Emerging Markets Law

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).

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