

The Appeal

Justin says the advantages of crowdfunding extend beyond accessibility and reach (although he admits they are significant benefits for investors). A solid crowdfunding platform provides investors additional investment opportunities they wouldn’t normally get because investors can “leverage the connections of the platform, as well as benefit from the enhanced purchasing power when investors pool their capital.”

With traditional investing, investors don’t hear about certain kinds of opportunities and wouldn’t have the cash needed to hit minimum investment levels. The reduced minimums of crowdfunding allow investors to be involved in a greater number of deals with smaller investment amounts, helping them diversify across geography and property types.

Crowdfunding also allows investors to “leverage the expertise of the credit teams of the platforms.” Justin says the platforms that “take great pride in the transactions they allow to be posted and filter out the majority of requests for funding” will only post transactions “vetted by professional credit teams, and investors benefit from the knowledge of these professionals," he says.

The Upswing

As VP of Investor Relations Heath Binder points out, while crowdfunding platforms are only capturing a very small percentage of the market, it’s an untapped market with tons of room for growth. And Justin says crowdfunding platforms—and RealtyMogul.com in particular—are gaining a lot more attention from sponsors. 

“We’ve had billions of dollars’ worth of transactions cross our desks because people in the business realize the benefit that can be gained by utilizing this new channel for capital,” Justin says. “It’s even quite common to have sponsors approach us, in some cases—despite already having plenty of capital available to them—just to initiate a relationship so they may be best positioned to benefit from the promises the bright future of real estate crowdfunding holds."

Many of these firms simply don’t want to be the firm that’s left in the dust and has to “play catch-up to their [more forward-thinking] competition.” Or, they’re looking to diversify their portfolio, maybe a stable capital-raising infrastructure outside of family or friends, Justin says, and it’s up to these crowdfunding platforms to prove they’re able to deliver time and again and can provide a valuable resource for these firms. 

The Dangers

Of course, with a platform this new, there are plenty of concerns and dangers to be aware of. Justin understands finding the right platform is the biggest concern for many new sponsors. “What happens to your investment if the crowdfunding company goes out of business?" he says.  "There are many young platforms out there, and it would be wise to look at how well capitalized the platform is.”

But an investor can be best served by platforms with strong security regulations that reduce the chance of being taken advantage of or being shut down by a regulatory body like the SEC. In many ways, Justin says the risks of crowdfunding—fraud and relaxed credit standards—aren’t unique, as they apply to all investments. 

“Just make sure you’re dealing with reputable people who have a history and track record for investor protection. One of our core values is investor protection. Jilliene, our CEO, and I agreed from day one when we started the company that this would be held to the highest standard possible.”

A risk of the platform similar to other private placements, however, is these crowdfunding investments are illiquid, meaning there is no secondary market. So when you invest in a crowdfunding platform, unlike a publicly traded stock, you can’t take out your investment whenever you like.

“In some cases,” Justin notes, “you may even be prohibited by the SEC from transferring ownership of your investment for up to a year. If you anticipate a short-term need for your capital, you may not want to get it locked up in a crowdfunding investment. 

The Future

Justin believes crowdfunding opens many new avenues of alternate investments in every industry, which can have a profound impact on investing. 

“Investors aren’t going to be so limited in choices, and where stocks and bonds have been the typical go-to investment of the masses, I hope to see crowdfunding provide options for diversification and better overall portfolio resilience.”

But Justin doubts crowdfunding will become the status quo for general investing, since it’s not needed for traditional investment options like stocks and bonds—or any other asset, for that matter, where robust secondary markets are already in place. The biggest impact, he notes, will be on markets where access was limited by the necessity of personal connections and liquid cash to meet minimums. In other words, real estate.

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