In up-and-coming neighborhoods, it’s not uncommon for developers to swoop in and alter historic buildings beyond recognition, or tear them down completely to make way for new projects. But when Eve Picker, president and founder of the real estate crowdfunding portal Small Change, learned about a three-story property called the Buvinger Building in Pittsburgh’s Lawrenceville neighborhood, she saw a way to both preserve history and add much-needed housing units in a thriving area.
“I’m an architect by training. I’m an urban designer. I’ve spent my life thinking about how to make good change in cities,” Picker says. “I really believe that you can spend some money and do some good with a building—or not.”
Until recently, equity crowdfunding was only available to accredited investors.
The goal was simple: to maintain the character of the 1882-built Buvinger Building, while making better use of the space and capitalizing on Lawrenceville’s growth. After acquiring the building and putting together the plan to preserve and redevelop it, developer Shawn Kichline of Oxide Real Estate Development LLC needed to secure funding.
That’s where Small Change comes in. To start the process of securing investors, Picker posted a detailed description of the project on Small Change’s website, which included information about the building’s history and aesthetics, the financial returns and risk factors, and a link to invest. Small Change met their investment goal of about $240,000 in just under three months, and construction on the project began in late Feb. 2017.
This type of funding is known as “equity crowdfunding.” It differs from sites like GoFundMe and Kickstarter in that the people who contribute are investors seeking a return, not donors supporting a project. Equity crowdfunding is relatively new, and came about in 2012 thanks to the Jumpstart Our Business Startups Act (the JOBS Act) signed into law by President Obama.
Until recently, equity crowdfunding was only available to accredited investors, who must have a net worth of at least $1 million or meet certain income requirements—about 3 percent of the U.S. population qualifies. Such was the case for the Buvinger Building project.
“It’s opening the capital market just a little bit to allow people like you to participate in American entrepreneurism.”
But in May 2016, the most anticipated and potentially transformative part of the JOBS Act, known as Title III, went into effect, doing away with the equity crowdfunding requirement that investors be millionaires. Title III, commonly known as regulation crowdfunding or Reg CF, permits electronic portals to open equity investment offerings to anyone over the age of 18, as long as the offerings are capped at a $1 million raise over a 12-month period. That’s exciting and unprecedented, says Mark Roderick, a crowdfunding attorney at Flaster/Greenberg P.C., because it diverges from 85 years of securities regulations.
“The purpose of the [Title III] crowdfunding rules is to say, for the first time, we’re going to allow non-wealthy investors to participate, and we’re going to do it in a way that does not impose extraordinary costs on the entrepreneur. That is just a brand new thing,” says Roderick, who has worked with Small Change. “So it’s opening the capital market just a little bit to allow people like you [ordinary people] to participate in American entrepreneurism.”
Though the internet paved the way for Title III crowdfunding, it solves a problem that existed long before the digital revolution. When securities regulations were put in place to protect non-wealthy investors after the stock market crash of 1929, one unintended consequence was that those very same investors were frozen out of a broader range of investment opportunities. It took years for the SEC to approve the Title III regulations in the JOBS Act, Roderick explains, because of the challenge inherent in striking a balance between protecting investors and making it easier for developers to raise money.
Directing money toward community
Small Change, however, is raising more than just capital. It’s a crowdfunding platform that backs real estate development projects in “places that would benefit and be transformed by” an investment. This could mean investments in historic districts, low-income neighborhoods, and places where affordable housing is scarce.
It also means that, in addition to financial returns, many Small Change investors are seeking investments that align with their values. It’s not something easy to quantify—and that’s where the Change Index comes in. The index is Small Change’s proprietary system for measuring a project’s viability in terms of transportation, the environment, and economic inclusiveness. For instance, a project is given a transportation score that reflects access to walking, cycling, and public transportation. The Buvinger Building earned an overall score of 9.5 out of 10 on the Change Index. Projects must earn at least a 7 to be considered as offerings on the platform.
“The Change Index keeps us honest, more than anything else,” Picker explains.
“It’s important on a larger scale to preserve the character and history of the neighborhood.”
The Index also provides a metric for potential partners and investors to gauge their compatibility with a particular project. Developer Shawn Kichline, a principal at Oxide Real Estate Development LLC, was attracted to working with Small Change on the Buvinger Building because the Change Index aligned with his own values.
“I think it’s important on a larger scale to preserve the character and history of the neighborhood,” says Kichline. “It’s part of the draw.”
Dallas Sommers, 55, a former portfolio manager who invested $10,000 in the Buvinger Building, says he wasn’t necessarily looking for a values-based opportunity. But the Change Index enhanced his experience.
“It’s not off to the side, like ‘Oh, these are nice values.’ It was actually built right into the screening process for what they do. That alone, without getting into the details, was a big nice benefit for me.”
The Democratization of Finance?
Small Change launched its first Reg CF offering in New Orleans in the spring of 2017. As one of only about 25 Title III electronic crowdfunding portals approved by the SEC, Small Change deals exclusively with real estate, which makes it even more of an outlier among a Title III field generally focused on startup and small business financing.
“You’re limited to raising $1 million a year, and people think well, that’s not very much for real estate,” Roderick says. “However, Eve [Picker] is bucking that common wisdom by focusing on a particular kind of real estate that satisfies The Change Index. She is unique in the ecosystem.”
Equity crowdfunding creates opportunities for people at all income levels to invest locally.
Picker, who says she’s “in love with rust belt cities,” started Small Change in part to put the control back in the hands of people who live in and care about their own communities. Though Picker decided to become an architect early on, she bristled at the idea of designing buildings without taking into account the historical or social context of a neighborhood. It wasn’t until moving to New York City from her native Australia to attend a master’s program at Columbia University in urban design that she really began thinking about how buildings help create public spaces.
In many respects, the relatively small-scale projects Small Change takes on are a perfect for fit Reg CF. By lowering the threshold for investor income and assets, and allowing investment transactions to take place online, equity crowdfunding creates opportunities for people at all income levels to invest locally where they live.
“I feel that if I had regulation crowdfunding then [earlier in my career] I would’ve gone on to do more projects,” Picker reflects. “As I built my portfolio over the years as a developer in underserved neighborhoods, it became clear to me that architecture and design were the really easy parts. The most difficult part was getting these projects financed.”
Ordinary people will feel empowered to expand affordable housing options and make a difference.
As real estate equity crowdfunding matures, Picker hopes it becomes a financing tool for people who want to make change—and urban innovation—in their own backyards. The more opportunities for investment, the more comfortable people will become with the concept.
Though still in its infancy, Roderick predicts that as equity crowdfunding evolves, the industry may diversify to accommodate investors’ desires. Other portals like Small Change might pop up, focused on geographical regions or market segments such as multi-family homes or project quality, explains Roderick.
Picker hopes that, as community members get the chance to participate in funding the type of projects they want to see in their neighborhoods.
Says Picker, “That’s really where my heart is.”