In 2011, Ben and Dan Miller had an audacious idea: why not let local residents, rather than outsiders, invest in commercial real estate in their neighborhoods? But that seemingly simple idea was not easy to pull off. It was months before the JOBS Act would be passed, much less proposed, and their inquiries led to quizzical looks and dead ends. The brothers finally hit upon Regulation A, a little used securities exemption. Turns out it was little used for a reason, but they plowed ahead anyway. In August 2012, eight months after filing their Reg A paperwork, the Millers launched the first crowdfunding campaign for a commercial property—a building in Washington DC’s up and coming H Street Northeast corridor that formerly housed a dollar store.
Individuals could invest as little as $100 in the building, which would be gut-renovated and leased to established local entrepreneurs. Within weeks, 175 people had invested a total of $325,000. Today, 1351 H Street NE is home to Maketto (pictured above), a thriving, genre-busting concept that combines a coffee shop, restaurant, retail and Asian market-inspired food stalls, and the Miller’s company, Fundrise, has crowdfunded dozens of commercial real estate projects and attracted a horde of competitors to what is now a billion dollar market.
We talked with Fundrise cofounder and CEO Ben Miller about the new Regulation A+ rules.
Amy Cortese: You’ve conduced three Reg A offerings over the past few years. Why did you choose that exemption?
Ben Miller: At the time, short of a full blown IPO, Regulation A was the only exemption available to us that would allow unaccredited investors to invest in our offerings. (District of Columbia regulators enacted an “intrastate” exemption in October 2014).
AC: What was the process like?
BM: Slow, expensive, and arduous. Each filing took six to seven months to get cleared, cost $100,000 to $200,000 in third party expenses, and took enormous effort to manage the complexity involved. To give you a physical sense, each filing weighed 15 to 25 pounds in paper! We also had somewhere around 12 different reviewers as a result of the states—more than double what you would expect in a typical initial public offering.
AC: What’s your view on Reg A+?
BM: While I don’t think Regulation A+ is applicable to real estate deals the way we used its predecessor exemption, it is most definitely a powerful improvement to the capital markets. Many middle-sized companies will now have access to up to $50 million from the true public, which creates a potentially viable alternative to private equity. The SEC is attempting to address a serious problem in capital formation for high growth companies by democratizing access.
AC: So you don’t plan to make use of Reg A+ anytime soon? Can you elaborate on that?
BM: While we’re looking into it, we haven’t determined if it is economic or feasible for real estate. Real estate deals require certainty of closing, something that isn’t present in best efforts offerings subject to lengthy, uncertain regulatory reviews.
“It’s crazy to think that Facebook probably had 4 to 7 people review their $16 billion initial public offering, but a small business looking to raise money from across the country under Tier 1 would have 50 to 100 reviewers and commentators!”
Typically, a real estate company has to close on an acquisition within 60 to 90 days of getting it under contract. With Regulation A, as well as under the new A+, it takes months to get cleared by the regulators—in our experience, approximately 6 months. Once cleared, a company can then start the fundraising process, which is likely to be another multi-week, if not multi-month, undertaking (not including the 21 day public review period required by Regulation A+). Rarely can a real estate company wait 6 months before knowing if the funds are available.
AC: Outside of real estate, do you think the revised Reg A will be widely used?
BM: Among certain types of companies, such as biotech or regional consumer brands, Regulation A+ could become a common source for growth capital.
AC: What are the biggest drawbacks you see to either Tier 1 or Tier 2 of Reg A+?
BM: Our experience with Regulation A leads us to believe that coordinating reviews among up to 50 state regulators and the SEC, as required under Tier 1, will be too onerous and expensive to be useful for most companies. The lack of uniformity among state regulators, in both content and focus, makes it very hard to put together a deal that would satisfy 50 individual state reviewers. It’s crazy to think that Facebook probably had 4 to 7 people review their $16 billion initial public offering, but a small business looking to raise money from across the country under Tier 1 would have 50 to 100 reviewers and commentators!
AC: In your view, does Reg A+ satisfy the need for mainstream investing and capital-raising, or do we still need Title III of the JOBS Act?
BM: Personally, I love the potential of Title III. While it is the most challenging to regulate because of the high risks involved with a proliferation of small offerings, it could also have the greatest impact on the most underfunded part of the economy, small business. Unfortunately, Congress did not provide the SEC with the same regulatory deference it did in Title IV (Reg A), so it will be difficult for them to craft regulation that is both workable for small businesses and consistent with the text of Title III of the JOBS Act.
AC: You started Fundrise with the goal of giving everyone the opportunity to invest in real estate, especially local real estate. Four years (and many state and federal laws) later, how close are we to achieving that goal?
BM: We have never been so close, but still have one more push to go before investment is fully democratized.