How StreetShares navigated the Reg A+ path to attract retail investors

streetshares, reg A+, and crowdfunding

Mark Rockefeller is CEO and cofounder of StreetShares

Why go the Reg A+ path?

StreetShares chose the Reg A+ path in order to attract a large group of non-accredited retail investors. We serve the military and veterans community, and we want investors from that community. As most veterans are not accredited investors, it was essential to reach nonaccredited investors (via Reg A+) in order to expand our community of investors in veterans community. We’ll expand beyond the veterans market in the future as well.

Mark Rockefeller, StreetShares
Mark Rockefeller, StreetShares

Early testing showed that we can mitigate loan risk using our “social-lending” technology. When connected by StreetShares technology, borrowers simply don’t want to let down their community… Lower-risk loans result in a lower cost to borrow for veteran-owned small businesses and lower risk for investors. With Reg A+ qualification, we can further de-risk lending by backing loans to veteran businesses with a layer of capital derived from the veteran and military community.

Ultimately, our goals are to 1) create an alternative to the popular online “payday”-type small business lenders that target my fellow veterans and 2) make loans more flexibly and conveniently than traditional banks.

What was the most surprising part of the process?

How long it took. We were able to secure SEC approval after 9 months of negotiations, and the SEC was very good to work with. But the process took longer than expected. StreetShares was honored to receive this historic approval, enabling everyday Americans (not just millionaires) to be able to invest in loans to small businesses. We handle the underwriting and credit decisions and then co-invest in each loan ourselves.

Advice for other companies thinking about embarking on a similar trajectory?

Reg A+ is not for the faint of heart. It requires capital to endure the process, audited financials, and patience. Reg A+ qualification only permits raising up to $50MM in a 12 month period. So to most benefit from Reg A+, a company needs to be large enough to have the resources to endure the approval process, but small enough such that $50MM moves the needle. There are a lot of companies in this size that could benefit from a Reg A+ raise.

Get good counsel. StreetShares has been very fortunate to have good lawyers in house and hire the best outside counsel with expertise in Reg A+. As the innovator in bringing Regulation A+ to small business lending, we have relied upon team members with leadership experience at no less than the U.S. Department of Justice, the Consumer Finance Protection Bureau (CFPB), and the SEC. Because of this investment made by StreetShares, everyday Americans will now benefit from the investing opportunity.

What does your marketing plan look like if you can really tackle the entire population?

StreetShares is undertaking an unprecedented membership drive to promote StreetShares to both the veteran-owned small business and investment communities (currently approaching 10,000 members strong with almost no advertising).

Thus far, we’ve had extremely low default rates, due to veteran-group loyalty.

Not surprisingly, we are issuing this new kind of investment security first to the military and veterans community. That is, of course, where it all started.

Photo credit: stevendepolo via / CC BY

Fundrise’s Brandon Jenkins on the need to keep raising the quality of real estate deals online

Fundrise is a leader in online real estate investing and it’s soon to get even more interesting as recent regulatory changes are making it easier for crowdfunding platforms to incorporate even more investors. It’s an interesting time for the firm: it recently announced it had raised $50M for an e-REIT in light of the new Regulation A+ changes.

Fundrise COO, Brandon Jenkins joins us to talk about the state of his business, how competition in online real estate investing is changing the market, and how he thinks 2016 is going to turn out to be a huge year in his industry.

What was the inspiration for creating Fundrise? What was the genesis story?

brandon jenkins, COO of fundrise

The idea behind Fundrise came out of the personal experience of our founding team as real estate developers in Washington, DC. After an unsuccessful experience seeking funding for a new type of real estate project with local tenants, we saw an opportunity to open up the world of real estate investing to a broader audience.

More players are entering the online real estate investing space — how do you differentiate yourself? How do you think the market is organizing (is it around debt/equity or residential/commercial?)

First and foremost quality. We only work with the best quality real estate companies and search through hundreds of deals a week selecting only the top 1% to actually offer as investments.

Second, we focus on providing unmatched customer experience by creating a one-of-a-kind platform. Our technology is 100% designed and built in house…from scratch, so that the experience of investing on the platform is as straightforward and enjoyable as possible.

How big a role does education play in investor acquisition?

When you democratize an asset class for the first time, you’re naturally going to connect with investors who’ve never picked their own real estate investments before.   

To that end, we take education very seriously.

Our biggest concern right now is around the quality of deals being done by other platforms in the space. We’re seeing other companies do bad deals, with bad prices and bad terms so we feel that we have an obligation to give investors the tools they need to make smart, informed decisions — whether that’s a deep dive into our underwriting process or a rating system for understanding risk-return tradeoffs.

You moved from a brokerage model to more of an origination model — why? how did that position you differently?

Funding all our investments upfront using our own $25M balance sheet has a few key benefits:

1. You see higher quality investments: We can negotiate better deals with top real estate companies because they require certainty of funding. By funding real estate projects upfront, we believe we are able to achieve superior pricing and terms, and source more investment opportunities from the best companies in the country.

2. You start earning immediately: Interest starts accruing as soon as your investment settles—typically within five days—eliminating lengthy escrows. This model more closely resembles stocks, bonds, and other publicly-traded securities.

3. Your interests are the same as ours: Fundrise pre-funds every real estate project, using our own balance sheet. This puts our “skin in the game” and shows our conviction in the deal.

Where is your business/market headed in 2016 and beyond?

Since we founded the industry back in 2012, real estate crowdfunding has seen tremendous growth. But it’s really just beginning. 2016 will be a huge year for the space. I think we’ll start to see consolidation of platforms and some platforms really start to own one and dominate an asset class — like the SFH market. Investors will begin to enter the space in droves.