Thoughts On RealtyShares Closing Its Doors To New Investors

[Sam]

Hi Folks,

I'm surprised and shocked RealtyShares has decided to close its doors to new investors and will focus on managing its existing ~$400 million in investments for existing customers. I've met them multiple times since 2016 and I was excited by what they were doing. It looks like they were close to getting funding that fell through last minute, so they could no longer expand. I heard they even had a closing dinner to celebrate.

I've spoken to their CMO, and she has assured me our existing investments will be managed until original target exits. They've set up LLCs and operating companies for the specific purpose of managing our investments. RealtyShares, at the end of the day, was a marketplace (with an investment committee that vetted deals) and conduit to match investors with sponsors of real estate crowdfunded projects around the country. Investors in RealtyShares, the company, have no lien agains the separate LLCs set up for each of our investments on the platform.

I'm still waiting for someone from the investment committee or investor relations team to get back to me with more details. I want to know who the point person will be, whether the dashboard will still function as planned, etc. As some of you know, I've got hundreds of thousands invested with them, and I'll certainly be on top of them to make sure the investments are carried out as planned.

I'm sad for the employees at RealtyShares who will no longer have jobs. And I'm sad for the end of this relationship. In retrospect, it seems like they expanded too fast and weren't able to optimize the technology/automation aspect of their business. Their business is pretty capital intensive to vet all the details, be FINRA regulated, etc. It sounds like the more demand they had, the more they lost money as there was not enough supply of deals. It was always that way since the beginning though.

I'll update this thread with any information I find out. For those who get feedback from them, please provide feedback as well. I think many of them are going to gather feedback over the subsequent days and then respond with answers.

Related: https://www.financialsamurai.com/risks-of-real-estate-crowdfunding-investing/

Update Nov 10, my post: https://www.financialsamurai.com/the-sad-demise-of-realtyshares-whats-next-alternatives-and-lessons/

[Sam]

Got a response from investor relations regarding my DME fund investment:

Please rest assured that your investment in the DME Fund will be taken care of. We are in the process of transitioning all of our active investments to a fund administrator, NES, who will handle distributions. We are also in the process of assigning a new manager for the equity investments who will be responsible for ongoing asset management and reporting. We will certainly keep you posted as we continue to firm up the transition plan.

The fund admin: https://nesfinancial.com/fund-administration/

[Michael]

Wow, I didn't see that one coming! I guess you're probably right though, it's a pretty capital intensive business. It's also makes me curious about the viability of the other big crowd funding sites.

Wishing you all the best with your existing funds and investments.

[Cheezus]

Appreciate the update.

[pat]

 I am really concerned that some of the sponsors will use the situation to their advantage as RealtyShares may not have sufficient people to go after them given staff cuts.

[Sam]

I am really concerned that some of the sponsors will use the situation to their advantage as RealtyShares may not have sufficient people to go after them given staff cuts.

It is a possibility, but then the sponsors would ruin their reputations and never get to do new business again.

So I suggest every investor write down all the details of their sponsor for safe keeping, in case one does go rogue.

[Cheezus]

I know this is terrible, but in a way, this does have some positives.  This will give us a great idea about how crowdfunding sites manage their demise.  That's always been a huge concern for me.  Having so much money with these companies, then what happens if the companies fail?  All the funds are invested.  Who manages it, etc...   I do have quite a bit with RS and I'm definitely curious to see how it's handled. 

[Sam]

I know this is terrible, but in a way, this does have some positives.  This will give us a great idea about how crowdfunding sites manage their demise.  That's always been a huge concern for me.  Having so much money with these companies, then what happens if the companies fail?  All the funds are invested.  Who manages it, etc...   I do have quite a bit with RS and I'm definitely curious to see how it's handled.

Indeed. NES is the fund administrator, so they will handle the reporting and distributions.

We didn't invest in RealtyShares the company, we invested in individual real estate deals sourced by the sponsors. So our risk is with the sponsors and real estate assets they invested in.

Write down all information about the deals and sponsors ASAP.

[Cheezus]

I wonder what would happen if Fundrise went under.  Individual deals vs eREIT.

[Cheezus]

Log in to RS, click on "Documents" then "Investment Documents" - you can download the full package for the active investments right there to keep handy.

[Cheezus]

Sam,

This also sheds some light on the Fundrise iPO.  Maybe they were facing similar issues but were a little more creative with raising funds? 

[Sam]

I wonder what would happen if Fundrise went under.  Individual deals vs eREIT.

They should have the same safeguards in place. I will reach out and inquire about the exact safeguards.

Also, Fundrise has continued to do their Internet Public Offerings by raising capital from existing investors. They've raised capital within the past 6 months, but I don't know the details, just that they have raised funds.

This is the best public I've seen about Fundrise's progress: https://www.sec.gov/Archives/edgar/data/1640967/000114420418051231/tv503614_1sa.htm

From the doc:

In July 2018, we surpassed 50,000 investors on the Fundrise Platform.

    •   In July 2018, we surpassed approximately $500 million in cumulative originations of debt and equity investments across our Sponsored Programs.
    •   In August 2018, we sponsored two additional eREIT programs: Fundrise Growth eREIT II, LLC and Fundrise Income eREIT II, LLC, available to anyone in the U.S.
 
    •   In August 2018, we surpassed approximately $2.5 billion in total real estate property capitalized.
    •   In August 2018, Fundrise earned position #35 on Inc.’s 2018 list of the 5,000 fastest growing companies in the US and #1 in the financial services category.
    •   In September 2018, we surpassed $400 million in assets under management under the Sponsored Programs.

[jy2005]

Hi Sam,
Thanks for opening this forum. Yes it is a good idea to write down all sponsors contact info for each of our investments.

Since RS is closing its door, and a few investment sponsors are already missing payments, I propose we establish an investor watchdog group, and assign certain group members monitor certain investments and report status to all.  That way we get all properties covered, without individual investor having to track all properties.

[Sam]

I just compiled together everything I have on the RealtyShares Domestic Equity Fund (DME Fund) and one deal in Conshy, PA I'm in. This is for my records, and for those who have investments in one of these 18 investments. The DME Fund has 17 investments, which were open to anybody on the platform. The investments were made in 2016, 2017, and maybe early 2018.

https://www.financialsamurai.com/realtyshares-dme-fund-information-investments-sponsors-updates/

I encourage everyone to do the same ASAP.

[Zenz]

Thanks for opening up this forum. I am also quite nervous about my investments at RealtyShares, especially the ones that have recently gone into default.

I think having a group monitor the RealtyShare investments will be essential.  Even if we technically may have certain legal rights with respect to certain real estate in the world, the practical reality (at least for me) is that I don't really have a lot of time or money to chase down sponsors that stop paying if the new administrator doesn't do a good job.  Individually, we have very limited power or resources, but hopefully as a group, we have a better chance of enforcing our rights and making sure the new administrator acts in our interests.

[Derek]

My concerns mirror the others', and I believe that we did invest with RealtyShares the company. When deals go south, as several of mine have, RealtyShares is being paid to handle it. They track down the sponsors who have gone silent, shake out payments, deal with foreclosures, etc. When my sponsor bails and no longer makes payments for a property half the country away, I'm concerned that's now on me to deal with. There are a ton of nuances that go into these deals, especially equity, and a lot of oversight required to make sure performance is acceptable and on track.

Of course, to get into any of these deals we had to sign the countless pages of agreements understanding the risks.

[Sam]

My concerns mirror the others', and I believe that we did invest with RealtyShares the company. When deals go south, as several of mine have, RealtyShares is being paid to handle it. They track down the sponsors who have gone silent, shake out payments, deal with foreclosures, etc. When my sponsor bails and no longer makes payments for a property half the country away, I'm concerned that's now on me to deal with. There are a ton of nuances that go into these deals, especially equity, and a lot of oversight required to make sure performance is acceptable and on track.

Of course, to get into any of these deals we had to sign the countless pages of agreements understanding the risks.

Yes, RealtyShares only has a wind down team and fund administrator now to oversea everything, and that is a concern. Which is why we need to gather information, band together, and make sure the sponsors perform as expected. Their reputations are on the line.

The good thing is, RealtyShares sourced capital from sponsors is usually only one part of their capital fundraising. If the sponsor screws RealtyShares platform investors, they end up screwing other investors they've raised money from on the same deal.

They've set up LLCs and operating companies for the specific purpose of managing our investments. RealtyShares, at the end of the day, was a marketplace (with an investment committee that vetted deals) and conduit to match investors with sponsors of real estate crowdfunded projects around the country. Investors in RealtyShares, the company, has no lien agains the separate LLCs set up for each of our investments on the platform.

We need to be patient. I am hopeful that by year end, they will have things in place during the transition to provide us transparency.

[chitown-2020]

An interesting thought... based on their 'good-bye' message, RealtyShares has $400M in deals under management.   Presumably a huge expense for them has been marketing and developing deal flow / investor engagement.   With both of those burdens removed, presumably managing down the existing portfolio could be quite profitable.    Let's not forget, they get ongoing fees for every deal throughout its lifecycle.

Presumably they have a deal with NES for administration that would consume a portion of that -- but there's ongoing cash to somebody.    Might go back to their investors or to pay off debt, who knows... but this will generate cash for somebody until the last deal cycles...

I've got a healthy interest here -- and am definitely disappointed.   This was supposed to be a portion of my FI plan.   I know there are other options, but it is worrisome if this was one of the better platforms.   Thanks Sam, for creating this forum... agree, let's all hang tough together and all share info.

[Sam]

Chitown -  yes, they should be earning $4 million-$5 million a year in fees from there at $400 million in investments. I hear they have 10 to 15 people left to manage the investments in operation transition period. I also presume they have some cash on the balance sheet as well and didn’t go all the way to zero dollars. They may have a line of credit that they need to pay back, which I’m assuming the creditor will work out with them.

[Sam]

Fundrise response if they go under:

In the event of a bankruptcy of Rise Companies (Fundrise's parent entity), the Fundrise investments should not be pulled into to the bankruptcy estate, as the Fundrise eREITs and eFunds are not wholly owned subsidiaries of Rise Companies. However, the Manager may be disrupted by any such bankruptcy. In such event, assuming that the Manager was also deemed bankrupt or insolvent, the shareholders would have the opportunity to replace the Manager for cause under the terms of the Fundrise eREIT and eFund operating agreements.

For more information, please see the disclosure regarding "Term and Removal of the Manager" under the Management section of each investments' Offering Circulars here, as well as each investments' operating agreement (below).

Income eREIT Operating Agreement
Growth eREIT Operating Agreement
East Coast eREIT Operating Agreement
Heartland eREIT Operating Agreement
West Coast eREIT Operating Agreement
Los Angeles eFund Operating Agreement
DC eFund Operating Agreement
National eFund Operating Agreement
Income eREIT II Operating Agreement
Growth eREIT II Operating Agreement

Our operating agreements require that we prepare an annual report and deliver it to our common shareholders within 120 days after the end of each fiscal year.