Fundrise ditches traditional crowdfunding to focus on REITs

Startup launched second non-traded investment trust

Fundrise has abandoned its original crowdfunding model in favor of REIT platforms
Fundrise has abandoned its original crowdfunding model in favor of REIT platforms

Fundrise has abandoned the real estate crowdfunding model it pioneered – at least for now. The company will instead focus on managing its non-traded REITs, new filings with the Securities and Exchange Commission show. 

The strategic shift by one of the industry’s most visible startups comes as intense competition and an inflow of institutional investment have moved real estate crowdfunding away from the small investor-centric model it started off with.

In January, the Washington, D.C.-based company launched its second non-traded REIT, which makes equity investments in real estate, according to the SEC filings. The firm had launched a mortgage REIT in November.

A casualty of Fundrise’s new focus on REITs is its original business model. In a February 23 filing, Fundrise said it “ceased continuation of the consolidated Originated Program of Project Dependent Notes in favor of the real estate investment trusts” in late 2015.

In other words: it no longer lets investors pick and invest in individual projects via its website, a process Fundrise had once described as “democratizing investment.” After real estate crowdfunding’s de-facto legalization in 2013, dozens of other startups followed in Fundrise’s footsteps.

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“Although we have paused originating new deals for the Project Dependent Note Program, we have not stopped offering individual investment opportunities altogether,” Ben Miller, CEO of Fundrise, said in a statement to The Real Deal Wednesday. “We see the eREIT model as an evolution in the core mission of the company. The eREIT provides greater diversification at lower minimums to a much broader group of potential investors.”

Crowdfunding’s proponents argue that letting investors pick properties online leads to more transparency and lower transaction costs, and to a healthier and more balanced real estate investment market overall.

Fundrise’s new REITs still claim to offer low transaction costs but no longer let investors choose their own properties. The two vehicles are similar to traditional non-traded REITs, but fall under Regulation A of the JOBS Act. This means investors can buy shares directly via Fundrise’s website – as opposed to through a broker-dealer – allowing for a much lower minimum individual investment.

As of March 27, Fundrise had raised $28.9 million from investors for its mortgage REIT and $8.6 million for its equity REIT, filings show. It had previously raised $66.8 million under its old model from investors for specific real estate projects.

Last year, the firm’s co-founder Dan Miller, brother to Ben Miller, left Fundrise for undisclosed reasons. The startup is backed by more than $40 million in venture funding and industry heavyweights like Silverstein Properties’ Marty Burger and Ackman-Ziff’s Simon Ziff. The company was in the news earlier this year, after TRD reported the REIT’s CFO Michael McCord was fired amid allegations of extortion. McCord later told the Washington Post that he had uncovered “serious fraudulent behavior” at the firm.