New rules help ordinary investors tap into crowdfunding
The tiny house was unlike anything Garfield residents had seen before, and Victoria Kurczyn wanted a piece of it.
Not to own it, exactly. Kurczyn wanted to be one of the investors who forked over $100,000 in a crowdfunding campaign to build it.
“It's the first of its kind in our city,” said Kurczyn, 33, of Squirrel Hill. “This is a way of bringing affordable housing to an otherwise forgotten about neighborhood.”
But Kurczyn wasn't allowed to participate. She didn't qualify as an “accredited investor” — those with a net worth of $1 million or annual incomes of $200,000 — and U.S. securities law prevented her from taking a stake in the project.
Today, she can. As of May 16, new rules went into effect that allow ordinary investors to take an equity stake in crowdfunded companies, which raise funds from anonymous investors online.
Crowdfunding portals such as Kickstarter have for years allowed individuals to pony up money for projects they support. But until now, those investors have never been able to share in the financial returns of a company, settling for gifts like posters or T-shirts instead of cash.
The new rules from the Securities and Exchange Commission expand opportunities for average Americans to build wealth.
“As a millennial, I think it's important that we have a choice about how we can invest our money,” Kurczyn said. “We can support whatever causes we want now, which is important to build wealth.”
That was the ideal that Eve Picker had in mind when she built the tiny house through her nonprofit cityLAB, which oversaw the home's construction and sale. Picker wanted local people to be able to take a financial stake in making their communities better.
Picker wished the new SEC rules were in place for the tiny house project “because then the people in the neighborhood could invest in it,” she said. “The thing I love about Pittsburgh is this palpable desire to make the city better.
Picker has launched a new company, Small Change, aimed at doing just that.
Small Change is a portal through which community development projects can seek funding. Picker is awaiting approval from the SEC. To date, 11 portals are registered with the SEC, though hers would be the first focused exclusively on real estate development.
Supporters of equity crowdfunding say it will democratize investing and expand opportunities to working class folks that were previously reserved only for the wealthy.
Skeptics say the new regulations, which span 685 pages, are too restrictive and could actually harm investors. Disclosure and reporting requirements for companies seeking funding, and caps on how much a person can invest, make crowdfunding an unattractive option for most startups.
Only the most desperate companies will turn to crowdfunding portals after they have exhausted all other options, leaving individual investors with a selection of half-baked ideas that are likely to fail or provide minimal returns, said Alejandro Cremades, co-founder of crowdfiunding site OneVest.com, who favors raising money from accredited investors rather than ordinary individuals.
“The big issue is that when you have companies that are not fundable ready, the potential is low of being able to do an exit — meaning get acquired or go public — that would provide a really nice return to investors,” Cremades said.
Crowdfunding for real estate is not new. Investors poured $484 million into real estate projects last year, up 250 percent from the year before, according to the Cambridge Judge Business School.
But those projects are not the cost-intensive urban redevelopment projects that Picker has in mind. Proposals through portals like RealCrowd and Realty Mogul offer returns of 15 percent and more to buy and renovate properties that are already leased with tenants, not vacant eyesores. There is no altruism baked into the sales pitch. Just the chance to profit.
Picker has been a real estate developer in Pittsburgh for decades.
In 1997, she turned an early 20th-century paper warehouse on First Avenue into eight loft condominiums. Picker said she struggled to get banks on board, who at the time were skeptical that anyone would want to live Downtown.
Eventually, she convinced two — the former National City Bank and Dollar Bank — to lend her money. She pre-sold all of the units before completing the building.
Others have been more difficult. Two buildings in East Liberty, like the six-story Liberty Bank Building on Penn Avenue and the Werner Building, a two-story retail property on South Highland Avenue, “limped along for many years” before becoming financially stable with paying tenants, she said.
The tiny house in Garfield had its own challenges. The 14 investors who put up a total of $100,000 for its construction were guaranteed a 7.5 percent return if it sold within a year, which it did. Still, it sold in March for $109,500, much less than the $191,231 it cost to build. The shortfall was covered by $92,000 in grants and subsidies from the city's Urban Redevelopment Authority and nonprofit community groups interested in supporting affordable housing.
Regulators capped the amount of money that backers can invest, which is tied to their income. Someone earning less than $100,000 is allowed to invest up to $2,000 a year.
The most anyone can invest is $100,000 per year, no matter how wealthy they are.
It is important that investors get something for their money, Picker said, but she also expects her projects to appeal to their ideals.
“I think you can spend money on a building and do nothing or you can spend money on a building and do something for the place it's in,” she said. “We're trying to spend money on buildings and do something of value.”
Real estate broker Dani Gundlach has been investing in real estate in Pittsburgh since 2004, her first a duplex in Oakland. She was chiefly interested in turning a profit, not reviving a blighted community, but said she likes the idea of investing in more idealistic projects.
“I'm excited about taking my funds and putting them into projects that I believe in, my neighborhood, but that traditional banks may have said no to,” said Gundlach, of Shadyside.
There may not be many projects for her to invest in, critics say. The SEC requires companies to provide investors with detailed disclosures about the financial condition of a company that a typical private company isn't required to report. That could heap excessive burdens on startups and put them at a competitive disadvantage that would dissuade them from seeking investors through crowdfunding, said Michael Hund, an attorney in securities law for McNees Wallace & Nurick in Harrisburg.
Still, he says the law is well intentioned.
“All of a sudden, people on the street can play in a game that only rich people were able to do,” he said. “That's pretty cool. But I'm not sure where it's going to end up.”
Picker said she isn't discouraged. Small Change will help companies navigate reporting requirements.
She expects to have the first offering ready by late summer or early fall, though regulatory rules prohibit her from discussing the details in advance.
Kurczyn is eagerly awaiting.
“I think this is going to be very successful,” she said. “We're appealing to the 99 percent. I'm especially excited for millennials, because that's a huge bunch of people that can make things happen.”
Chris Fleisher is a Tribune-Review staff writer. Reach him at 412-320-7854 or firstname.lastname@example.org.