Throughout my career, I’ve been a strong advocate of financial fairness and Wall Street reform.
My research has centered on a creed that wealth gaps can be successfully narrowed by democratizing access to capital through laws and technologies that facilitate micro-alternative investing. Such liberalization can help solve many of the issues that have been the subject of recent political debates.
With that in mind, the Alpha Pages will be publishing my new column that focuses on the industry’s most disruptive and exciting alternative investing platforms, particularly the ones that offer investors of any class the potential to build for the future.
I felt strongly that this column debut with a platform that not only serves retail investors, but whose leadership shares the commitment to tightening investment opportunity gaps.
That’s why I want to introduce you to GROUNDFLOOR.
The firm is receiving a groundbreaking SEC qualification that would allow it to open the $70 billion real estate lending market to more individual investors than ever before.
Founded in 2013, GROUNDFLOOR is the first micro-lending community for real estate. The company began setting new crowdfunding precedents in 2014 when it moved its headquarters to my home state of Georgia in order to initiate its “retail investor pilot program” by taking advantage of IGE (“Invest Georgia Exemption”), one of the country’s earliest and most progressive intrastate crowdfunding laws.
IGE was written in 2011 by Vincent Russo when he was serving as the General Counsel to Georgia Secretary of State Brian Kemp. While IGE currently allows Georgia-based companies to raise up to $1 million a year from Georgia residents, Kemp is in the process of raising the annual limit to $5 million. Georgia’s non-accredited investors are free to invest up to $10,000 under IGE.
Through IGE, GROUNDFLOOR has funded more than $2 million worth of commercial loans for residential real estate projects. So far, more than $800,000 of lender principal and interest has been repaid, and not one borrower has defaulted. Perhaps the most compelling finding from the Georgia pilot is that the average annualized yield of GROUNDFLOOR loans remains over 12% while averaging just seven months in duration.
GROUNDFLOOR’s returns look pretty enticing considering what a dismal year it had been for those who held their money in stocks, traditional bonds and even cash. According to Barron’s, U.S. stock funds tracked by Morningstar are down 7.6% this year, taxable bond funds are losing about 1%, and cash is generating somewhere between 0 and 1%.
To say that retail investors are desperate for yield is an understatement. With interest rates at historic lows and conventional asset classes underperforming, more and more retail investors have turned to marketplace lending a.k.a. peer-to-peer investing (P2Pi) in search of better returns. Unfortunately, not all marketplace lending platforms have the regulatory authorization to accommodate non-accredited investors. While recognized platforms such as Prosper and Lending Club provide non-accredited investors with access to consumer debt, GROUNDFLOOR is presently the only online platform to offer real estate backed notes to unaccredited investors in multiple states.
In stark contrast to IGE, filing for a multi-state offering is a long and arduous undertaking. However, despite the lengthy approval process and modest 6-figure offering size, I believe that GROUNDFLOOR’s SEC qualification holds historic significance for a number of reasons.
It is the first marketplace lending business to receive approval under Reg A+ for “Limited Recourse Obligations” (LROs) – a new asset class that will likely fuel the creation of many novel higher-yielding fixed income products for retail investors.
Additionally, by demonstrating innovative applications for intrastate exemptions, GROUNDFLOOR’s unique regulatory roadmap shows how the states and the fed can actually work together in order to democratize the flow of capital.
I truly believe that GROUNDFLOOR’s sub-million dollar Reg A+ offering will have far-reaching implications on retail investors, intrastate offerings and financial services as a whole.
According to GROUNDFLOOR’s CEO, Brian Dally, “the SEC qualification is merely the beginning of a much broader vision.” However, Dally assures me that GROUNDFLOOR will never give up on the retail investor.
ASSET CLASS OFFERED: “Limited Recourse Obligation” (LRO), a new type of Peer-to-Real Estate Debt
TYPES OF INVESTORS SERVED: All investors (unaccredited and accredited retail as well as institutional)
ADVANTAGES OF LROs: Attractive IRR, short duration, asset-backed
WHERE IT MAY FIT IN AN INVESTMENT PORTFOLIO: Fixed-income diversifyer
CAN BE HELD IN RETIREMENT ACCOUNTS: Yes, in self-directed IRAs (SDIRAs)
ANTICIPATED RETURNS: Secured loans typically pay 5-26% annually. Average annualized yield of GROUNDFLOOR loans is averaging around 12%.
LOAN RATINGS: Each loan is algorithmically graded on a scale of A-G to give every lender the information they need to make the best decision for them. Lenders can also see a snapshot of their current loans, including upcoming repayments and projected earnings.
MINIMUM INVESTMENT: The minimum investment on Groundfloor is $10.
AVAILABLE TO INVESTORS IN THE FOLLOWING STATES: California, Illinois, Maryland, Massachusetts, Texas, Virginia, Washington, Georgia and the District of Columbia
BORROWERS SERVED: Builders / developers
GROWTH OF THE BUSINESS:
NUMBER OF EMPLOYEES: 10
NUMBER OF EXECUTED TRANSACTIONS: 40
DOLLAR AMOUNT OF EXECUTED TRANSACTIONS TO DATE: Funded over $2 million worth of real estate project loans to commercial borrowers
Brian Dally is a co-founder of GROUNDFLOOR and serves as our CEO. He is responsible for marketing as well as setting long term direction and goals for the company. Brian’s 15 year career building disruptive technology startups spans stints in Silicon Valley, Boston, London and the North Carolina Triangle region. Previously, he led the launch of Republic Wireless to take on the big four cellphone carriers to international acclaim. As a result, millions more Americans can now afford a smartphone. Brian has a JD from Harvard Law School, an MBA from Harvard Business School, and a BA with Highest Distinction from the University of Virginia.
Nick Bhargava is a co-founder of GROUNDFLOOR and serves as the EVP of Regulatory Affairs. He leads product development and is responsible for regulatory strategy. An expert in securities law, Nick was heavily involved in the JOBS Act as an early pioneer who advanced the concept of crowdfunding. Nick and Brian met through Groundwork Labs in the Triangle-area startup hub the American Underground. His years in finance have included work for the Financial Services Roundtable, SEC, FINRA, TD Waterhouse and RBC Financial Group. Nick received his LLM at Duke University School of Law and holds a BS in Biological Sciences and Business from the University of Alberta.
RECENT COMPANY DEVELOPMENTS:
On August 31, 2015, GROUNDFLOOR was qualified by the SEC to sell securities to non-accredited investors under the amended Regulation A (referred to as Regulation A+), effectively democratizing real estate investing for all and paving the way to a $70 billion real estate lending market.
GROUNDFLOOR is the first company to achieve SEC qualification for peer-to-peer micro-lending since Prosper and Lending Club in 2009. They are also the first company ever to qualify for real estate micro-lending, and the first issuer to complete the new North American Securities Administrators Association (NASAA) Coordinated Review Process, which is designed to facilitate the filing of Regulation A offerings in multiple U.S. jurisdictions.
GROUNDFLOOR’s model is based on origination and servicing fees. Company receives between 2-5% overall through a combination of origination and servicing, depending on the project.
“As with any disruptive technology, we believe the benefits of radically broadened access to retail investors nationwide, and society in general, will be profound. That’s what really motivates us. We also believe that real estate lending is more investor-friendly—providing them with a risk-adjusted asset and a defined path to liquidity—than other options available today.” – GROUNDFLOOR