The Ultimate Guide To Real Estate Crowdfunding

Regulation Crowdfunding (Reg CF) has completely changed the landscape

Real estate is the world’s largest asset class by far, and until we learn how to strip-mine asteroids it’s going to stay that way. Real estate has been the centerpiece balance sheet line item for generations of the wealthiest individuals, and more than 90% of US millionaires are invested in real estate aside from their primary residence.

But that’s NOT to say that real estate investing is just for the wealthy, or the rich for that matter… Real estate is the people’s asset. It’s easy to feel discouraged and dismiss real estate investing, however, with modern regulation real estate is NOT out of reach at all. Whether you’re a seasoned investor looking to add diversification to your portfolio or just getting started on your investment journey, Pistachio is how everyone can invest in real estate… and we’ll explain how it works below.

Regulation Crowdfunding (Reg CF) has completely changed the landscape of opportunity for the everyday investor — unlocking the private securities market for the largest class of investor in the US. More than 89% of all US households do NOT qualify as “accredited”. Previously, leaving the vast majority of Americans from participating in these private deals. “Title III” (Reg CF) of the Jumpstart Our Business Startups (JOBS) Act has opened the door for non-accredited investors to finally have a level playing field.

And with the recent regulatory updates in March 2021, the opportunities for both investors and issuers are now much more attractive. Enter real estate crowdfunding.

Why is Reg CF Important?

Reg CF, aside from leveling the playing field, affords investors the opportunity to economically benefit from the investments occurring all around them today. Before it was the “high-net-worth” and “high-income” individuals funding private projects, often from the “inner-circle” of the country club or invite-only dinner party. With Reg CF, we can afford everyone the opportunity to promote the entrepreneurial projects (in our case real estate deals) that drive this country forward.

Imagine being able to drive through the center of town, past new stores and shopping centers and housing developments, being able to say that you helped fund that project. You’re a real estate investor, investing in the projects you care about and benefiting in so many ways from their success.

Benefits for Everyone

For Investors

  • Significantly lower investment minimums. Typically, investment minimums for private real estate deals are between $5,000-$100,000. With Pistachio, investors can begin investing with as little as $100.
  • You are more likely to be able to participate in a deal. Typically, private real estate deals take a small number of investors... “the inner circle”. With Pistachio, real estate deals can include an unlimited number of investors up to the $5M maximum raise amount.
  • Deals are more transparent. There are no sketchy back-room deals. You, and all of the investors, have equal access to the same information, legal documents, and discussion board with the issuer.
  • You are supporting small businesses and/or local real estate deals. Small businesses create more than 1.5 million new jobs annually.
  • You may make money on your investment. When your real estate investment does well you may make a return on your investment.

For Issuers

  • Issuers use regulation crowdfunding to raise operating capital, build community and engagement and increase the breadth of their deal flow. Regulation crowdfunding combines both marketing and fundraising into a single activity.
  • Reg CF allows issuers to raise from a larger group of investors, decreasing reliance on a small group, institutional capital or private equity.
  • Issuers can "test the waters" on a deal to gauge interest before committing to a large fundraising undertaking.
  • Investors become advocates, repeat investors, and evangelists for the offerings/companies they invest in. This means the next offering can be even easier to raise.
  • Issuers have much more flexibility for the type of offering they want to offer to investors. This can be a single property investment, a portfolio, or other types of deals.

Reg CF Rules and Regulations

For Investors

  • You must be at least 18 years of age.
  • You must disclose identifying information, as well as net worth and annual income. (for Reg CF Investment Limits, and/or to verify accredited investor status)
  • You should be in a financial position that allows for the risk of losing all or part of your investment. (Never invest money you cannot afford to lose in its entirety)
  • You are generally required to hold you investment for a period of at least 12 months after the campaign closes. Investments are generally illiquid and cannot be traded even after the holding period ends. State-level anti-fraud legislation (blue sky laws) may also apply.

For Issuers

  • Must provide complete and accurate disclosures to public, in order for investors to make informed decisions, or risk severe legal consequences.
  • All transactions must take place online through an SEC-registered, FINRA member intermediary. (Pistachio is in the process of acquiring SEC-registration and becoming a licensed portal)
  • Limit the amount individual non-accredited investors can invest across all crowdfunding offerings in a 12-month period. (Reg CF Investment Limit)
  • Required to file a public disclosure of information with SEC, investors, and the intermediary. (This includes detailed information such as risk factors, capitalization tables, and financial statements for the previous two years)
  • There are continuing reporting requirements post-offering.
  • Must be a US company
  • Must pass a bad actor check on all officers, directors, and managers, as well as an intermediary's due diligence check, such as the vetting process that Pistachio takes with every issuer.
  • Subject to anti-fraud and anti-manipulation provisions of the securities laws. (KYC and AML)

Common Types of Real Estate Investments

Membership Units

Membership units represent an investor’s fractional ownership stake in a limited liability company (LLC). Investors (members) hold a membership interest, which gives the investor profit and voting interests in the LLC, which can be altered by the terms of the contract. (You must carefully read the deal terms to know your investor and voting rights.)

LLCs:

  • Distribute membership interests in any manner they prefer, rather than ranking members by their total contributions.
  • Add the investor’s name to a ledger, rather than issuing stock certificates (like a corporation would).
  • If profitable, the Manager (similar to a President or Chairperson) has the power to make distributions to members. This is similar to dividends made to stockholders in a corporation.
  • If the company is sold or merged, members will receive cash or equity as consideration for their ownership right.

Debt

Debt is a loan between an investor and a company.

  • Often referred to as bonds or debentures.
  • The debt is repaid to the investor within a predetermined period of time (term).
  • The investor profits on the interest amount of the loan, typically paid periodically with the return of the initial capital.

Revenue Sharing Notes

Revenue sharing notes are an agreement between the investor and company wherein the company agrees to pay the investor a percentage of the gross revenue of the business on a periodic basis until the initially agreed upon "repayment amount" is met. In this case, the debt is repaid not on a fixed basis, but is dependent on the amount of revenue the business is bringing in.

Term Notes

A business agrees to pay the investor a set percentage (interest) on the investment, for the duration (term) of the loan. Payments are fixed each month for a predetermined number of months.

‍Reg CF Investment Limit

For Investors

Non-accredited: Over the course of 12 months, the maximum a non-accredited investor may invest across all issuers operating under Regulation Crowdfunding (Title III) is:

  • If either the investor's annual income or net worth is is less $107,000: the greater of $2,200, or 5 percent of the greater of the investor’s annual income or net worth

Ex. If the investor's income (or net worth, whichever figure is greater) is $100,000 per year, they may invest up to $5,000 or 5% of this figure.

  • If both the investor’s annual income and net worth are equal to or greater than $107,000: 10% of the greater of the investor’s annual income or net worth, not to exceed $107,000

Ex. If the investor's income (or net worth, whichever figure is greater) is $150,000 per year, they may invest up to $15,000 or 10% of this figure.

For Issuers

A company issuing securities in reliance on Regulation Crowdfunding is permitted under Rule 100(a)(1) to raise a maximum aggregate amount of $5 million in a 12-month period (before the amendments, the limit was $1.07 million).

What to Expect When Investing

  • Investors should expect to hold their investments long-term and NOT rely on receiving a return on their investment.
  • Diversification may lower risk, and should be used to balance an investment portfolio.
  • You must conduct your own research on issuers and offerings.
  • There are many risks that may prevent you from getting a return on your investment including but not limited to:
  • Past performance does not indicate future performance.
  • Market conditions may rapidly change.
  • Real estate often comes with unexpected costs and timing delays.