Updated: Nov 10
There is no doubt that the rise of online crowdfunding platforms altered the face of the real estate lending industry. Real estate crowdfunding companies appeared overnight and quickly became one of the most popular ways for the average investor to participate in investments that were once reserved for the very wealthy.
However, unlike the seasoned traditional and private institutions in the lending industry, these crowdfunding companies are still fresh faced, having only been around for less than a decade. This means that, much like any other business, the resilience of a crowdfunding platform has only been time tested by the bare minimum criteria. In other words, if the company’s platform is easy to use and the company provides consistently good product (performing real estate investments) with a competitive return, then they will continue to thrive. If they do not, then the company will fail to retain their current capital base and generate new capital, and eventually fizzle into nonexistence.
While this is all well and good for business, the fact that these crowdfunding companies have yet to undergo the true test of their validity and sustainability – a full-blown real estate market correction – is largely understated. Unfortunately, this may be to the detriment of thousands of investors who will soon realize the true extent of their exposure the hard way, and here’s why.
Who Stands to Lose?
When the Securities and Exchange Commission originally opened the door to crowdfunding with the passage of Rule 506 of Regulation D in 2013, these investments were originally reserved for accredited investors. Accredited investors were seen as being sophisticated enough to perform their own due diligence and understand the inherent risk, but more importantly, they are wealthy enough to handle the potential losses.
In 2016, the door was thrown wide open when the second part of the Jumpstart Our Business Startups (JOBS) Act went into effect, allowing non-accredited investors to participate in these crowdfunding platforms. While this initiative to give the average investor more opportunities to expand their investment portfolio was well-intended, there will most likely be unintended consequences. These investments are not much different than what is being offered to accredited investors, exposing the average investor to a similar risk profile that they are less likely equipped to understand nor handle financially.
To be continued….
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