Can Real Estate Use RegCF
CEO and Co-Founder
CEO and Co-Founder
Oscar is currently one of the Top 10 Global Thought Leaders in Equity Crowdfunding, a Top 5 Fintech Influencer, Top 10 Blockchain and a Top 50 InsureTech. He has published an eBook that has been downloaded in over 20 countries, and been distributed by partners worldwide. Oscar is a featured speaker on Fintech, regulated, equity crowdfunding, compliance, shareholder management, investor relations, and transparency in the USA, Australia, UK, Germany, France, Netherlands, Canada, Singapore, Indonesia and China. He speaks to audiences covering alternative finance, RegTech, insurance, banking, legal, and crowdfunding. Oscar also advises the world’s leading research, accounting, law firms and insurance companies on the impact Fintech, RegTech, LegalTech, InsurTech and OrgTech is having in their business.
Carman Lehnhof Israelsen
Marty is a nationally recognized securities, finance and fintech attorney and counsels clients throughout the U.S. and internationally on various forms of structured finance, private and public securities offerings, fintech, real estate financings, venture capital and angel financings, fund formation and compliance, business formation and corporate governance. Since 2009, Marty has been active in advising clients in the crowdfunding and peer-to-peer lending space, with a particular focus on the JOBS Act, Regulation D offerings, intrastate offerings and Regulation A. His clients in this space include nationally and internationally recognized platform operators, sponsors, issuers, REITS, funds and service providers. He has been recognized as one of the top crowdfunding attorneys in the United States and continues to provide expertise and play a leading role locally and nationally in this area of securities law.
Republic Real Estate
Jesse Stein has served as the co-head of Republic Real Estate since June 2020. Previously, Jesse was a co-founder and Chief Operating Officer of Compound, the Chief Executive Officer of Commencement Capital, and was the founder and Chief Operating Officer of ETRE Financial, LLC. Jesse has a background in equities trading and real estate investment banking. Jesse graduated from Cornell University and received a Master’s Degree in Real Estate Investment from New York University.
Oscar Jofre 00:32
Okay. All right, we are set to go. All right. Welcome, everyone. Welcome to the course summit webinar series 2021. Once again, my name is Oscar Jofre, we’re going to have a fun time we’re obviously changing the time is is everybody’s starting to notice where we’re going to try something new. We’re going to try things a little bit later. Now we’re going to be going to a 12:30pm. schedule, and 4:30pm schedule to see if this helps people schedule to be able to make it thanks for the feedback that we’ve been hearing from everyone. And the format is still the same. Today, we have two great speakers, one you haven’t met before, maybe you’ve seen Marty before in other webinars, we’re going to have a great discussion that, as always, no PowerPoint presentation. This is just dialogue. So you can hear what’s actually happening from those right at the front lines of things. And if you want to see this, it is on YouTube live as we speak. It’s also available on course, summit that IO. And once again, everyone, thank you for your support in our initiative to make sure that we educate as many people as we can. So I am you can tell I’m really excited about this. I’d be waiting for a long time for this discussion, because it’s just gonna be fun. But before we get into it, let’s get with the introductions. Jesse, you’re new to the please take a moment to introduce yourself.
Jesse Stein 01:58
Sure. My name is Jesse Stein. I’m the CO head of real estate at Republic. some background on Republic, it’s one of the leading crowdfunding platforms in the US formed in 2016. We have over a million members, me and my team were brought on last year to build out the real estate business line. So as you can guess the answer to the question of can real estate use brixia? I would answer yes. There are certainly some challenges that, you know, we’ll be discussing over the next hour.
Oscar Jofre 02:31
Perfect. Thank you, Marty, you know, I know you but maybe those.
Marty Tate 02:37
Yeah, I’m Marty Tate with the I’m a securities lawyer, with the boutique, law firm Carman Lehnhof Israelsen in Salt Lake City, been active in crowdfunding since the very beginning. In fact, even prior JOBS Act was trying to figure out how to do crowdfunding for online lenders. So and I’m active in the space, I represent a number of platforms number, lots of issuers, service providers, is that I’ve known Oscar since the beginning. So yeah, just happy to be part of this, this call and in this talk about this subject, I think it’s exciting.
Oscar Jofre 03:22
It is, it’s really exciting for me, I mean, look, I get excited about a lot of this stuff, I just, I think it’s great that every single time we keep, I don’t want to keep saying moving the needle forward. Other than we’re we’re doing just what we said, we want to include everybody, and include everything that in the past was not available to them. And real estate. I mean, this is real. I mean, this is a this is a real McCoy, it’s been really the average person out there during 33 million Americans now never get access to it other than they have to buy their home. And that’s it. But now they can actually invest alongside you know, the other players. And so this is going to get an exciting conversation. So, Jesse, we’re gonna start with you. I mean, first let’s, let’s discuss the the the, the differences between obviously, you mentioned some challenges from a real estate. Let’s talk about what kind of transactions you’ve seen that is working versus not working. So we’ll start from there. And then obviously, Marty will move into more on the legalities of it. But let’s start with you because you’re actually doing it.
Jesse Stein 04:33
Yeah. And I think, you know, when you when you discuss the various challenges of the industry, you have to look at it from both sides, both the investor side as well as the sponsor side. And, you know, crowdfunding in general is really creating a marketplace that that builds an equilibrium between those those two types of types of investors and sponsors. On the investor side is a little bit different type. The value that’s provided for for real estate than there is in, say, raising capital for startup companies, where, you know, the innovation on investing in real estate online, is really at that property specific level. You know, you see on all these platforms, people talk about the democratization of real estate. The democratization of real estate has been around for decades, since, you know, the modern read era began in the early 90s, everyone has had access to real estate, but it’s been in a form of a big portfolio, diversified by geography, often diversified by asset class. So the real innovation with real estate crowdfunding is the ability for an investor to invest in a specific property. And investors typically look for, you know, a few different things in deciding what type of assets they want to invest in, could be a location, is it close to where I live? Is it a location I’m familiar with? Is it somewhere I vacations is it somewhere I would love to vacation? Did I read an article about that city, and I would love to get exposure to that city, you know, real estate location, location, location, the same thing applies in crowdfunding. And being able to provide targeted exposure to a specific location, whether it’s block by block or city by city, you know, is a real innovative aspect of real estate crowdfunding. Second, you’re able to offer certain types of assets that aren’t available in the public market. And it could be new type of operating strategies like co living or ghost kitchens, you know, or glamping, right? There’s a lot of interesting innovation within the real estate operating space where sponsors now have a vehicle to go and raise that capital. And then, of course, there’s the sponsor, right, at the end of the day, crowdfunding is based on building a network, a network of investors, a network of followers, and, you know, this really provides an ability for sponsors to go out to networks that they have built over time, and bring in capital and relatively small dollar amounts.
Oscar Jofre 07:21
And, and that’s interesting, you know, it’s good that you broke it down to you democratize the real estate property itself. That’s really interesting. Because when people think of real estate right away, they’re thinking buildings and all that you it’s, you quand it down to a very specific kind of, I don’t want to say asset class, because real estate is the asset. Correct. But the component of it, and, and, Marty, I’m going to come back to you. I mean, I, I personally have not seen any. So for me, I’m an educator, I’m going to be asking questions like any other investor. Um, how does this happen? How is this different than your traditional guests? You know, we’re investors, investing in this whole pockets, how is this going to be different structure for a new investor? And in the right car model?
Marty Tate 08:03
Let me in let me back up just a little bit. You know, we have been, people have been investing doing crowdfunding with real estate for since the passage of the JOBS Act and the regulations that came out, in fact, that’s probably been the leading asset class from the beginning, but not probably it has been. And the the most, you know, successful, at least the earliest success in crowdfunding was in real estate. And the reason for that is real estate’s. It’s an asset, like Jesse was saying that, that people understand, right, you can look at a building, you can look at a house, you can look at whatever it might be, and say, Oh, that makes sense. A lot of the platforms came out and did you know, some of my clients, they came out into debt, right. So they were offering a note that was secured by an asset that you could participate in, and they did these payment dependent notes and so forth. So people were able to invest in in been investing in these assets. And there’s been tremendous success, the difference. The difference between that and what we’re talking about now is all of those have been done under 506 C, so they were limited to accredited investors. So as a non accredited investor, if you wanted to invest in real estate, like you said, you had you know, you’re really your only options to you know, invest through a mutual fund or some sort of publicly offered vehicle or rate or something like that. And there’s been a lot of in that was sort of the interim step you’ve had fundrise and realty mogul and others offering these you know, their their rates and so people could come in under a RegA plus offering and invest in those in that again, You’re buying into a package of real estate. And so reg CF, I think that the biggest thing is the, with the changes, and we’ll we’ll talk about that, because that’s really what’s going to pour gas on this is the ability for not upgraded accredited investors to invest in real estate, using reg CF, and for issuers to raise capital into their projects, using reg CF, I think there’s, you know, the friction between the two is being eliminated, or at least minimized.
Oscar Jofre 10:36
Well, that that that is an interesting point. I mean, Jesse and the team, you guys had, I mean, when you pulled up with a million, it’s pretty good. Now, March the 15th. So based on what you’ve already indicated, what you’ve been doing, will the acid, don’t say that again? But will the type of real estate change because now you can do 5 million, right? I mean, that that Scott to be able to bring in, and I am gonna walk into the investor part soon as well, because I think this is a wake up call everyone. I mean, in my view, those who were privileged got it and everybody else kind of sat back and you know, couldn’t do anything, you’re changing that. So let’s start with the the increase, how’s that going to change potentially, the type of real estate that you put in front of people to invest in,
Jesse Stein 11:30
it’s tremendous, and ever since those rule changes been announced, the responses that we’ve gotten from sponsors, you know, it’s been a complete 180, where, you know, in most cases, a million dollars is not a lot of money for real estate, right. And when you’re talking to a sponsor, and you start saying, you can raise up to a million dollars doing this, you know, sponsors that are successful, that are working on larger projects, that’s not very interesting to them. Now that you have that $5 million limit, all of a sudden, it’s a decent size equity chunk for most projects. So I think you’ll start to see more experienced sponsors start using reg CF. I think reg CF, will replace RegA in a way where, you know, you have had very few real estate sponsors who have successfully raised 5 million from non accredited investors through RegA, right? You have the fundraisers, you have the realty moguls of the world, they have huge marketing budgets that most sponsors, you know, do not have and are not going to be able to put to work for a RegA offering. The fact that you can raise capital privately through you know, 506 c while you’re doing a reg CF doesn’t necessarily limit the amount of total capital you’ll be able to raise through crowdfunding. And in a way, it makes it a lot easier for people to raise large amounts of capital from the entire crowd accredited non accredited.
Oscar Jofre 13:10
Did you get disconnected there? Or is it just me? We’re good? Yeah. Okay, good. Oh, yeah. No, I can hear you, I can hear you. So let me ask you this just here before I go into Mardi. So obviously, this month, we’re going to be happy. So you’re in so you’re the way you’re balancing is saying that the with the reg CF, you’re going to be able to do their reg D rather than opting in for the RegA. I do agree in the past array gays, we didn’t see that. I think now with the 75 million this kind of change that I want to keep this discussion really on the right car, because I I do feel that in real estate, there is part there’s 100 million dollar deals 50 times, you know, and there are a lot of good deals, you know, multi unit homes, that $5 million, it’s most people get left out of out of it. So is the idea that you’re looking for companies to be doing the combo? Or is it just purely going to be more from a reg CF point of view?
Jesse Stein 14:09
No, no, it’s it’s we work with companies using all of the exemptions, right CFA D. You know, the point I was trying to make is that, in general, you, you’ll see sponsors who are working on larger transactions, use CF. And CF, you know, regardless of the size of transaction can be used as a complement to a more traditional capital race for sponsors who already have a capital base that they typically go out to. You know, it’s a way to build that network. And, you know, the smart sponsors that we speak to they realize crowdfunding is still in its very early stage, right? There’s been tremendous growth over the last five years or so. But while today, a crowdfunding raise might just be a compliment, in raising for a larger Project over time, we all know it’s going to continue to grow. And we’re going to get to the point where a sponsor is going to be able to raise as much capital as they need for a project using crowdfunding, whether that happens in two years, five years, 10 years, we think the industry is going to get there. And investors. You know, they like, they like reinvesting with the same sponsor that they’re comfortable with. So you know, sponsors are starting out today, looking to build a network, an investor base that they can go back to over time, and each subsequent offering or each subsequent projects that they do, they have that base to begin with. And they know like, in building a social media following, you know, you have to start somewhere. And the larger you can grow that base, you know, the more volume you can bring in on your next capital raise
Oscar Jofre 15:55
it and I know, you keep referring to sponsors, and this is a brand new dialogue that we hadn’t seen before. Marty, how does that fit in? I mean, so when you’re used to going to a platform, and you, you invest in the company directly, now we’re hearing the word sponsor, what is the sponsor? Right.
Jesse Stein 16:13
term sponsor is the management of the real estate company. So, you know, it’s, it’s, it’s different than, say, an operating company where, you know, you have your CEO, CEO, whatever your management team, the sponsors, basically the management team that you’re investing in. But you know, what one other point regarding the raise and limits and the size of these offerings, what’s different about real estate and operating companies is you don’t have these various stages, there’s no see there’s no a there’s no B, real estate exists. And there are different types of projects, it could be development projects, or could just be a buy and hold. But you’re typically not getting in early as compared to the person that’s investing, you know, a few years down the road, you may be getting into that different value, or different time within a project. But what that means is a small project can generate just as good returns as a large project. And, you know, that’s where we’ve seen a lot of success, and CF where, you know, a project might need a limited amount of capital, that doesn’t necessarily work for a larger institution, or either even a high net worth. But allowing the crowd to make relatively small investments to aggregate that small amount of capital lifts needed to do the project is just a very, very good method for a company to raise the money for that project.
Oscar Jofre 17:53
Okay. So as I said, I, you know, it took us a few years to get everybody equipped to online investing. You know, Marty, we have been through this a long time. This is mean that, obviously, the new rules allow the accredited investor with the accredited investor prefer to do it this way, rather than the traditional way. Because that’s the one investor that already knows it. Or will it will be the neon accredited investor, it because they need to get adjusted, like as I’m taking notes here, I’m hearing the word sponsor the word projects. It’s not a return. It’s a timeline. Like, did you know what I mean? It took us a long time to teach the current crowd, which I have no problems with it, but which is established already. On your credit. Just want to hear your thoughts.
Marty Tate 18:43
Yeah, well, I think I mean, credit, investors have been investing in real estate through crowdfunding for years now. And I think that’s something they’re very comfortable with at night. And I don’t think the barrier, I don’t think it’s going to be a big hurdle for non accredited investors to start investing, like I said before, it’s one of the advantages of real estate is it’s a, it’s an easy asset to understand. A lot of times, like Jesse was saying, it might be a little, it might be something local, they might be able to say, Oh, yeah, I know, that building or I know that area, or I’ve been to that city or whatever it is. So they can, you know, people can understand. And so I think from an investor standpoint, I don’t think there’s it’s going to be a big hurdle to get people there. I think they’re going to be able to invest. You know, when and one of the other things that Jesse alluded to is that, you know, real estate, unlike a, you know, an operating company, they’re designed to have returns, a lot of times you’re investing in a company that’s or into a, an asset that’s going to be producing revenue. You’re going to be investing in a You know, it might be an apartment building is being rented or retail center that’s being leased out. But, but in addition to that, there’s usually an exit amount that that happens. can happen there’s, there’s a market for these exits that that is might be different than an operating company, you invest in an operating company and you kind of hope that it is sold the hope that or you hope that it will go public or something that there’ll be an exit, but with the with real estate, there’s, there’s almost always an exit that’s built in. So that’s something that’s comes into play.
Oscar Jofre 20:41
Yeah, so that’s interesting. So on real estate would distinctive differences there, there’s going to be that dividend. So now this is very new, right? We haven’t seen that before nobody, right? Now they get a certificate, a digital certificate of ownership. Now, these holders are going to be receiving so Jesse, how often is that happening? Is that something that is done on a quarterly basis, annualized basis? Or are you holding that, that, that earned out until the, you know, the property goes out? What kind of structures are you are you doing?
Jesse Stein 21:17
It varies, you know, anywhere from monthly to annually, but it is one of the major differences, you know, between crowdfunding for real estate crowdfunding for companies where, you know, it’s a hurdle for a sponsor to have to deal with making distributions to potentially 1000s of investors providing tax documents to all of those investors, where within an operating company, you know, whether you’re raising capital through safe or either either through a price round, like you said, Intel, that company exits, potentially exits, right, that’s a long shot to begin with. You know, you don’t have to really worry about that you provide them updates, you provide them with communication, but there’s really no, you know, financial back and forth the way there is with real estate in projects, where there we’re paying dividends. The flip side to that is, by being able to pay dividends, you know, there’s a bit more transparency as far as how your investments doing, right, hey, you know, we estimated we have 6% returns, and our dividends are 6%, as well. So, you know, everything is on pace, the value of our asset is in line with, you know, where it was previously. So it gives a little bit more comfort and security to an investor, then, you know, what, what a startup May, but that’s all part of the investment strategy, right? you’re investing in, in a startup to help you hit a home run, get 100x on, you know, one or two of them were in real estate. It’s it’s you’re, you’re not looking for that moonshot to shop type return, you know, you’re looking for more steady returns, both in the form of income and also appreciation.
Oscar Jofre 23:07
And that you brought up an interesting element here, that is where the traditional real estate with a sponsor and all that in dealing with a credit, the number of credit in the size of check their right, is their check is significant, the number of people they deal with is smaller, and regulation CF that changes it all together, the number the size, and hence the reason for the distribution component, do you think that is going to cause distributions are, you know, under reg CF are can only be done by certain parties, depending if the companies fall under a certain rule with with rule of 12 G. So how, how is that being done today? How are you doing? How are you handling that distribution? Because typically, that distribution, we have to go through a TA in the TA distributing and tax documents, right. So I’m just curious from that perspective,
Jesse Stein 24:05
it’s it’s really, I mean, that’s it, you need to transfer agent, right, like, like Kore, you know, to provide that service. And it’s very valuable. And, you know, it’s, it’s something that’s required, because, you know, almost no one is set up to do that work themselves. The distributions attacks, it’s just extremely time consuming.
Oscar Jofre 24:29
And that, could that be that barrier? But if it’s all brought to you by Republic, that’s what your intent is. Here’s the package. Here’s the turnkey component. Don’t don’t do right.
Jesse Stein 24:41
Yeah, it will pass it has to be a service that is set up in advance of a company running a campaign. And if you think about it, you know, a lot of these campaigns that are $100 minimum investment, where you know, even even 5% annual dividend return, you’re talking about making a $5 dividend. And that’s on an annual basis. You’re doing it quarterly that’s $1.25 that you’re sending, you know, per quarter, you get to the point where sending the money costs more than the actual dividend. So it’s, it’s a challenge. And I think service providers in general within the industry are going to figure it out and make it you know, as efficient as it can be. You know, but it’s, it’s more of a, of a sponsor, you know, saying, hey, do I really need to deal with 1000? investors? Right, and you want to be able to say, No, don’t worry about it, you know, we have processes in place where you don’t, you know, each time you want to make a distribution, you make a single payment to the transfer agent, they’ll deal with the 1000 investors.
Oscar Jofre 25:54
That No, I agree, I, you know, the all these questions are coming to my head are, are, you know, the critical. So, Marty, I got one for you that I guess, you know, I understand the difference between an operating company and obviously real estate. So how does this get packaged up in an instrument? That, obviously, where the safe has been that or the note, and this is clearly not going to be an instrument of equity? Because it’s 4000? olders? It’s good. What kind of instrument are we looking at, in order to put real estate in?
Marty Tate 26:31
Well, and, you know, I love to get Jesse’s input on this, because they, you know, they’re thinking about this and doing this, you know, in real life, but I, one of the things that we haven’t talked about yet, and one of the biggest changes, and we actually did a little webinar on this couple weeks ago, maybe was just the use of an SPV. And that change to, to the rules to regulation CF, I think that that’s, that is a huge benefit, because now you can have these investors come in through an SPV. And, and I, you know, these spvs will be set up as limited liability companies, you’ll just be buying interest, and people will have just a percentage interest in that in that entity. So rather than, you know, subscribing to a save here, you’re just subscribing to membership interest in the LLC. That will then turn around and invest in this project. Right. So I think that’s, that’s a huge win for the real estate. I mean, that that, for me, that was one of the biggest obstacles is is how do you get the equity, get the investment into the project itself? especially by use of a sponsor, you have, I mean, we’ve we’ve heard these terms, you know, capital stack, have you got an equity piece and debt and different types of things. And sometimes the sponsor has capital in as well. And it just became really difficult to crowdfund that because you had to invest into the operating company. And now you can come into an SPV, that SPV can then fill out a portion of the capital stack. And some of these, I presume, will be all equity deals, but I would guess that most of them your that crowdfunded piece is going to just be a small portion of the total capital that’s going into this project. So it might be it might be a $20 million dollar project, and they’re, you know, crowdfunding, 4 million or 5 million to to cover that, you know, that equity piece that’s needed by the sponsor in order to get the debt. So it
Oscar Jofre 28:48
is, you know, Marty, I’ve been talking a lot about the so you froze there. Sorry, Martin.
Marty Tate 28:56
So anyway, to me that, that, that that’s the way that’s the way that Oh, sorry. I hopefully I’m back. To me, that’s the way that I mean, that’s, that’s the way they’ll invest is just through subscribing to that LLC.
Oscar Jofre 29:08
So, okay, so that, you know, I was going to bring the SPV take it in, because the last webinar you and I did, we had a great discussion, there’s still a lot of ambiguity. Maybe for Jesse, it isn’t because so maybe I’m gonna ask you this. I don’t mean to put you on the spot, Jesse. But so what instrument were you using before the new the new amendment and then of course, going forward? That’s the SBB. bring you any comfort that there is one. I mean, I’ve been working with a number of fund administrators to bring out an SPV package. And, you know, they go Yeah, a million got we’ll do it 5 million. And then they asked how many holders and that’s when they say no, no, no. So you know, I’ve approached one of the three most prominent names out there. And they liked it. They go No, you can Got to get the numbers down and go well, no, I mean, Jesse wants to get people to put in $100. And so they they want in, and I found that firm that can actually do k once and all that fully automated. So it’s gonna you’re right Jesse, it. The interesting thing is the solution is there. So I can tell you unequivocally the solution is there. The key is, are the the right participants in each of the buckets willing to work together? That I am, I’m going to work with this firm, because I want to do anything I can now I need a fund administrator. So but let’s answer the first question, then move into the second part.
Jesse Stein 30:37
I mean, as far as the securities that have been issued, for our offerings today, for the most part, they’ve been typical LLC membership interests, where investors are coming into the company, directly as members. And, you know, we do have a system set up right now that does create an intermediary entity to aggregate investors, and then, you know, results in, you know, a single investor on the cap table of a company. You know, there are some inefficiencies there, you know, the new rules that, you know, are going to be put into place with respect to spvs, you know, helps form a solution, like you said, but, you know, there are a number of different moving pieces where it’s certainly doable, and there are certainly firms that are capable of creating these products to make it seamless for for a sponsor and seamless for an investor where, you know, neither both realize the benefits of having this intermediary entity. So it’s going to happen, it’s going to happen, you know, this year for sure. And we’ll be able to offer both, we’ll be able to offer, you know, an investor, the ability to invest directly with a sponsor and become a member directly into their LLC, or their limited partnership, however, structure or, you know, from a sponsors perspective, a lot of them, you know, don’t want that. They’re very happy to have the SPV as an investor until at the SPV. Will Republic, deal with all those underlying investors.
Oscar Jofre 32:14
Interesting. And from that point, that brother the other discussion we had Marty was okay, so we got the SPV. Who is the management of the SPV? Who is the proxy component to it, this is the this is the part that you indicated there was no guidance here from the SEC. But we didn’t have the guidance 2015 when safes were went out. So basically, it’s gonna take a player like what Jesse’s doing, to start creating an instrument to then put it in front of the SEC and say, This is the way we see an SBB rolling out I am I in? Am I getting it correctly this time? I mean, we’ve gone through if you’re on mute there, buddy. It’s okay, Marty, stereo. There we go.
Marty Tate 32:58
Sorry. Um, so, I think so. And I think that Jesse’s, you know, accurately said that, that I think these, you know, the platforms are going to be either themselves or working with third party providers to provide that, you know, management and administration of those spds. Because that’s, you know, in and of itself is going to be a nightmare, like you are potentially could be a nightmare, like you reference. So I think that’s one of the things that, you know, like, like everything we we figure out how to become more efficient and, and develop. But I, I, like I said, I think that’s the 5 million is is a big change. But the gspb to me, is the one that I was really looking for. So I’m glad to see it, especially I think, in real estate, it’s going to be a game changer, for sure.
Oscar Jofre 33:57
Well, it’s the I believe it’s the instrument that most accredited investors are most accustomed to. So and now under reg CF, they can invest with no limits. So that changes it. So do you think that’s going to help you, Jesse, the fact that you know, before you have restrictions now, the regulator’s have given you a gift. So the SPV. Just so you might have missed our previous webinar. One of the areas that we’re struggling with Jessie is that not only finding a fund administrator and all those pieces, which will come because that service providers, but it’s the legal structure of the SPV? Because the intended Yes, by the SEC is that the SPV sits right underneath the company? This is not, you know, put it away and I’m not responsible for them. In fact, it’s very clear you’re still responsible for those holders. It’s just they’ve given you this idea to put this one individual sorry, entity on your cap table. So the key here that we haven’t flushed out yet, and this week, maybe you and Marty should have a conversation because Marty is really eager to Get on the road on this one is the the How do you structure the actual legality? The spvs? Do you know from the traditional model to, you know, being the the proxy vote for the SPV? You know, I mean, have you guys put thought on that yet? Or? I mean, so it’s kind of two part question. Now you get accredited, they’re accustomed to it. So they’re going to be looking for it. And both models. And then of course, from the structuring side.
Jesse Stein 35:32
Yeah, I know that, well, we have a solution in place today. You know, prior to the SPV rules being implemented, that basically does a lot of the same thing. And that’s using an omnibus custodial account. Where it is aggregating investors, investors are technically giving up some of their rights. But it does create, you know, a lot of the same benefits when implementing the SPV. I’m not 100% familiar with the s, the SEC is guidance on the new rules with respect to SPV. I know that our counsel has suggested that there are some limitations, or or some some issues with how they’ve described the new rules that don’t make it as effective as it can be. So it’s not my area of expertise, I think it will certainly get worked out at some point this year, I do think it will be the go to structure for the majority of offerings in less than investor in unless a sponsor for some reason, wants to interact directly with their investors. But it’s, it’s like you said it’s an administrative thing as service providers going to figure it out. The SEC, I think has, you know, good intentions, as far as you know, putting that into place, as far as creating efficiencies. So, you know, we’re, we’re gonna stay on top of it and make sure we implement, you know, the best structure possible.
Oscar Jofre 37:03
Okay, so the, like, everything else, I mean, if we were going back, back to 2015, I think everybody was applying the same rule of thumb. Obviously, the the, the, the market is, is moving in such a rapid pace right now, there’s, I think, this time, it’s, I think we’re gonna get to an answer a lot quicker before we figured that it was going to take time, I think there’s enough information now that we can actively pursue this very, very quickly with people that have been there, done that. I know, you’ve got max on your team, you guys have done a great work at Republic, you know, innovating the instruments that companies can use. And then of course, investors can invest in. So once again, I’m, I am, I’m so pumped about this, because quite often, there are many, many projects that, that I’m using your term, of course, I usually use the word company, but projects that are only looking for that one to 5 million. And they’re, and they’re very, you know, they’re going to be comfortable with that, which is fantastic. But I think they’re going to need to know that whole turnkey because if not, that, that whole thing just slides down where where they need to start pulling things together to make it work, which is really not what any of us want at this time. So the the, I guess the the next question that I’m going to get to So, you know, the the one thing that you’ve mentioned a lot and I’m going to concentrate a little bit on this, because for the for the respect of the audience, whether there it is the the the non accredited investor, who, you know, like me, you put the term out there, you know, the term insider like all of us, we use terms like reg CF, RegA, exami. And so, Kim explained to me, so I understand you’re saying the sponsor is the management of the real estate, in, in, in your investing in the sponsor, meaning the management. So, what, what more are you doing? Or is it any more, is there a different form see to be filed with the SEC, because it is real estate? And then to are you doing any additional due diligence on this? Because it is a very, like, how do you know they actually have that block? Right? Or Jesse and then I’ll go back to you, Marty, my apologies.
Jesse Stein 39:31
I mean, I’ll touch on the first question and answer the second Marty can answer the forum see question in more detail. It’s, it’s the same process. As far as you know, forum sees required, you know, reviewed or audited financials are required. The information in the form See, I would say is 75%. The same, you know, the risk factors in general are slightly different discussion about the business is more of a discussion about the property, the property’s history projections plan of operations. But, you know, it’s it’s not too far off from from a forum see that you would see for a company and the process as far as onboarding is very similar as well. As far as due diligence, you know, there, there are a couple different layers of due diligence, right? It’s, it’s verifying some of the property information that the sponsor has presented. It’s evaluating financial projections, historical financials, making sure that those lineup making sure the terms of the offering are at market, right, we don’t want you know, sponsors to think that, you know, crowdfunding investors are the dumb money and offer terms that are completely outside of what’s typical in the real estate market. And then it’s, it’s reviewing the sponsor, and, you know, making both an objective and a subjective evaluation, as far as you know, the comp, the competency of that sponsor, reviewing their track record, and determining, you know, if it’s someone that we want to work with, and someone that we would want to invest with.
Oscar Jofre 41:19
So, Marty, to you, I heard a lot of different things here. And I’m going to come back, but I want to hear about the form see from your end.
Marty Tate 41:27
Yeah, so I think Jesse nailed it, I it’s the document obviously is the same, you’re just it’s, there’s going to be differences, like what like you said, the risk factors are going to different this description of the business you want to go into. I mean, I’m, I look at it, like, if you’re doing a private placement for a operating company versus doing a ppm for a real estate deal, obviously, with real estate, you, they you’re describing the project, you’re describing the, you know, the asset, and, and, and it’s, it’s going to be a little bit different that way. But again, you still have to follow the requirements of form. See, they didn’t, you know, the SEC hasn’t issued any particular guidance award or different instructions with regards to the SEC, or with regard to the form C. So it’s, it’s still the same form, just going to, there are going to be differences. And I, you know, one of the things that, that Jesse hit upon too, is that, you know, in a real estate deal, you know, I guess if you’re just, you typically when you’re doing something like this, if the sponsor already owns the asset, that’s one thing, but if they’re going in, and they’re acquiring the asset, you also have to coordinate all of this in connection with real estate, closing, escrow agents, and so forth. So there are there are some other differences, as well, I mean, this is a real estate closing is different than just Hey, we get we’ve raised the money, and now we can, you know, take it and start doing whatever with your The money is going to a specific purpose, and you’ve got to have everything lined up. At one time, I would imagine.
Jesse Stein 43:19
glad you brought that up. Because, you know, that is one of the biggest challenges with with real estate offerings is, for the most part, sponsors need money when they’re buying a property. And, you know, the way it works is you have limited time in order to buy that property, you know, a seller isn’t going to give you six months, 12 months, you know, to come up with the money, not that it takes that long to raise capital for the crowdfunding, but it’s very difficult to manage that timing as far as getting a campaign live, raising the capital, and then closing on that capital and ensuring that that capital is ready to, you know, to close on an acquisition. So it’s just really hard to use crowdfunding as a way to fund an acquisition. I think that I think that’s something that will will change over time. Right, eventually, you’ll be able to get a campaign up and raise capital and have it in a week. Just
Oscar Jofre 44:17
like that a week. Come on. I don’t know.
Marty Tate 44:22
I think that’s true. I mean, you see that? Okay.
Oscar Jofre 44:26
Yeah, the way I The way I see that is if right from the original transaction between the two parties, for the real estate here. It sounds some sort of blockchain that comes down. Are we here to do the calculation? It’s all into your right eye. From a technology point of view. We’re all there. I it’s
Marty Tate 44:46
one of the things Oscar, you know, I mean, you kind of joked about that. But one of the other changes that we haven’t mentioned is just the ability to test the waters. I mean, in reg CF, we’ve been limited. Basically, you can’t say anything about it until you’re live with the SEC whereas now People can go out and his sponsors, putting everything together, they can start getting indications of interest and so that hopefully that period where they say, okay, where it go, you know, we can shorten that. And, you know, meet those those deadlines because like Jesse said, you put up typically, like you put a property under contract, you have a certain time period that you’ve got to bring your financing together, you’ve got to get, you know, debt equity, all of that together. So there’s a crunch, but hopefully these rules will, will help make that easier.
Oscar Jofre 45:35
So I have a, I don’t think it’s a strange question. But you know, it’s, so I get the form. See, it’s the same as everything else. But you are doing more due diligence than just because, you know, the expectation from issues is, Hey, I follow my form. See, the SEC is guarded, which typically, some platforms are that philosophy that, you know, we’ll get you ready your office to be having to do more work than that. You can’t just take it on, just based on the form See, correct?
Jesse Stein 46:03
Yeah, no, there’s there’s a lot of, you know, supplemental information or backup information that we’re collecting, you know, to verify the information that within the form, see, you know, it’s another way that real estate is different than an operating company, a lot of times when you’re evaluating an operating company, you know, you’re you’re looking at the management team, and you’re making this fully subjective decision, you know, are these people that I feel are going to be successful? Is this a business model? I’m going to be successful? You know, there’s less tangible aspects for you to actually diligence, right, you’re betting on the future of a business. And that’s really just you’re guessing, right, based on, you know, whatever intelligence that you can gather, and asking questions and looking at, you know, whether it’s historical, but you’re still betting on a vision, in real estate, you’re really, you know, looking at a tangible asset with a lot more information that can be verified. And, you know, in looking at assumptions, it’s much easier to say, you know, hey, that doesn’t make sense, you’re not going to be able to sell this at a, you know, 3% cap rate in 10 years, right, or that’s not, you know, a market based assumption, where in an operating company, you can say, yeah, we’re gonna grow revenues by 50% a year for the next 10 years. You know, no one knows whether that’s correct, or way off base. But in real estate, you know, we can evaluate the assumptions that a sponsor uses in, you know, valuing the property today, and valuing the property in the future. And you know, what returns, each of those are going to generate and make sure they’re, you know, make sense, and that they’re marketable.
Marty Tate 47:51
And the other thing, sorry, the other thing is just and I’ve, I’ve done a lot of real estate and stuff over the years. And, you know, in connection with this, I’m sure Jessie’s Tina, you’ve got to look at, you know, title reports, and you got to look at Yeah, I anytime you’re doing real estate, there’s you know, you’ve got to review the purchase contract, there’s a lot of other if there might be environmental reports. So there’s there’s a lot of other complicating factors that go into that diligence. So, and I’m sure that’s, you know, stuff you guys draw, thinking about and doing so.
Oscar Jofre 48:23
And that’s what I was trying to get at, it’s very different. I mean, if I come in with my software, I show you the software, we show you the document, real estate, you got to know So here, I’m gonna throw one at you, Marty first, and then obviously led to your comic. So I’m a US based company, but my real estate properties are in Thailand, Indonesia, Canada, Australia. Is that going to change it? Or does it have to be in the US? This is a, you know, there’s a property need to be physically in the US, Marty for reg CF for reg CF only.
Marty Tate 48:56
So, Jesse, Mike, correct me on this, but I don’t think so. I mean, as long as I mean, the rules require that the issuer be a US company. And if the issuer is an SPV, that’s, you know, organized for the, for investing in this? I don’t think so. Jesse, do you have any thoughts on that?
No, I agree. You know, we haven’t, we have an offering for an international property that’s live right now on our platform. And, you know, they they set up a US entity to own to own the real estate, which which made it eligible for reg CF
Oscar Jofre 49:31
is so that’s the key. So the eligibility is making sure the as you said, the sponsors the management is in the United States, where the properties may be. So that’s a that’s an eye opener for everybody else listening in that. Here is a way that you could have a project for five minutes because in other countries $5 million, you can do a lot. You can build a lot of homes. And this is a this has been you know, guys, this has really opened my eyes a lot seriously. I mean, I got a ton of other questions that I think the the one question, but it sounds to me, Jesse, that you guys really found a way around with your LLC membership element. But as this picks up, it’ll be interesting to see what the SEC his point of view is. I think it’d be saying listen, we want everything on this SPV. But with that clarity, not 100% there. But once it gets there, I just I just think it’s going to be maybe it could it Do you think this could become the number one sector within reg CF in the next two, three years? I mean, what are your thoughts on that? Marty? I mean, we’ve done a lot of work in other sectors. But
Marty Tate 50:39
yeah, I think, you know, I don’t know, I, I just know that real estate has been the big I mean, it’s by far dominated craft the crowdfunding industry. So I don’t see why it wouldn’t continue to have a strong position. You know, I think I think reg CF for companies operating companies is going to continue to grow, but I don’t see why it wouldn’t be it continued to dominate this field.
Oscar Jofre 51:10
And Jesse, well, it’s kind of self serving. But yeah. Yes, of course. But don’t tell max. Okay, don’t tell the rest of the team, because they
know that. Well, I mean, that that’s one of the reasons why we were so excited to join Republic, where, you know, we did think that there was this niche available in the marketplace to offer, you know, interest and individual properties to both accredited and non accredited investors, right, you do have a bunch of platforms that are selling property investments to accredited you have, you know, the non accredited platforms that are selling non traded beats to vote, but, you know, there is, you know, certainly an interest from all investors in investing in specific properties, the great thing about real estate is you have just such a huge amount of potential product that’s available, right. And especially when you’re talking about doing smaller deals, like fix and flips, or single family homes or individual condominiums, right, you almost have an unlimited amount of supply on that side, whereas the same doesn’t exist for, you know, viable operating company. So I think the question is going to be, you know, how much demand can be generated from the investor side, you know, to match up with that potential supply? on the property side? You know, I, like I said early, I think we’re still at the very, very early stages, you know, some made a, an analogy to what’s happening in Bitcoin right now, where you’re now starting to see, you know, major institutions, major investors, you know, finally get involved after years of years of saying, it’s not for me, it’s not for me, it’s just a fad. And something similar, you know, kind of can occur in crowdfunding, where you’ve, you’ve had, you’ve had early adopters, right, going back the last five years and job DAC was was put into place, and you’re starting to see more institutional type sponsors beginning to use it. Everyone wants to be able to raise capital from retail investors, right? It might not necessarily be through crowdfunding. But when you see the Blackstone’s of the world raising billions and billions of dollars from retail customers who some of who are investing as low as $5,000, every other private equity company looks at that and says, Hey, I want to raise retail capital. And we’ve been speaking to major asset management firms that want to raise capital from retail investors, right, whether they use reg CF or RegA or even reg D with a smaller investment amount. It’s it’s certainly of interest to the industry as a whole. And I think, you know, the potential is is you know, tremendous. Yeah,
Oscar Jofre 54:06
uh, you know, it’s interesting when I when you were describing it, the flippers and all that you’re right, when you start adding all that up, it all fits under that whole real estate umbrella. So it never even dawned on me. I just keep thinking, you know, commercial building a residential building, but we’re not just talking about that. It’s basically A to Zed. You are right. I mean, I look in real estate. I remember I don’t know if you remember this Marty in Orlando, we had a the first session of crowdfunding Association. I’m gonna bring you back a few years, nine years for all of us, but they we were applauding that $50,000 was raised in equity crowdfunding. You remember when Rodrigo went on stage and said, I’m doing 300 million in real estate because jaw dropped to the ground. That happened right? And I remember Jesse, I don’t know if you ever saw this. But this, in, in the early days of the JOBS Act, everybody thought it was going to be early stage startups and all that. But it ended up being real estate, it was real estate, that glue did bear the real team logos, the real invest, there was a lot and not everybody survived, I got it. But there were some really good legitimate companies that are still there. I really believe that this is going to be impactful all the way through the key will be not now that we’ve democratized it, but we need to streamline it. One thing about real estate that I do know is that from a front end, you can streamline Greek, but you got to get that whole back end process completely streamlined, because all of the distribution of the tax one returns and the ongoing reporting and to Marty’s point, hey, before you even take on this project, there’s this whole administrative element that needs to pass through as well, to give the security assurance to the investor. So this is a I like this one a lot more, because it forces a lot of companies to work together for the greater good. Nobody can stand alone, you you, you obviously started in this is a I’m applauding it because it I think it’s going to do well for the industry. Let me ask you one final question to each of you. If you’re able to do so. I know, Marty, you and I’ve seen a lot of portals and I know you’re still helping new ones. If they were, let’s say, like a Republican, I’m not picking on republican that and they’re doing traditional software conference and all that and they put we’ll sit in there, how do you think that’s gonna fit in? Or do you think it’s going to need to be put in a different category on its own, because to Jesse’s point, it’s got a different differentiation, you don’t want to kill the other ones, you still want them to get their capital, while this one’s offering a dividend. That’s right.
Marty Tate 56:58
And that I that’s a business decision, I guess, for somebody like Republic, you know, to decide whether they want to do that. I don’t see why not. I mean, they’ve had great success. And I, you know, think the world that that platform, and I wouldn’t be surprised if you see other groups entering that field, you know, I represent a lot of sort of smaller and specialized platforms that that do different types of E. So I have, for example, you know, represent some five or six c platforms, that red p platforms that do real estate, particularly in sort of specialized assets like farming. And we’ve had discussions about this, you know, this, I think this, you’ll see some of those platforms actually evolved to, you know, and go through the process to become licensed as to do reg CF, because I think, you know, I think you’ll see an expansion that way as well, I think you’ll see that the people that were doing operating companies expanded real estate and the real estate people expand and do reg CF. So I think, you know, the market will just get bigger.
Oscar Jofre 58:06
I like to hear that. Jesse, what are your thoughts? I mean, I know you came into the republic family, you obviously embraced it. And it How do you feel about your asset class being alongside of it? Or do you think it needs to be properly positioned out in a in the same brand Republic, but in a different area? What are your thoughts on that?
I mean, Republic has made a real effort this year, and is continuing to make an effort to expand the assets on the platform above. And beyond early stage startups. Right. So in addition to real estate, they bought a video game company that sells interest in video game development. There’s a big crypto business at Republic, they bought another CF platform that’s more focused on Main Street type investing. And the way that and having a platform that allows an investor to invest across different asset classes, we think gives us a big advantage in the industry, because you don’t necessarily need to go, you know, to different platforms to get different types of exposure. And we do separate it on our platform, right. But we also allow someone to look at everything all at once your portfolio is blended, ultimately, you know, they’ll be pie charts that show you own, you know, X percent of your portfolio and startups and y percent in real estate. But, you know, I think where the industry is heading, you know, and people have been calling for, you know, consolidation for a long time, but multi asset platforms where, you know, investors right now might have 10 different accounts, one for their cars, one for their baseball cards, one for their art, one for their startups, one for their real estate, right. And, you know, we think ultimately, you know, you’ll be able to have one account and be able to access all those Different investment types.
Oscar Jofre 1:00:04
I like that. I like that. It’s a great way for all three of us to close off today. I’m Jesse, I’m glad you were able to make it. Marty. I’m always enjoying our conversations. I hope, you know, as you can see, I am so pumped right now how it’s evolving. I really am this real estate and reg CF. I knew about you, Jesse, before, I’ve been following you to say one of our clients we sent over to you. And I’m glad I think it did work out for you. It was a Chinese company that that we had, and it does sound like it did. And, you know, I’m, I’m a big advocate of democratization without the you know, ultimately, making sure that we’re keeping everybody safe. Because, look, we only got I think we said before 358,000 investors in reg CF last year, this year, we’ve got to get over that. I mean, it’s close to the million and not more to be actively investing and just scratching the surface of it. And I believe real estate could really bring more light to it because people can I know real estate, I get it. And the fact they get into that they’ll maybe look at your point Jesse, look at that. I would have never looked at that company something Juju juice. I think I like that you know it I think it’s gonna be very interesting. So thank you both so much for making the time. It’s a bit of short notice this time I do apologize for that. We are changing our schedule for everybody else. Um, the videos will be on course I’m adedayo of course KoreConX YouTube channel. There’ll be all the speakers information if you want to get a hold of Jesse and of course, Marty. Their information is on core summit data, your website, you can reach out to them directly or we’ll provide it to you. Thank you both have a fantastic week. Jesse wishing you all the best for 2021 a minute and Marty, you and I will be talking very soon. I think that SPV thing we got to get nailed down