Review of Real Estate Crowdfunding

Real Estate Crowdfunding Adviser

Investor lawsuits fly against Realty Shares and MG Capital; New “Offer Lottery” feature of the New CrowdStreet.

February 2020 Study of Real Estate Crowdfunding Review

(Disclaimer: I am an investor expressing my personal opinion and not a registered financial advisor, attorney or accountant. Consult with your own financial professionals before making any financial decisions.)

Class action case for Realty Shares

Crowdfunding platform RealtyShares ran out of cash in 2018 for funding their activities and shut down for new real estate investors. At the time current investors were told they would continue operations as planned. RealtyShares then announced that the older investments would be taken over by a third-party company to potentially ensure a smooth transition.

Quick jump to 2020 and now creditors are filing a class action lawsuit against RealtyShares claiming breaches of securities. There are two parts over the lawsuit:

  1. An Ingersoll Financial, LLC (the “Nationwide SFR Package”) debt contract in 2016
  2. A 2018 debt deal that loans to Franchise Growth, LLC, including a loan in Kentucky involving a Church’s Chicken.

It alleges that the firm caused undue damages to investors because it had failed to provide sufficient due diligence to substantiate the reported “track record” or “extensive experience” of Franchise Growth. It also claims that loans were not distributed by inspection-verified draws (and instead distributed at once in a much riskier transaction) in the industry standard method of protecting creditors.

If and when Realty Shares issue a comment to the public on this, it will be published here.

MG Capital case (Not to be confused with MG Properties Group or MLG Capital)

Lamorna Capital says that they spent $1 million in MG Capital Fund III and never received any rental payments, according to a case filed with the New York Supreme Court.

They further assert that the alleged track record of MG Capital has been falsified, stating that Fund I was not a real fund, no fundraising actually took place in relation to Fund I and Fund II, and Funds I and II followed an unknown investment strategy that was significantly different from the strategy followed in Fund III.”

They also say that audited results were not recorded in 2014, 2015 2016, the fund engaged in a manipulative effort to rollover Fund III investors into Fund IV to prolong their lock-up and several other allegations.

Though I can’t confirm or deny the following directly, some of their investors additionally claim:

  1. The CEO of MG Capital will no longer be with the company, and an acting CEO may have been instated.
  2. MG Capital may prematurely liquidate both MG Capital Fund III and MG Capital Fund IV and investors say that they are afraid of major losses.
  3. MG Capital could be under criminal investigation by the authorities.

It will be mentioned here if and when MG Capital makes a public statement about this.

New Crowd Street “Offer Lottery”

Investors say Crowd Street is experimenting with a new feature on smaller deals that it calls the “offer lottery.” They argue that the way it operates is that only specially chosen investors are allowed to view the bid, and then they have to decide to invest or not just 24 hours after the webinar. They are put into a lottery if they want to continue and can only invest if they win.

It could be an interesting and exciting way to invest for reliable, aggressive investors to invest with little or no due diligence.

Investors who put in a reasonable amount of due diligence may be significantly put off by the possibility that they might invest all that time and energy, genuinely like the offer and then not be able to invest.

And cautious investors who might spend weeks or a month thoroughly investigating a new sponsor and/or a single offer seem unlikely to be able to accept this kind of time-constraint and the prospect of a lottery system that eventually prevents them from investing in all their due diligence.