Crowdfunding Platforms Are Raising Significant Amounts of Capital

A decade ago, crowdfunding platforms sprung up out of what seemed to be thin air following the approval of the JOBS Act, which loosened restrictions barring un-accredited investors from participating in investment funds. The goal of the JOBS Act was to help small businesses raise $1 million, but Bruce Stachenfeld, chairman of RE law firm Duval & Stachenfeld, says that the leading crowdfunding platforms have by far exceeded that goal.

“Crowdfunding has grown up to be a real player in the real estate market,” Stachenfeld tells GlobeSt.com. “Over time, these platforms have aggregated investments from high-net worth individuals, people that could invest $10,000, $25,000 or $100,000 that want to invest in real estate but don’t have access to private equity funds that have a $1 million or $5 million minimum.”

Instead, crowdfunding platforms have hosted fundraises well over $30 million, with most organizations targeting $5 million to $20 million. “Most of them are saying that $1 million is too small, and unless there is a special circumstance, they are not even interested in it,” says Stachenfeld, adding that each of the two leading platforms, Real Crowd and CrowdStreet, have more than 50,000 investors participating on the site.

While increased investments have helped to fund deals and push the method of funding into the mainstream, larger sponsors are also seeing a benefit to crowdfunding as an integral part of the capital stack. As Stachenfeld puts it, most equity on a deal is raised with a 90-10 model with a sponsor putting up 10% of the equity capital and a third-party, usually an institution, providing the remaining 90%. “In the past, the sponsor would go to an institution to negotiate a deal, and they are very hard fought,” Stachenfeld explains. “If someone is putting up only 10% of the money and negotiating with a third-party that is putting up 90% of the money, the third-party has a lot of bargaining power and control rights.”

Before crowdfunding, this was really the sponsor’s only choice, but crowdfunding has opened up new opportunities to raise at least a portion of the capital while maintaining control rights. “With crowdfunding, you have a chance to get the money from a crowdfunding platform,” says Stachenfeld. “That doesn’t mean that they are going to give away the store completely, but the odds are the deal will be better economically and will be better on control rights.”

Although crowdfunding platforms have been around now for 10 years, a lot of this growth has come in the last 18 months. “The numbers have really gotten bigger in the last 18 months,” says Stachenfeld. “I think it is going to be on everyone’s lips more and more in commercial real estate transactions. That’s my prediction.”