Pioneering real estate microlender GROUNDFLOOR recently announced a cash infusion of $1 million and a move from North Carolina to Georgia to take advantage of their new home state’s welcoming crowdfunding environment.
The funds come from angel investors Inception Micro-Angel Fund, Michael Olander, Bruce Boehm and Mark Easley Sr. The move, which has been in the works for some time, allows GROUNDFLOOR to work with Georgia’s many citizen-backed real estate initiatives while working in one of the nation’s most progressive states for crowdfunding.
“(Many) early adopters of our projects are here,” said GROUNDFLOOR CEO and co-founder Brian Dally. “We’re already seeing how real estate microlending can play a role in the development of local communities.”
Simplicity and expediency were two early traits Georgia displayed that were key to it’s success, explained Mr. Dally. “Georgia was smart in acting quickly, but they also put out clear and simple guidelines. They have become a model for others, as their steps are clear, simple and it is not costly to comply with them. There are also steps to apply the brakes if needed.”
In the aftermath of the recent housing collapse, Georgia was quick out of the gate improving its economy. “GROUNDFLOOR is a fantastic example of the types of business innovation that will continue to build Georgia’s economy and create opportunities for our residents,” said Georgia Secretary of State Brian Kemp in a news release. “Because of the Invest Georgia Exemption, crowdfunding is taking off in Georgia ahead of other states that are still waiting for the SEC to rewrite and approve parts of the JOBS Act.”
In 2011, Georgia unveiled the Invest Georgia Exemption, which among other things allowed both non-accredited and accredited residents to purchase debt and equity securities from companies. For-profit companies can raise up to $1 million annually via this method and non-accredited individuals can invest up to $10,000.
Being quick to the draw will also allow Georgia to attract more innovators and the investment that comes with it, Mr, Dally offered. “Other states will have to come up with their own solutions (or risk a brain drain).”
To become a national success, GROUNDFLOOR will have to comply with and successfully navigate the myriad of regulations related to the JOBS Act. They already have a head start as GROUNDFLOOR co-founder Nick Bhargava is an expert in securities law who helped draft parts of Title III. Mr. Bhargava, who once worked at FINRA, was an early proponent of the crowdfunding industry.
“Nick is our secret weapon,” Mr. Dally offered. “(Legislation navigation) takes a lot of know-how. Knowing laws is one thing, but applying them is another. With Nick’s knowledge we can apply our specific approach which will enable us to build.”
Federal dithering on the JOBS Act and several instances of politicians speaking out against parts of it have fostered a fear in many, who worry the act will not get passed or will be so watered down as to be effectively useless. With regular news of other countries taking steps to welcome crowdfunding and peer-to-peer lending, does Mr. Dally worry that the United States will lose its position as the industry leader?
“People used to say we were behind Europe in cellular phones, but not now,” Mr. Dally stated. “The U.S. is moving deliberately and for good reason. It is better for us long term that they do (move slowly). Move deliberately and get it right.”
Two positive side effects of the glacial regulatory pace are it gives companies like GROUNDFLOOR the time to slowly build their company while also allowing the industry as a whole time to naturally evolve. “Rules are one step and many more are required,” Mr. Dally explained. This is not a fad. We are here for the long term. We are building a company over decades, using the existing laws and regulations, and are content with that.”
Many elected officials who express skepticism toward crowdfunding allude in some way to the ignorance of novice investors whose first foray into the mean streets of investing will come through crowdfunding, as if they are acting to protect investors from themselves. Are those officials selling crowdfunding investors short?
“The mass market investor is smarter than many give them credit for,” Mr. Dally said. “They can be just as sophisticated as an accredited investor. It’s not that they aren’t capable, they just don’t have the time.”
Enter GROUNDFLOOR and their brethren, platforms whose fate is literally dependent on picking the right properties, ones that make early adopters a good return, which in turn attracts a larger clientele thereby allowing the company to grow.
The size and investing might of the potential pool of unaccredited investors is huge. “We’re not talking about tens of thousands of investors,” Mr. Dally offered. “we are talking about hundreds of thousands of them.” Fifty-seven percent of the potential investing income pool is controlled by non-accredited investors, Mr. Dally learned. “Out of $600 billion that is $340 billion siting in the hands of non-accredited investors.”
Many of the most novel crowdfunding initiatives are directed to improving the lives of specific target groups, like people in third world countries receiving microlans from Kiva supporters, or to green initiatives like alternative energy sources which can potentially impact the world. Real estate crowdfunding has that potential, as it lends itself well to community revitalization.
“There are lots of byproducts when you increase transparency and the level of access to information to all,” Mr. Dally explained. “Good things happen.”
Mr. Dally went on to cite the early history of the internet. “The early adopters were people wanting to revitalize their communities.”
Those people were disruptors and so is Brian Dally. His LinkedIn profile mentions he likes to attack entrenched industry incumbents from a position of weakness. Do incumbents share areas of weakness?
“Everyone has their own experience with cell phones, banks, and other products. Many apply old ways of thinking to old technologies and presume to know human nature. The old ways do not work any more.”
“In the past we had to go to the library to learn about investments and new perspectives. Now we can get new information on new sources more more quickly. We can now hear from experts and each other. Incumbents are slow to recognize that.”
A common theme of many of Mr. Dally’s past successes and one he wants to see repeated in GROUNDFLOOR is the returning of control to the individual consumer and investor. He did it with smartphones at Republic Wireless and he did it with consumer internet and enterprise IP communications at Peripatetic Ventures. Differentiation is a key component in this strategy as one has to convince adherents of the entrenched there is a better way. Where will the differentiation occur in real estate crowdfunding?
Mr. Dally mentions algorithms can always be refined so they become better at rating loans. Gaining a better understanding of risk in system design and the risks faced by the independent builders GROUNDFLOOR partners with are other areas.
As both the industry and GROUNDFLOOR continue to grow, are they at risk of losing that uniqueness that attracted people to them in the first place? “The internet is distributive by its nature. GROUNDFLOOR is the internet arriving to finance. As the industry grows it will distribute more, not less.”