Seeking to create a secondary market for crowdfunding investors, real estate crowdfunding website PeerRealty has opened CFX Markets, an exchange for real estate crowdfunding, to the public.
The opening is considered a landmark development in the advent of crowdfunding — which has strong roots in real estate investment — in that it gives investors the much-needed option of liquidity, one of the core benefits of traditional investment opportunities like the stock market.
PeerRealty was founded with the mission of challenging the convention of real estate developers catering exclusively to the wealthy elite. “With the explosive growth of real estate crowdfunding over the past several years, the launch of a secondary market marks a new phase in the maturation of the industry,” said Jorge Newbery, CEO of American Homeowner Preservation, one of CFX’s crowdfunding platform partners.
2 types of crowdfunding: products versus financial returns
The term “crowdfunding” has become more familiar with the rising popularity of Kickstarter, GoFundMe and the like, but there are actually two kinds of crowdfunding. The aforementioned websites offer the first type — online fundraising in exchange for products or rewards.
The second is equity crowdfunding, which allows eligible individuals to invest in a project in exchange for future financial returns, an opportunity that was legalized by the Jumpstart Our Business Startups Act (JOBS) Act of 2012.
[Tweet “Equity crowdfunding allows individuals to invest in a project in exchange for financial returns.”]
The bipartisan legislation was intended to encourage funding of American small businesses by easing various securities regulations. It provided a new exemption from the requirement to register public offerings with the Securities and Exchange Commission for certain types of small offerings, including the use of Internet funding portals registered with the government.
The JOBS Act opened up equity crowdfunding to a new group of wannabe investors — “average Joes” with little experience in investments — but in an effort to protect them from making risky financial decisions, the legislation limited participation to “accredited” investors. To qualify as an accredited investor, an individual must have an annual income of more than $200,000 or a net worth above $1 million.
The JOBS Act greenlit many successful equity crowdfunding portals, including Crowdfunder, Fundable, EquityNet — and PeerRealty, where advisers with institutional backgrounds review and select high-quality deals for investors.
“We see real estate as the best fit for crowdfunding because real estate is such an easy-to-understand asset,” said CFX Managing Director Juan Hernandez. “For example, real estate is very easy to price. You can get a room of people to agree on the price of a building.”
Liquidity and centralized exchange
But despite the benefits offered by real estate crowdfunding, PeerRealty’s officers noted that liquidity remained a challenge, limiting investments to people who can take on longer-term deals. To that end, PeerRealty created CFX, which acts as a stock exchange for crowdfunding investments, allowing investors to buy and sell shares from other participants in the market, subject only to SEC resale restrictions.
[Tweet “PeerRealty’s officers noted that liquidity remained a challenge. CFX was the answer.”]
“We’ve always felt that in order for equity crowdfunding to reach its full potential, investors would need the option of liquidity,” Hernandez said. “Investors will be more comfortable and confident in investing in these types of deals if they know they won’t be locked into deals for the duration of an instrument. They can seek liquidity if they so desire. This gives users the ability to adjust their portfolios when needed.”
By integrating with other crowdfunding portals — American Homeowner Preservation, CrowdFranchise and PropertyStake, in addition to PeerRealty — CFX acts as a centralized exchange where investors can buy and sell shares of crowdfunded assets with each other.
How CFX works for investors
Upon visiting CFXinvesting.com directly or through CFX’s partner portals, investors may sign up for a free CFX account. By authenticating their identity on the CFX platform, they can sync up their existing CFX partner portal assets.
CFX will then automatically pull updated data from the partner portal, and investors interested in selling assets that they own can indicate the price for which they’d like to sell. Interested buyers can review listed assets and offers, along with historical financial data on each asset, before posting bids to buy.
An investment’s market value is calculated by multiplying a company’s total number of shares and the price of a single share. The sponsor controls and is responsible for managing the assets.
However, CFX makes no recommendations about any particular investment, and each investor must do their own due diligence before making a decision.
[Tweet “CFX verifies all investors’ identities to ensure they are who they say they are.”]
Eligibility for the platform
Currently, only accredited investors are eligible to purchase CFX assets. As defined by the SEC, an investor must meet one of these criteria to qualify as accredited:
- Earn an individual income of more than $200,000 per year, or a joint spousal income of more than $300,000 per year, in each of the last two years and expect to reasonably maintain the same level of income;
- Have a net worth exceeding $1 million, either individually or jointly with his or her spouse;
- Be a bank, insurance company, registered investment company, business development company or small business investment company;
- Be a general partner, executive officer, director or a related combination thereof for the issuer of a security being offered;
- Be a business in which all the equity owners are accredited investors;
- Be an employee benefit plan, a trust, charitable organization, partnership or company with total assets in excess of $5 million.
The CFX platform is currently in invitation-only mode. Investors interested in buying or selling shares of crowdfunding assets may request access at CFXinvesting.com.
