One Crowdfunding Firm is Pumping the Brakes

The crowdfunding industry is facing a test. So far, the sector, which came out of the Jumpstart Our Business Startups Act (JOBS) Act in 2012, has only existed in a healthy market.

Still, some firms were preparing for an eventual downturn. “A lot of the underwriting and analyses that we were doing on deals included stress tests for what would happen when the market turned,” says Adam Kaufman, co-founder and COO of ArborCrowd. “But nobody could have predicted this.”

There’s little doubt that the COVID-19-fueled economic crisis has changed things. “There’s a lot of complications that are happening right now in the industry as a whole,” Kaufman says.

Kaufman says many crowdfunding deals that were presented to the crowd even before the COVID-19 crisis were questionable. He believes these deals are at higher risk of further deteriorating in the current environment.

“The fact is that many real estate deals – whether they are crowdfunded or not – are experiencing greater difficulty due to the pandemic,’ he says. “While stimulus could help stave off some failures, we don’t know how long this is going to last. If a deal’s fundamentals were less than stellar to begin, investors should be worried about seeing any sort of return on their original investment.”

Some crowdfunding platforms aggregate deals, which may mean less-than-rigorous underwriting, according to Kaufman. ArborCrowd performs the due diligence ahead of time and writes the checks upfront before it takes properties to the crowd.

“We’re putting our money on the line and investing it,” Kaufman says. “To do that, we have to feel very comfortable with a transaction.”

For the time being, the ArborCrowd has ceased taking deals to the market. “We have deals in our pipeline that we’ve warehoused that were supposed to launch by this point,” Kaufman says. “We would never launch a deal amid the economic uncertainty that’s existing today.”

Since Kaufman has no idea when the dust is going to settle, he thinks the prudent move is to pause. “We want to offer our investors the best possible investment opportunities, and it would be dishonest to launch a deal in this market cycle,” he says. But with rapidly changing fundamentals and asset prices, the current market is too uncertain. “The details of all of the deals will change,” Kaufman says.

Whenever the market stabilizes, Kaufman will take those deals to market.

“We still believe in our deals,” Kaufman says. “We’re still invested in them. We still want to syndicate them out to the crowd. They have the fundamentals to continue to succeed, but we’re not going to present it in a time like this where there is uncertainty.”