Abstract
Like a juggernaut, “crowdfunding” has hit the media, the financial markets and the common narrative by storm. Incipient in many ways, the intermediation of financing transactions online has become a billion-dollar industry. As technology has advanced, even recreated, industries, there seems none more primed than “finance”, an inherently information business. By creating improved efficiency, both art and science of finance are enriched. A 21st century vestige of the 1980's syndication business, real estate seems to be enjoying the fruits of the crowd, with $1 billion of property financings conducted online in 2014, with an expected $2.5 billion this year. For sponsors and investors, there appears legitimacy to the online approach, underscored by the level of venture capital now finding home in this burgeoning sector. Yet, like its progenitor, might real estate crowdfinance find legislative, regulatory, and practical headwinds, stunting its progress? Still early, with business models, scalability and sustainability still suspect, the current momentum seems promising.
TopIf There’S A History, There’S No Mystery
As I commented in the 2015 Massolution Real Estate Crowdfunding Industry Report, what we are witnessing is largely a 21st century manifestation of the real estate syndication model heavily utilized during the 1980s, at least for commercial real estate endeavors. Working either as a principal or as an intermediary, groups would raise funds from “syndicates” of accredited investors through the private placement of limited partnership offerings, with proceeds being used to acquire, rehabilitate, construct, or reposition commercial or multi-family real property. In the effort to aggregate such funds, the “syndicator” or say, sponsor, would prepare a placement memorandum, sometimes consisting of hundreds of pages, which it would provide individual investors generally by snail mail, and then “dial for dollars”. Participant investment sizes were set at a level to induce broad participation, but not so low to the extent of creating a “herding cats” phenomenon. The verbal exchange between fundraising sponsor and prospective investors tended to be laborious, as many of the questions or comments were redundant from investor to investor, regardless the size of a particular investment commitment, whether $25,000 or $250,000. Telling the same story time and again, was a characteristic of the syndication process. And then there was the monitoring of who received a book, what the nature of the conversation was and finally allocating time to complete the one-on-one sales process. Post fundraise, the communication between sponsor and investors was equally arduous, layering more paper, snail mail, and repetitive repartee.
Enter crowdfunding, or more explicitly, the analog nature of fundraising communication between sponsor and investors going digital. Rather than authoring a paperback tome, crowdfunding platforms expose dozens if not thousands of investors simultaneously to an investment proposition through engaging and informative websites, with customer relationship management (CRM) systems to support both outreach and ongoing investor management. Simply, this has become the process of telling the story singularly to a plurality, underscoring the efficiency of digital communications. Consider the cost and time savings of creating a single digital copy and allowing through invited online access compared to the mailing out 500 individual books, and then following up on each. And yes, pursuant to securities regulations, each of the old style books were to be manually numbered and controlled. Further imagine if such “book” required an amendment or introducing an update in the project. The efforts and costs to distribute what needed to be shared for informed investment decision making drastically have been reduced. This has wide ranging implications: in reducing the cost of intermediation, smaller transactions might be economically “syndicated”, as one can only assess so much in intermediation fees so as not to severely impact investable funds, nor gouge the economics in the end for the investor.