The Real Estate Crowdfunding Review February 2020 Update
Updated: Sep 6, 2023
Investor lawsuits fly against Realty Shares and MG Capital; New CrowdStreet "Offer Lottery" feature; Private Investor Club welcomes 3,500th member; 4 newest specials; 5 club feeders on-boarding;
(Usual disclaimer: I'm just an investor expressing my personal opinion and not a registered financial advisor, attorney or accountant. Consult your own financial professionals before making any financial decisions. Code of Ethics: We do not accept any money from any sponsor or platform for anything, including postings, reviews, referring investors, affiliate leads or advertising. Nor do we negotiate special terms for ourselves in the club above what we negotiate for the benefit of members.).
Realty Shares class-action law-suit
In 2018 RealtyShares ran out of cash for funding their operations and shut down to new investors. At the time existing investors were assured that operations would continue as normal for them. Then RealtyShares announced that a third-party firm would be taking over the older investments from them to presumably ensure a smooth transition.
Fast forward to 2020, and investors are now filing a class-action lawsuit against the RealtyShares alleging securities violations. The lawsuit is over two deals:
A 2016 debt deal involving Ingersoll Financial, LLC (the "Nationwide SFR Package")
A 2018 debt deal making loans to Franchise Growth, LLC, including a loan involving a Church's Chicken in Kentucky.
It alleges that the firm caused unnecessary investor losses because it had not done effective due diligence to substantiate Franchise Growth's claimed "track record" or "extensive experience". It also alleges that loans were not dispersed in the industry standard method of protecting investors via inspection-verified draws (and instead dispersed at once in a much riskier transaction). If and when Realty Shares issues a public statement on this, it will be reported here.
MG Capital law-suit (Not to be confused with MG Properties Group or MLG Capital)
According to a case filed with the New York Supreme Court, Lamorna Capital claims they invested $1 million in MG Capital Fund III and never received any rental distributions.
They further claim that MG Capital's claimed track record was falsified: "Fund I was not a real fund, no fundraising actually occurred with respect to Fund I and Fund II, and Funds I and II pursued an undisclosed investment strategy that was materially different from the strategy pursued in Fund III.".
Also they claim audited results were not produced in 2014, 2015 2016, the fund engaged in a coercive attempt to rollover fund III investors into fund IV to extend their lockup and numerous other allegations.
Also, while I cannot personally confirm or deny the following, some of their investors additionally claim that:
MG Capital's CEO may no longer be with the firm and an interim CEO may have been appointed.
MG Capital may be prematurely liquidating both MG Capital Fund III and MG Capital Fund IV and investors claim they are fearful of significant losses.
MG Capital may be under investigation by federal authorities.
If and when MG Capital issues a public statement on this, it will be reported here.
New Crowd Street "Offer Lottery"
Investors claim that Crowd Street is experimenting with a new feature which it calls the "offer lottery" on smaller deals. They allege the way it works is that certain specially selected investors are allowed to view the offering, and then they have only 24 hours after the webinar to decide to invest or not. If they wish to proceed they are put into a lottery and only if they win can they invest.
If accurate, aggressive investors who invest with little or no due diligence may find this an interesting and exciting way to invest.
Investors who put in a moderate amount of due diligence may be significantly put off with the idea that they might invest all that time and effort, actually like the deal and then not be allowed to invest.
And conservative investors who might invest weeks or a month fully examining a new sponsor and/or any single deal, seem unlikely to be willing to consider this kind of time-constraint and the possibility of having all their due-diligence wasted by a lottery system that ultimately prevents them from investing.
Private Investor Club Updates:
(Membership in the club is free, but requires verification that the investor has no ties to platforms or sponsors. New members can apply here.)
Club welcome 3500th member
Thank you to all club members for referring your family and friends. We just welcomed our 3,500th member and are now over $5.7 billion in investable assets. This size is what allows us to gain access to institutional sponsors and asset classes that we can't access otherwise, as well as get millions of dollars in special deals for club members.
New club specials
Thank you to these new sponsors who have given club members these special deals:
Hard money loan fund (name kept private) What: First position hard money loan fund lending on construction loans in the western US. Conservative first position only, 65% LTV or less and exceptional claimed track record of about 1% uncured defaults. Special terms for club:Minimum of $250k reduced to $100k for club members.Management fee reduced to 1.5% from 2% normal fee (typically requires $1 million for this reduction but we are getting it automatically).Reduced to 1% if we can aggregate at least $10 million.
Multi family Value Fund (name kept private) What: multi family fund investing in class B+C in the south and southeast. Special terms for club: Minimum reduced from $100K to $50k for club members investing directly.
Mobile home parks sponsor: (name kept private) What: mobile home parks between $3 million to $15 million. Special terms for club: Early looks: They claim their deals typically fill in a couple of hours. Club members get access to their deals 24 hours earlier. Reduced minimum: Normal minimum is $50k but they are willing to entertain lower for club members.
Multi-family sponsor: (name kept private) What: Multifamily sponsor. Special terms for club: Reduced minimum: $25k minimum versus $50k normally.
Club-only Feeder Fund Updates:
Feeders allow club members to access funds at significantly lower minimums than direct investment. They can also offer better diversification and simpler taxes.
Stategy: value-added multifamily sponsor in the West.
Experience: Claims multiple real estate cycle experience and zero investor losses.
Debt: Conservative leverage and high skin in the game (10%+).
Tax treatment: very favorable (passive "super shielder").
Offers investors a fairly unique chance to 1031 exchange at the end of the investment into another one to indefinitely defer ALL taxes.
Litigation finance isn't directly correlated to the business cycle and can provide good diversification and protection in a recession/downturn.
Experience: longest track record in the industry. Founders in this business since before the great recession.
Projected return: 18-20% IRR (net of all target, feeder fees and cash drag from reserves).
Minimums : $25k via feeder versus $5 million when investing direct.
Note: investor must have $5 million+ in net assets ("qualified purchaser") and third-party verify that they are an accredited investor (with Assure).
Asset class: litigation finance is not directly connected to the economic cycle and can provide good protection and diversification to a portfolio during a stock market or real estate downturn.
Summary: Focuses on overlooked “middle market” investments and overlooked geographies.
What is the middle market? $500,000-$3 million investments. Most funders consider only investments of at least $2.5 billion/25 million in the damages.
Projected returns: 25% net IRR
Investor requirement: Accredited investor!! (Very unusual in this asset class which usually requires qualified purchaser/$5 million in net investments)
Debt fund sponsor (non-real estate related) that has an exceptional recession track record.
Employees and family have over hundreds of millions dollars of skin in the game, and it has won many industry awards.
#1 investment for members of Tiger 21 (investment club that requires $10 million in investments minimum and $30,000/ year membership fee).
$25k minimum via feeder (vs. $1 million minimum direct).
To protect the sponsor's confidential information, you must take an introductory phone call with them first, before receiving the pitchdeck, due diligence and Q&A.
Note: investor must have $5 million+ in net assets ("qualified purchaser") and third-party verify that they are an accredited investor (with Assure).
Here's a list of all of the other current club feeders. (More...)
