Tag: CrowdStreet

Escrow account crowdfunding portals

By Itself, An Escrow Account Won’t Stop Sponsors From Stealing Investor Money

On By crowdfundattnyIn Crowdfunding Portals, Crowdfunding Real Estate, Portals, Real Estate2 Comments

As reported everywhere, CrowdStreet investors recently suffered very large losses when a sponsor apparently absconded with their money. It’s a very bad thing, not only for those investors but for the real estate crowdfunding industry. You’d almost think this were crypto! 

In the aftermath, many have called for crowdfunding sites to use escrow accounts. My point today is that escrow accounts by themselves aren’t enough.

CrowdStreet hosts offerings under Rule 506(c), where escrow accounts aren’t required. On the other side of the street, in the Reg CF world, funding portals must use an escrow agent. Rule 303(e) even specifies who can serve as the escrow agent (a broker-dealer, a bank, or a credit union) and directs which instructions the funding portal is required to give to the escrow agent under what circumstances. If and when the issuer reaches its target amount the funding portal must instruct the escrow agent to release the funds to the issuer, while if the investor cancels his, her, or its investment commitment or the offering is terminated, the funding portal must instruct the escrow agent to return the funds to the investor.

Now let’s assume exactly such an arrangement had been in place for the doomed offering on CrowdStreet.

The offering would have stipulated a “target amount” of $63 million, with the money held securely in escrow. With the target amount raised, CrowdStreet would have given the escrow agent instructions to release the money to the sponsor, following the regulations to the letter. And the sponsor would have stolen it.

By itself the escrow account wouldn’t have prevented the theft. Extrapolating to Reg CF, the escrow accounts used by funding portals do not prevent theft. They just make the unscrupulous sponsor wait until reaching the target amount to steal the money.

To prevent the theft you have to layer something on top of the escrow agent. In the CrowdStreet offering you could have prevented the theft by wiring the money not to the sponsor but to the title company conducting the closing, with instructions that it would be used only to acquire the property. In a typical Reg CF offering, where the money is being used by the issuer for marketing or other general business purposes, it’s much harder.

This is another reason why the “bad actor” rules are odd. They catch people who have violated the securities laws but not people who have robbed strangers at gunpoint. 

Questions? Let me know. 

Real Estate Crowdfunding: How Far We’ve Come

On By crowdfundattnyIn Equity Crowdfunding, Real Estate, Real Estate Investment Trust, UncategorizedLeave a comment

 

The JOBS Act was signed by President Obama on May 5, 2012. Last month, a client of mine, Tapestry Senior Housing, raised about $13.6 million of common equity for a project in Moon Township outside Pittsburgh. Tapestry is an affiliate of Tapestry Companies, LLC, a national firm that operates as an owner, manager and developer of senior and multifamily properties. The Moon Township project involved the adaptive re-use of an existing Embassy Suites hotel.

This was the largest raise in the history of the CrowdStreet platform and, in my opinion, an important milestone for the Crowdfunding industry.

Not long ago, real estate Crowdfunding was limited to single-family fix-and-flips. At the annual meeting of NAIOP in Denver, in October 2014, I moderated a panel on Crowdfunding with Adam Hooper of RealCrowd and Darren Powderly of CrowdStreet, as it so happens. The audience for our panel was the smallest of the conference — but at the same time probably the youngest and most enthusiastic.

The size of the deals grew and high-quality sponsors like Tapestry began to notice. Now, when word gets out that someone has raised $13.6 million of equity, I believe we’re going to see a spike in interest from a broad spectrum of sponsors in every industry sector.

You can’t raise $13.6 million for just any sponsor and any deal, of course. Tom LaSalle, Jack Brandt, and their team at Tapestry have a remarkable track record in the senior housing space, and this was their third deal on CrowdStreet. CrowdStreet itself has a terrific and well-deserved reputation as a premier site. Put a great deal, a great sponsor, and a great site together and you get a terrific result.

But let’s not forget the most important factor of all (besides the lawyer, I mean). In the Moon Township deal, Tapestry and CrowdStreet gave about 280 accredited investors from all over the United States the opportunity to participate in the kind of investment once reserved for the wealthy. That is now, and will continue to be, the most important ingredient for success. When we talk about Crowdfunding as the democratization of capital, that’s what we mean.

Tapestry raised $13.6 million from 280 investors. There are close to 10 million accredited investors in the United States alone. To my mind, that means that the opportunity for growth, even within Rule 506(c), is practically unlimited.

So hats off to Tapestry and CrowdStreet, and on to the next deal.

Questions? Let me know.