Recent regulatory changes and the emergence of real estate investment crowdfunding companies has effectively put an end to the stereotype that owning a piece of commercial property is a privilege of the affluent. Now just about anyone in the United States can earn a return on his or her investment.
In December, a Washington D.C.-based investment startup launched an Internet tool that allows would-be investors to purchase $50 million worth of shares in a real estate investment trust (REIT). Fundrise calls its tool the world’s first eREIT, which is available through the firm’s online FinTech (financial technology) platform.
“The Fundrise eREIT is a revolution in how investments are made — available to the public without the costs, middlemen and inefficiencies of conventional channels,” said Fundrise co-founder and CEO Ben Miller. “We believe this is a superior alternative to the high fees and volatility of the stock market.”
Fundrise expects the FinTech industry to lure investors away from Wall Street by offering investors easier access to the $13 trillion commercial real estate market. Instead of investing in publicly traded companies, investors can diversify their portfolios by allocating funds into investment properties such as offices, shopping centers and apartments.
Fundrise, which launched in 2010, is a pioneer in the commercial real estate crowdfunding market. Crowdfunding — the process of raising capital through little amounts of money from large numbers of individuals — has been around for many years. KickStarter and IndieGogo are crowdfunding websites for artists and innovators, where users can “back” their favorite projects and receive rewards in return.
But equity crowdfunding is relatively new. Equity crowdfunding is the process of raising money in exchange for ownership (instead of rewards). In other words, it’s similar to an initial public offering (IPO), but for private companies — an initial private offering, so to speak.
The market for equity crowdfunding is robust. Today, Fundrise competes with several other firms, including RealtyShares, iFunding, CrowdStreet and Patch of Land.
Until recently, federal regulations barred commercial real estate funds and startups from selling ownership shares to non-accredited investors — roughly 97 percent of Americans. In October, however, the Securities and Exchange Commission (SEC) announced its adoption of final rules to permit companies to offer and sell securities through crowdfunding.
The new rules explicitly allow non-accredited investors to purchase ownership shares “so long as their investment in common shares does not represent more than 10% of the greater of their annual income or net worth (for natural persons), or 10% of the greater of annual revenue or net assets at fiscal year-end (for non-natural persons).” The SEC also lets crowdfunding firms offer up to $50 million in shares without SEC registration.
Anticipation grew quickly weeks before the offering as Fundrise sent pre-release messages stating, “We’re about to announce a major innovation,” calling it the “biggest financial innovation since we launched the first crowdfunded real estate deal back in 2012.”
Jordan Sale, director of marketing at Fundrise, said the waitlist passed 16,135 interested investors the night before the announcement.
On December 3,,the company opened a 48-hour priority access window for investors to invest a minimum of $1,000.
About three hours later, Miller sent an email announcing the company was restricting the initial $1 million processing window due to an excess in demand by 503 percent. The eREIT sold shares at an average rate of $21,428 a minute.
While the eREIT is currently closed for processing, Miller says Fundrise plans to resume sales shortly on a first-come, first-served basis.
Dave Schools is a contributor for Opportunity Lives. You can follow him on Twitter@DaveSchools_.