Realty Mogul, a new crowdfunding platform based in Los Angeles, launched today to allow accredited investors to buy slices of real estate deals for as little as $5,000. The company, originally called "Real Estate With Friends," is democratizing an industry that has historically been an elite club, said cofounder Justin Hughes. "Now, you don't need to know a guy," he said. "You know us. We're your guy."
Hughes and his cofounder, Jilliene Helman, both worked in real estate before they started Realty Mogul. The idea came after the federal JOBS Act, which passed in April, lifted the ban on "general solicitation," meaning that investors could now be solicited through a website instead of only in closed-door meetings. The President endorsed the plan, and small business and startup workers rejoiced even though there are some concerns about relaxing the rules.
"Now, you don't need to know a guy. We're your guy."
The JOBS Act will also allow Realty Mogul to eventually drop the accredited investor restriction and open up the platform to anyone with cash; that change is likely to come later this year, once the Securities and Exchange Commission revises its rules to reflect the new law.
But the crowdfunding for real estate boom is part of a larger trend in crowdfunded investments. The JOBS Act opened up the possibility of using the internet to match investors with deals, and that's resulted in crowdfunding portals for startup companies and even people.
Regulators found 8,800 registered domains with "crowdfunding" in their names as of November 30, 2012, "up from less than 900 at the beginning of the year," according to a report by the North American Securities Administrators Association. The Association deemed 200 sites worthy of further scrutiny. About 75 percent of the sites were placeholders, probably waiting for the SEC to complete the guidelines that will fully legalize equity crowdfunding for non-accredited investors.
Realty Mogul and its ilk are technically legal because they restrict their offerings to "accredited investors," a federal definition set in 1982 that states an investor must have a net worth of $1 million or an income of $200,000. Those numbers have never been adjusted for inflation.
However, Realty Mogul suffers from the same criticisms as most of the new equity crowdfunding ventures: one, it allows investors to self-verify their status (although it does "reserve the right" to ask for a tax return), and two, its existence makes it easy to raise money for bad deals.
"Many accredited investors are ordinary professionals who are not financially sophisticated."
"When these thresholds were established, an accredited investor was meant to be in the top one percent of Americans in terms of wealth and presumed sophistication," wrote vocal opponent Vernon Martin, the Florida-based founder of American Property Research, a commercial real estate advisory firm. "Today, this category covers about the top seven percent, and many accredited investors are ordinary professionals who are not financially sophisticated."
Thanks to the JOBS Act, he said, the real estate investment industry "will be able to find even more suckers." He's referring to unsophisticated investors like his neighbor, a radio engineer who was recently ripped off by a Tenants-In-Common investment, an analog version of crowdfunding for real estate.
"Generally, a project has no problem receiving capital," he told The Verge. "It's only projects which are having trouble which seem to attract this type of crowdfunding or syndicated solution."
Unfortunately, those risks may be similar across the other industries now opening up crowdfunding investment portals — hence the SEC's cautiousness as it moves toward opening these portals to non-accredited investors as well.