Is Crowdfunding Still Viable In Today’s Market?

At the beginning of August, CrowdStreet CEO Tore Steen stepped down amid fire after more than $50 million went missing, as reported in Bisnow. The funds had been raised for deals in Atlanta and Miami by New York real estate firm Nightingale Properties, and they never closed. Both the Atlanta and Miami entities filed for Chapter 11 bankruptcy, per Bisnow.

The recent events raise questions over whether sponsors should consider raising money through crowdsourcing platforms such as CrowdStreet. When evaluating the options, it’s important to note that there are different structures. For instance, some cater to accredited investors while others accept non-accredited investors. The way funds are raised on platforms can vary too. While certain crowdfunding sites enable sponsors to have direct contact with investors, others keep the relationship anonymous

Looking at the bigger picture, crowdfunding has been on the rise in recent years. This type of sourcing got its kickstart in 2012 with the passage of the JOBS Act, which permitted more digital opportunities for individual investors to participate in the market. Leading platforms have raised significant amounts. CrowdStreet, for instance, has funded more than 750 deals with over $4 billion invested.

Given the recent events, however, it’s important to note that clearly, there will be some challenges ahead as investors grow concerned over the legitimacy of these tools. Sponsors may want to make sure that the funding of their deal is not fully reliant on a crowdfunding raise. It’s also more crucial than ever to carry out due diligence before making an investment.

A starting point could be to check if the platform is open to accredited investors or non-accredited investors. In this article, we’ll look at the difference between these categories, and consider how crowdfunding has opened avenues for non-accredited investors. In the following article, we’ll cover crowdsourcing options for accredited investors.

Accredited and Non-Accredited Investors

Historically, real estate investments have often been limited to accredited investors. To qualify as an accredited investor, certain criteria must be met. This consists of having a net worth of more than $1 million excluding the primary residence, or an income of more than $200,000 individually or $300,000 as a couple during each of the past two years with an expectation to continue with the same salary in the current year, according to the SEC.

In recent years, crowdfunding has changed this concept, with some platforms opening the gates to larger pools of investors who are non-accredited. These individuals will have a net worth of less than $1 million excluding their home and earn an income of less than $200,000 as an individual or $300,000 as a couple during the previous two years.

The SEC has certain investing guidelines for non-accredited investors. If their annual income or net worth is less than $107,000, the investment limit is either $2,200 or 5% of their annual income or net worth, whichever is greater. If both the annual income and net worth are $107,000 or more, the limit is the greater of 10% of their annual income or net worth, up to $107,000.

Crowdfunding for Non-Accredited Investors

Some of the well-known platforms for non-accredited investors include RealtyMogul, Yieldstreet, and DiversyFund, and Fundrise, as mentioned in Nerd Wallet. Other options are GROUNDFLOOR, Roofstock, and Small Change. These sites are always changing, so you’ll want to check the latest updates and reviews before moving forward with an investment.

When I interviewed Jamison Manwaring on my podcast, “The Insider’s Edge to Real Estate Investing,” he shared his passion to give opportunities to a broader audience. Jamison is the co-founder and CEO of Neighborhood Ventures, a crowdfunding platform which is open to non-accredited investors with starting amounts as low as $1,000 for multifamily.

In addition to navigating the ample regulation in crowdfunding, Jamison noted the importance of educating investors and developing trust. “It doesn’t matter if the check is $1,000 or $1 million—people look at it the same,” he said. When breaking into crowdfunding, he and his partner agreed to try raising $500,000 that they needed for a deal via online, rather than tapping friends. Through the process, they learned that investors were looking for consistent returns and structured the plan accordingly. “In four weeks we funded the whole project,” he explained.

The Intricacies of a Crowdfunding App

Janine Yorio, the CEO of Everyrealm who served as the head of real estate at Republic, joined my podcast to discuss her experience and background in the crowdfunding space. Republic enables non-accredited investors to participate with venture capitalists for as little as $50. Prior to her time there, Janine spent years building and running a fintech app called Compound which was acquired by Republic in 2020.

On the show, Janine discussed the significant upfront investment needed to build the app and get approval for it. During this time, she and her partner carried out marketing efforts to inform investors of their options. Once the app was in place, individuals jumped at the chance to contribute as little as $100. More than 4,000 participated in the first investment, and $450,000 was raised through the app. “We never talked to people on the phone,” Janine shared on my podcast. “It was all through the app and fully automated.”

Janine’s crowdfunding app was used for projects in places like Miami, Nashville and Austin, with an eye for locations that were booming. “We wanted to make it so you could invest passively in a downtown urban core,” she shared. “Real estate is the world’s largest asset class…the more we can increase the ownership and improve what that looks like, the more people can invest and play alongside the big players.”

Ultimately, those who want to use crowdfunding to raise funds could find opportunities, though investor demand may drop given the recent fallout. In addition, there are many legal complexities to follow, and you’ll need an attorney to help you sort through them. New investors may be well suited to begin with a partner who has access to other sources of funding while building a track record.