Since legislation paved the way for crowdfunding in the real estate industry, over 100 companies have entered the market to serve the needs of sponsors. Many failed in a few years while others became leaders in their respective niche.
Over time, it became apparent that old truths of real estate still stand. Relationships, above all else, matter. Ownership of the investor relationship provides access to capital. So some crowdfunding companies decided to own the relationship of its members.
Now we have two prevailing models in the industry. Let’s go over the key differences between them so you can decide which is right for you.
Indirect crowdfunding companies like RealtyShares and RealtyMogul form a Single Purpose Entity (SPE) such as an LLC that is then invested into a sponsor’s entity.
Because the SPE is controlled by the indirect platform, they set the financial structure, operating agreements, and terms of the offering, including all decisions regarding reporting and distribution to the investors in the SPE.
The promotion of offerings is also controlled by the crowdfunding company. They select the marketing strategy and language best suited for their brand. In some cases, sponsors are not even mentioned. The investor places all trust in the crowdfunding company and relies on them to source and manage the property.
This means that when an investor decides to participate in your deal, all communication is handled by the crowdfunding company. You won’t get any contact information about the investor, eliminating the opportunity to build a relationship with your investor.
If your intent is to grow your investor base, this is not the option for you.
A crowdfunding company operating under the direct model gives sponsors complete control over all major decisions including their financial structure and terms, operating agreements, etc. — just as they were prior to raising capital through a crowdfunding site.
When investors have questions about an offering, they are directed to the sponsor for answers. Reporting and distribution is also done by the sponsor, not the crowdfunding company.
This model removes the crowdfunding company all together and allows sponsors to form a long-lasting relationship with investors for subsequent fundraising. Within the crowdfunding industry, RealCrowd remains as the only platform that follows a true direct model.
"We envision an open marketplace where sponsors and investors make connections, grow networks, carry out transactions, and do deals without all the institutional intermediaries and encumbrances that existed in the pre-JOBS Act era."
- Adam Hooper, CEO of RealCrowd
This really depends on your level of experience and comfort level managing deals. Indirect platforms have certain advantages that may be appreciated by less experienced sponsors:
RealCrowd charges fees to sponsors for access to the marketplace, hosting an offering, marketing, and other services like investor verification and electronic document execution. Investors can join the platform at no charge.
Companies that operate under an indirect model assess fees differently. Creating an SPE themselves adds an additional layer of investment structure that brings fees and costs with it.
Some companies charge fees to both sponsors and investors and may charge fees in up to three different areas—placement fees or front-end fees, ongoing asset-management fees and a percentage participation that the crowdfunding firm collects at the exit as a back-end fee.
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