Emerging Markets Law

Showing 7 posts from April 2014.

GroundFloor Leads Georgia Real Estate Crowdfunding

Gearing up for the Crowdfunding Expo at Cobb Galleria on May 1st I’ve been reading up on developments in crowdfunding real estate. Last week’s announcement of a crowdfund offering for the Hard Rock Hotel in Palm Springs made news, but there is a lot more going on in real estate crowdfunding here in Georgia.

One of the leaders in this space is GroundFloor.

GroundFloor was founded by Brian Dally, a Harvard-trained lawyer who had several entrepreneurial successes before turning his attention to crowdfunding real estate, and Nick Bhargava, a lawyer who has worked for both the SEC and FINRA.

GroundFloor has closed three financings in Georgia so far, all of which have been residential rehabilitation projects. One of those projects was in Midtown Atlanta while the other two were just outside the Atlanta perimeter. The Midtown Atlanta deal took the form of a senior secured loan to the project developer while the other two were “mezzanine” loans where the loan will stand behind another lender who is in senior position on the collateral.

What makes GroundFloor’s approach intriguing is that it has used a single offering memorandum to sell successive tranches of notes, the proceeds of which have been used to fund a single loan to the project borrower. (Here is their Securities Purchase Agreement). In other words, while investors have committed their funds to specific projects, the investors do not, themselves, make a loan to the borrower. Rather, the investors purchase notes issued by a GroundFloor affiliate which, in turn, makes a single secured loan to the borrower. The notes purchased by investors are non-recourse to the issuer, with repayment of the investors’ principal and interest coming solely from the borrower’s repayment of its loan from GroundFloor.

This multi-investor-single-loan approach is very similar to the approach utilized by Lending Club, except that Lending Club’s notes are registered with the SEC. GroundFloor takes advantage of our intrastate crowdfund rule – the Invest Georgia Exemption (or “IGE”) – to sell its notes exclusively to Georgia investors. The notes are exempt under Section 3(a)(11) of the 1933 Act and exempt from the Georgia Securities Act by virtue of the IGE.

GroundFloor’s approach allows the platform to spread the cost of preparing a PPM and legal documents across multiple projects. Structuring its investments as loans (rather than equity investments) gives investors a greater level of security (since their investments ultimately fund a secured loan to the borrower).

Lending Club Acquires Springstone Financial

Posted In Crowdfunding

Lending Club, the peer to peer lending platform, announced this past week that they had acquired Springstone Financial for $140 million in a combined cash and stock transaction.

Springstone Financial is a consumer lender based in Massachusetts that specializes in consumer loans for elective medical and dental procedures as well as a tuition financing for K-12 private school education.

Lending Club financed the acquisition in part from a $65 million equity capital raise from T. Rowe Price Associates, Inc., Wellington Management Company, LLP, BlackRock and Sands Capital.  As Peter Renton of Lending Academy notes, from a recent 8-K filing this latest deal values Lending Club at nearly $3.8 billion (up from $2.3 billion in November 2013).

The transaction is noteworthy in several ways.

First, Springstone Financial to date has financed its consumer loans with traditional bank debt.  With Lending Club as its new corporate parent, I would expect that Lending Club would use its peer to peer platform instead of bank debt to fund Springstone Financial’s loan.  That would be a business model without precedent.

Second, and perhaps more importantly, the transaction marks a coming-of-age for the peer to peer lending industry.  P2P lending has been mostly a curiosity to date.  It has offered some investors a method for achieving better-than-CD rate returns and has made it easier for some consumer borrowers to get unsecured consumer loans.  On a macroeconomic level, however, P2P lending has not moved the needle on the U.S economy.

Lending Club’s acquisition of Springstone Financial may mark the beginning of a new phase for the industry, however.  If a P2P platform like Lending Club can grow its revenues by acquiring a traditional financing company like Springstone Financial, then many other things are possible.  Lending Club unlocks the power of the crowd by letter large numbers of investors provide the leverage to make its loans possible.  If the crowd likes how Lending Club grows, the crowd can become an almost unlimited source of additional capital for future deals.

Hard Rock Cafe & Hotel Palm Springs Crowdfund Offering

RealtyMogul has announced a "crowdfund" offering of securities in the Hard Rock Café & Hotel in Palm Springs, California and the announcement is getting a lot of media attention.

While I applaud any entrepreneur who can successfully launch a fundraising campaign and garner medial attention, I am concerned that some of the non-legal press may be confusing for investors and some entrepreneurs.

Strictly speaking, the Hard Rock offering is not a true crowdfund offering.  Rather, RealtyMogul has formed a special purpose LLC (Realty Mogul 20, LLC) that is offering membership interests to the public under SEC Rule 506(c).  As such, investments in this offering are strictly limited to persons who qualify as “accredited investors” under SEC rules.

Investors will invest their cash with Realty Mogul 20, LLC and that entity, in turn, will make an investment in Kittridge Hotels & Resorts, LLC, the entity that manages the Hard Rock Café in Palm Springs.

Confusion may arise because the SEC has proposed (but not yet adopted) crowdfunding rules under the 2012 JOBS Act.  These rules, when adopted, will permit issuers to offer securities publicly to potential investors (including those who are not accredited investors).  Until these proposed SEC rules become effective, however, crowdfund offerings to non-accredited investors remains prohibited.

Another interesting twist is the way in which the sponsors are attempting to exempt their structure from the Investment Advisors Act.  In the investor disclosure documents the sponsors describe that the company (Realty Mogul 20, LLC) will not be an investment company under the 1940 Act.  They also disclose an affiliated entity that is registered as a broker dealer (presumably to collect a placement fee for the offering).  They disclose that the company will be exempt from the 1940 under Section 3(c)(1) (the chief exemption for private funds, recently narrowed by the Dodd-Frank Act) and yet the fund manager will not be registered under the Investment Advisors Act because the underlying investment is an investment in real estate.

This approach to avoiding the use of a registered investment advisor as the fund manager is often attempted in real estate investment funds.  The approach is not entirely free from risk, however, as there is relatively little SEC guidance on  when a private fund is primarily engaged in making an investment in real estate (an activity that does not require an RIA) as opposed to an investment in securities (which does require an RIA).

Crowdfunding USA Conference May 1

Posted In Crowdfunding

I'm looking forward to speaking at the Crowdfunding USA Conference at the Cobb Galleria on May 1st and 2nd.

Conference organizers tell me that Georgia Secretary of State Brian Kemp will be speaking, in part to describe his thought process when he adopted the Invest Georgia Exemption.

My firm was one of the first to utilize the Invest Georgia Exemption when we advised Bohemian Guitars on their IGE offering.  Bohemian Guitars was the first issuer to close successfully an offering under the IGE rule.

California Refuses to Enforce Binding Arbitration Clause in Consumer Contract

A California court recently refused to enforce a binding arbitration clause in a consumer contract in a case against DirecTV.

At issue is a putative class action by consumers in California against DirecTV, the satellite television company.

The Federal Arbitration Act and a recent U.S. Supreme Court case indicate that federal law pre-empts state contract law when it comes to the enforceability of binding arbitration clauses.  The California appeals court hearing the question refused to enforce the arbitration clause, notwithstanding these authorities.

Although DirecTV has indicated it will appeal, there is some dicta in the appeals court ruling that should provide guidance to contract drafters seeking to craft enforceable clauses for binding arbitration.

Can Crowdfunding Provide Capital for Rooftop Solar?

Bloomberg has a piece on SolarCity's efforts to bring crowdfunding to rooftop solar.  The article quotes the Solar Energy Industries association saying that U.S. homeowners installed 792 MW of solar power in 2013, an increase of 60 percent from 2012.

Crowdfunding is an intriguing model for residential solar.  On the positive side, it gives hyper-local investors the opportunity to invest in resources that are close to them.  Having a personal connection to the investor is a key element of most successful crowdfunding projects.

On the other side, however, solar projects can become extraordinarily complicated because of tax credits and other financial incentives.  In addition, especially in California where most residential solar is being deployed, state and local zoning and permitting requirements impose a high level of execution risk for the developer.  A developer that fails to get their local permits or a necessary utility interconnection agreement can end up fouling an otherwise-meritorious project.  That level of complexity is often difficult to disclose fully and clearly to crowdfund investors.

Developers that want to pursue crowdfunding would be well advised to make certain their offering documents have been vetted by lawyers who know their way around crowdfunding and the unique aspects of solar.

State Regulators Hire Lawyer to Sue SEC

As if the pending regulations under the JOBS Act weren't enough for start-ups to keep in mind, now another regulatory agency has come out of the woodwork with its own views and may attempt to sue the SEC to make further changes in the law.

The North American Securities Administrators Association today announced that they have hired form SEC staff attorney Tom Sporkin to explore legal avenues of opposing the SEC's proposed regulations under the JOBS Act.

At issue are the SEC's proposed Regulations modifying Regulation A as required by the JOBS Act.  The SEC's proposed Regulations would make it easier for small companies to raise capital through exempt offerings under Regulation that would bypass state blue sky laws.

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