When brothers Ben and Daniel Miller, cofounders of Washington, D.C.–based WestMill Capital Partners, sought to use crowdfunding to raise money locally for a development project, they initially ran into a roadblock. The Securities Act of 1933 prohibited generally advertising opportunities to invest in securities offerings. Then they discovered a little-known exemption for offerings that didn’t exceed $5 million—as long as they qualified the project with the U.S. Securities and Exchange Commission (SEC) and registered it with local securities regulators. In 2012, the Millers launched Fundrise.com, a D.C.-based online platform that allows other developers to raise money via crowdfunding.
On September 23, 2013, new rules went into effect that allow companies to advertise opportunities to invest in securities offerings as part of the JOBS Act. At present, only accredited investors (such as individual investors with income above $200,000 or a net worth exceeding $1 million) can participate unless the project is qualified with the SEC. Ben Miller talks about the potential opened up by the new rules and by anticipated future changes to the law.
What led you to start Fundrise?
Originally, we created Fundrise for our own real estate development company. We couldn’t find a capital source to let us do what we thought was the right thing in certain neighborhoods. Sometimes a neighborhood wants a certain kind of development that providers of institutional capital don’t understand, or the neighborhood doesn’t fit their model. There are a lot of neighborhoods that want local, authentic development, and institutional capital is usually focused on national credit tenants. Once we got hundreds of people investing, we realized there was an opportunity to do this not just for us but for other developers, too.
What has changed for Fundrise since the SEC’s September 23 rule change?
We launched projects with key developers all over the country, so now we can have offerings in cities like Detroit, Boston, New York, Los Angeles, and San Francisco. We also launched investor networks, which enable a developer to build a profile on the Fundrise website and start gathering investors online. Say a developer in Detroit wants to undertake a historic renovation of a residential property in downtown Detroit. People all over the country are interested in that kind of product.
Another rule change is expected to come in 2014—what will that enable?
Currently, we still have to file our offerings with the SEC in order to reach out to unaccredited investors. That takes 90 to 120 days. The next rule change will eliminate that filing process. That’s when we fully democratize investment in real estate. It doesn’t make sense to me to source capital from institutional capital across the country rather than from across the street.
What are crowdfunding’s advantages and disadvantages for developers?
People think about real estate differently from the way institutions think about it. If I say to you, I want to build affordable housing in your area, and I can give you an 8 percent return, you might be interested. An institutional investor might say that an 8 percent return is too low. Plus, if 10,000 people are investing in their neighborhood, that creates massive social power. They’re going to shop there and eat there. If you have a permitting problem, 10,000 people can e-mail the permitting office. If you want to raise $20 million or $100 million, though, institutional capital is a better source. We can’t operate at that scale yet.
What challenges does online crowdfunding face?
There is a learning curve, just as there was with Amazon.com 20 years ago, when buying a book online seemed bizarre. Most individuals have little knowledge of real estate investment. With Fundrise, they get to see the marketing data, property information, geotechnical reports, title insurance policies, and concept plans for a project. There are many paradigms we have to shatter, and one of them is that developers see transparency as an enemy. Transparency helps people see the forces at work on the developer and understand the decisions they are making.