Are You Ready for 204 Million New Investors?

By Robert J. Finlay — Chief Executive Officer

We recently marked a historic moment in American business as new SEC rules adopted last March became effective.

Robert J. Finlay is the founder and CEO of QuietStream Financial.

The new rules under Title IV of the JOBS Act lower barriers to raising equity capital for entrepreneurs and small companies by creating a simplified registration process for securities offerings of up to $50 million.

However, in my view, the most compelling aspect of the new rules is the potential to dramatically expand the pool of eligible investors. Accredited investors (those making more than $200,000 per year with a net worth $1 million excluding their primary residence) could already make investments. Reg A+ adds the rest of the entire general public to the pool of eligible investors, but with one limitation. There is no limit on how much a non-accredited investor may invest in a Tier 1 offering (offerings up to $20 million), but non-accredited investors are subject to a limit of 10% of the greater of their annual income or net worth on the amount they may invest in Tier 2 offerings (offerings up to $50 million).

To give you an idea of the magnitude of this change, there are estimated to be 8.6 million accredited investors in the United States. According to United States Census Bureau statistics, there are approximately 204 million people 18 years and older who are not accredited investors. In other words, the pool of eligible investors just increased almost 24 fold!

The other exciting aspect of Reg A+ is that it creates the framework for a secondary market in securities issued under Reg A+. Lack of liquidity was previously a factor that kept many eligible potential investors out of the market. The removal of transfer restrictions (except with respect to affiliates of the issuer) should also stimulate investment.

We are laser-focused on how these developments will affect your business. Our team of professionals at QuietStream Financial, Investor Management Services, and FullCapitalStack will monitor offerings, interpretations and enforcement actions under these new rules and provide you with periodic updates.

In the meantime, please take a moment to review our crowdfunding regulations chart, which summarizes various regulations governing raising capital.

Will peer-to-peer lending predict what happens next with real estate crowdfunding?

Peer-to-peer lending is about to get real — and commercial real estate crowdfunding won’t be far behind.

This week, we learned details of how Goldman Sachs will begin offering consumer loans via online platform. With plans to launch in 2016, there is little doubt the innovators who devised P2P lending will feel the heat.

As commercial real estate investment professionals, we need to pay close attention or risk being left in the dust. Technology is creating new opportunities for institutional investors and owners who are willing to adapt.

Innovators such as LendingClub and Prosper used financial technology (FinTech) to capitalize on a gap in the consumer and small-business lending markets after the Great Recession’s credit crunch. Seeing traditional banks and related lenders withdrawing, these platforms created a market for individuals to borrow small amounts from pools of cash supposedly invested by other individuals looking for new investment opportunities. The result has been billions of dollars in credit extended for debt consolidation, home improvements and other projects.

The concept is based on the idea that individual investors can now buy fractions of their peers’ debts — “peer-to-peer lending.” However, who really is the “peer” on the backside of this $15 billion to $30 billion market? It’s not savvy individuals making smart decisions for direct investing. Banks, institutional funds, and money managers looking for yield have powered the growth rate, funded the loans and have started to package the debt into securities. They are at times assisted by “first look” offers from the originators, and proprietary risk models to analyze the loans.

Most of the “peers” who own these loans are actually institutions, such as hedge funds and other investment pools. The borrower’s true peers likely end up only owning a piece of these loans through shares in a fund placed in their 401k, packaged and sourced by sophisticated institutions.

The standardization of consumer risk scores and credit profiling has propelled this new asset class into the securitization market, which has attracted new and additional capital. In turn, this will likely convert into more products at better rates for consumers.

What is the lesson here for commercial real estate investors? Our industry is on course to create the same type of standardization needed for institutional capital and lending efficiencies. These three factors are shaping the trend:

  • Crowdfunding has given real estate owners the ability to market their performance. Soon investors will be able to compare sponsor performance in standardized models.
  • FinTech is giving real estate owners the ability easily manage their investor base and post new, accessible offerings.
  • Real estate owners can now spend less time sourcing investors and more time managing their portfolios.

Although crowdfunding for real estate is in its infancy, there is already buzz about institutions and banks partnering with platforms to source product. Just like P2P lending, investors will soon find the ability to hold shares of a REIT in their 401Ks that primarily owns “crowdfunded” participations of equity in real estate.


Nikki BaldonieriBy Nikki Vasco | Chief Investment Officer | FullCapitalStack

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