The History of Real Estate Crowdfunding

This article highlights the colorful and tumultuous history of real estate crowdfunding by reviewing the key happenings in the capital markets around the Great Depression, after World War II, and through the Global Financial Crisis of 2007.

What is Real Estate Crowdfunding?

Real estate crowdfunding is an innovative way for individuals to invest in real estate without buying an entire property.

Through online platforms and crowdfunding sites, investors pool their money to fund real estate ventures, from residential projects to commercial spaces or even commercial debt.

With a minimal investment, often just a few hundred or thousand dollars, one can own a share in a property and reap proportional returns.

Essentially, this approach democratizes property investment, offering a simpler and more accessible way for many to diversify their portfolios in the real estate market.

As with all investments, there are risks, and proper due diligence is required.  But for those eager to tap into real estate, crowdfunding is a promising option.

To learn more about real estate crowdfunding, see our Comprehensive Guide on Real Estate Crowdfunding.

When Did Real Estate Crowdfunding Start?

Real estate crowdfunding formally emerged in the early 2010s with the passing of the Jumpstart Our Business Startups (JOBS) Act in 2012.

In the last decade, the Real Estate Crowdfunding market has grown significantly as more investors utilize more platforms and fund more real estate deals.

Why Was Real Estate Crowdfunding Uncommon Before the JOBS Act?

To understand why Real Estate Crowdfunding (and crowdfunding overall) was almost unheard of before 2012, we need to look at the happenings in the U.S. capital markets in the last 100 years.

Before the Great Depression

In the years leading up to the Great Depression in the late 1920s and early 1930s, the U.S. capital markets were:

• Largely unregulated – Securities markets had little regulatory oversight, registration, or reporting requirements prior to the Depression.
• Dominated by bonds – Corporate bonds were a much larger and more developed market than equities at this time. Stocks (meaning individual equities) were just starting to emerge.
• Using fragmented exchanges – Trading was centralized on several regional exchanges like NYSE and Chicago, lacking coordination.
• Dominated by retail investors – Stocks became popular among middle-class retail investors, though overall ownership was still low.
• Fixed commissions – Brokerage fees were fixed at high levels, limiting competition. Discount brokers didn’t exist yet.
• Rampant with speculation – The bull market of the 1920s led to highly speculative investing fueled by easy credit and margin loans.
• Frequently manipulated – Actions by “pools” and other manipulators distorted stock prices and caused extreme volatility.
• Fueled by optimism and hype – Media hype around stocks boosted speculative investing among those hoping to get rich in the market.
• Lacking transparency – Companies were not required to disclose much financial data. Opaque practices were common.
• Unfair to investors – Those with connections were treated differently, often receiving special terms or payoffs before others.  The “friends of the family” prospered at the expense of others.

So, in summary, the U.S. capital markets were freewheeling, retail-driven, lightly regulated, and increasingly speculative in the years leading up to the 1929 crash and the Great Depression.

The Great Depression Changed the Capital World

The Great Depression hit the capital markets (and the world) like a ton of bricks.  In the early 1930s, the U.S. capital markets saw:

• Stock market collapse – The most infamous event was the stock market crash of 1929, which saw the Dow Jones (equities) lose nearly 90% of its value from its peak in the fall of 1929 to the summer of 1932 as the Dow fell from 380 to just 41 points.
• Bank failures – Over 9,000 banks failed as depositors rushed to withdraw funds, reducing available capital dramatically.
• Extreme volatility – Stocks saw wild price swings on a daily basis after the initial crash, fueling uncertainty and panic selling.
• Evaporation of credit – As banks failed, lending dried up, making it extremely hard for businesses and consumers to access credit or capital.
• Widespread pessimism – Investors completely lost confidence and faith in capital markets due to 1920s abuses and crash.
• Reduced issuances – IPOs and bond issuances plunged as few investors were interested in buying new offerings.
• Unemployment spikes – Job losses from the Depression reduced consumer purchasing power and savings available for investment.
• Shift to no-risk assets – Investors flocked to safe assets like Treasuries and FDIC-insured bank accounts, shunning stocks.

So, in summary, the Depression devastated capital markets as stocks crashed, banks failed, credit channels collapsed, and widespread pessimism replaced the previous speculative optimism.

Government Response to the Great Depression

In response to the Great Depression, the government took emergency measures like passing the Securities Act of 1933 (often referred to as the ’33 Act) and the Securities Exchange Act of 1934.

Although both these acts rocked the capital world, the following parts of the Securities Act of 1933 are specifically relevant to private investors (like us) and crowdfunding:

• Registration requirement – Public securities offerings must be registered with the SEC, requiring extensive disclosures. However, private offerings were exempt from this requirement.
• Accredited investor exemption – Private offerings sold only to accredited investors are exempt from the registration requirement.
• Ban on public solicitation – Private offerings couldn’t advertise or promote deals to the general public.

The 1933 Act focused on ensuring proper disclosure about securities being offered for public sale.  However, the ’33 Act also defined the concept of the accredited investor and outlined that private offerings sold only to accredited investors could avoid the disclosure, scrutiny, and cost of SEC registration.

The Securities Act of 1933 has played a key role in stabilizing the capital markets for decades, but it also limited private deals in several ways, including:

Limiting the Pool of Investors – By restricting certain private offerings to accredited investors, the number of potential individual investors was massively reduced which impacted the capital available for businesses seeking funding through private placements.

Limiting Reach – By disallowing the public solicitation of private offerings made it difficult for those seeking capital to reach non-institutional (meaning private and smaller) investors.

World War II and Beyond

Between the 1940s and the mid-2000s, the capital markets experienced significant growth, massive innovation, as well as increased risk.  Noteworthy happenings during this period, include:

• High economic growth fueled by the pent-up consumer demand after the war and increasing corporate profits.
• Surge in stock issuances and IPOs as companies sought to raise capital for growth and expansion.
• Soaring individual and index stock prices as investor optimism and disposable income led to heavy buying.  Retail investors who shied away from stocks since the 1929 crash came back to the market in droves, attracted by the profit potential.
• Increases in trading volume fueled by increased buying, reduced trading costs, and eventually by shifts to electronic trading, automated trading, and high-frequency trading
• Explosion of derivatives like options, futures, and swaps, enabled greater leverage but also increased risk.
• Reduced regulation which eased trading limits on institutions, allowed the expansion of derivatives, reduced caps on leverage, and allowed commercial banks to engage in investment banking and trading.

So, in summary, this period saw massive economic growth and prosperity, technological transformation, shifting regulations, new products, and broadening market access, while also experiencing greater turbulence.

The Global Financial Crisis (GFC) of the Late 2000s

The Global Financial Crisis (GFC), often referred to simply as the “financial crisis,” was a severe worldwide economic downturn that began in 2007 and peaked between 2008 and 2009. The GFC was the most severe financial crisis since the Great Depression of the 1930s. 

The GFC originated in the U.S. housing market and the rise of subprime mortgages (meaning loans offered to borrowers with weak creditworthiness).  These risky mortgages were packaged within complex financial products and sold as securities to investors. Investors often purchased these products with high levels of debt under the belief that these assets were safe and would appreciate in value.

As adjustable mortgage interest rates rose, homeowners had difficulty refinancing or selling their homes, causing a spike in delinquencies and foreclosures.  These widespread loan payment issues caused the values of the securities tied to these mortgages to plummet, which led to the failure of key businesses (e.g., Lehman Brothers in September 2008), disrupted the financial markets, and created panic and loss of confidence in the broader financial system.

In terms of the capital markets, the global financial crisis led to:

• A decline in IPOs due to market volatility, economic uncertainty, and decreased investor confidence
• A more risk-averse approach by banks, financial institutions, and venture capitalists
• Tightened lending standards by banks

The combination of these factors (and others) created a severe credit crunch. The inability to obtain credit had a widespread impact on the economy, but was especially problematic for younger, less established companies.

The Jumpstart Our Business Startups (JOBS) Act was created to stimulate economic growth by making it easier for small businesses and startups to access capital.

Technically speaking, the history of real estate crowdfunding actually started with the JOBS Act in 2012.

The JOBS Act Paves the Way for Crowdfunding

The Jumpstart Our Business Startups (JOBS) Act of 2012 played a pivotal role in democratizing access to capital for startups and small businesses by introducing and legalizing equity crowdfunding.

Before the JOBS Act, securities laws made it difficult for companies to raise small amounts of capital from a large number of people without undergoing the extensive and costly process of a full public offering.

The JOBS Act facilitated crowdfunding and democratized access to investment opportunities by:

• Allowing non-accredited investors to participate in equity crowdfunding campaigns (within predefined limits)
• Requiring companies raising funds through crowdfunding to meet specific disclosure requirements to ensure transparency
• Allowing companies to publicly advertise private offerings, as long as all actual investors are accredited
• Reducing the reporting and regulatory requirements for certain companies, making it easier for them to find and manage a larger investor base (such as crowd investors)
• Allowing broker-dealers to operate online platforms where securities are offered and sold without the platforms being deemed as “brokers” or “dealers”

In essence, the JOBS Act made it feasible for startups and small businesses to publicly solicit investments and accept money from both accredited and non-accredited investors, paving the way for the growth of equity crowdfunding platforms and democratizing access to early-stage investment opportunities for everyday investors.

Stated differently, the JOBS Act and crowdfunding allowed small investors (like us) to save

The Emergence of Real Estate Crowdfunding

The JOBS Act paved the way for crowdfunding of all types, including:

• Funding specific products or projects (via platforms like Kickstarter and IndieGoGo)
• Investing in companies for equity (via platforms like SeedInvest and Crowdcube)
• Debt-based crowdfunding (via platforms like Prosper and LendingClub)
• Donation crowdfunding (via platforms like GoFundMe and JustGiving)

However, crowdfunding, as a method of pooling funds from many individuals, naturally dovetailed with real estate due to various factors inherent to the real estate industry and the evolving financial landscape, including:

• High Capital Requirements – Real estate projects, especially significant developments or property acquisitions, often require substantial capital. Crowdfunding allows for the aggregation of funds from a multitude of investors, making it easier to meet these high capital requirements.
• Diversification for Investors – Real estate crowdfunding platforms allow investors to diversify their portfolios by investing smaller amounts across multiple properties or projects, rather than sinking a large sum into a single property.
• Democratization of Real Estate Investment – Traditionally, real estate investment opportunities, especially lucrative ones like commercial real estate or large developments, were reserved for wealthy individuals or institutional investors. Crowdfunding democratizes access, allowing non-accredited investors a chance to invest in these projects.
• Passive Income Stream – Real estate investments typically provide a steady income stream through rents, making them attractive for investors seeking passive income. Crowdfunding platforms highlight this aspect, drawing in investors looking for regular returns.
• Transparency and Control – Unlike traditional real estate investment trusts (REITs), many crowdfunding platforms offer detailed information about individual properties or projects. This transparency can give investors a better sense of control and understanding of where their money is going.
• Tangible Asset Investment – Unlike many startup investments, real estate represents a tangible, often appreciating, asset. This tangibility may be appealing to many investors as it provides a sense of security.
• Efficiency and Speed – Raising capital for real estate projects can be a lengthy and challenging process, especially through traditional channels like banks. Crowdfunding platforms can offer a more efficient way to source capital, often at a quicker pace.
• Technological Advancements – The rise of digital platforms, secure online payment systems, and advanced data analytics tools made it feasible to manage and operate real estate crowdfunding platforms, matching investors with suitable projects.

Today, real estate developers look to investment crowdfunding and online crowdfunding platforms as a way to raise money for a wide range of projects.

The Power of the Platforms

More than a decade has passed since the creation of the JOBS Act (and the start of the History of Real Estate Crowdfunding). Today, investors (and would-be investors) have access to a plethora of online real estate crowdfunding platforms and investments in equity or debt, various asset classes and geographies, and more.

The table below lists some of the leading real estate crowdfunding platforms.