Plenty of people have used crowdfunding sites such as the 10-year-old Kickstarter and Indiegogo, which make it easy to back entertainment properties such as movies, animated series, and games, as well as a bewildering array of gadgets, in exchange for some modest premium like a T-shirt or signed script.
And recent legislation and regulations have empowered companies such as High Times to tap the SEC’s newer Regulation A process to sell shares of stock to, particularly, fans with smaller pocketbooks.
Since 2014, CrowdStreet has used those increasingly capable crowdfunding tools to enable a very different level of backers, high-end “accredited investors,” who want to buy into a very different kind of asset, multi-million-dollar commercial real estate projects.
“We were definitely early to the game,” said Tore Steen, CrowdStreet’s CEO. “But we saw a huge opportunity (in) opening up access and transparency to an industry, quite honestly, that’s been very private and closed for many years.”
CrowdStreet is actually more like Indiegogo: if a company doesn’t hit its target raise within 45 days, it keeps what it has brought in.
There are, as with any relatively unregulated investment, reasons for investors to go in with eyes open and a great deal of care. But it’s another example, like virtual reality, of a technology once devoted to entertainment that is creating disruptive opportunities in a completely different sector.
Despite the disruptions to a cloistered and clubby industry, opening up commercial real estate markets has benefits for both sides, Steen argued.
“For the investors, for the consumer side of that marketplace, what we’re doing is providing access, transparency and efficiency to invest directly into commercial real estate, something that they really had not had that access to,” Steen said. “It’s usually been very exclusive.”
CrowdStreet also automates and streamlines the typical limited-partnership/LLP paperwork that snows under traditional deals, while allowing developers and operators to access new groups of qualified potential investors.
“It was very limited in terms of the base of investors that they could work with,” Steen said. “So they were all constantly looking at how do I grow my base of investors? And how do I go beyond my geographic boundaries in my local market?”
Traditional deals typically might need to raise $5 million to $15 million in equity from a group of high-net-worth individuals or funds that each contribute $500,000 to $2 million.
CrowdStreet’s minimum investment is far smaller, typically $25,000 but sometimes $50,000, on projects that have an average total capitalization of $35 million. The average equity raise through CrowdStreet on those projects has typically been between $3 million to $5 million, though more recently some projects have sought as much as $14 million, Steen said.
“Now you’ve opened up that ability for an accredited investor to put $25,000 to $50,000 into projects, and to sprinkle it around,” Steen said. Investments through CrowdStreet average around $45,000, with total portfolio investments typically around $250,000.
CrowdStreet launched the marketplace that handles these kinds of deals five years ago, and has handled about 300 projects since, Steen said. Only a dozen projects so far have gone “round trip,” cashing out the investors, but another $60 million has been distributed back to investors over the life of CrowdStreet.
To get a project into the CrowdStreet marketplace, it must go through what Steen estimates is about 100 hours of vetting, to make sure it meets minimum standards.
But even with that review, deals aren’t without risk, which is why only investors who meet the U.S. definition of “accredited” can take part. The investments are long-term, and it’s difficult to extract your investment quickly. And unlike the FDIC or SIPC, there’s no federal insurance fund in case a project fails.
“This is still a private-equity investment, an illiquid investment,” Steen said. “It has not changed to where it is a liquid investment. The accredited investors recognize that. Many of them, they’re looking to a longer-term investment, whether it’s five years, seven years, 10 years, where they like to have that cash flow from the investment. And they also like to obviously have a gain when it’s either recapitalized or sold.”
Down the road, that process of investment and payout may be managed by blockchain-based tools, but Steen said, “I think we’re still a ways from those newer technologies. The securities industry is evolving rapidly, but that will be a very big paradigm shift.”
In the meantime, CrowdStreet is evolving what it does too, adding both a portfolio fund of multiple projects and a subsidiary that provides registered investment advice. As with the other parts of CrowdStreet, the portfolio fund is non-registered.