Real Estate Forum - October 2013

NEW ECONOMY
Crowdfunding Has Place
At the Table

PALO ALTO, CA—Crowdfunding has been getting a lot of attention as a method, good or bad, of fundraising for real estate investments. As GlobeSt.com reported recently, some experts see potential risks in this method for inexperienced investors, but other experts say crowdfunding is a way to bring more capital into the market and allow more investors to enjoy the benefits of real estate investing for smaller increments of capital.

“There’s definitely a place for crowdfund-
ing in real estate,” says Adam Hooper, CEO
of locally based RealCrowd Inc. “It’s an asset
class that has typically been reserved for the
ultra-affluent or ‘typical’ type of buyer, but
our level is maybe $5 million to $20 million
in total purchase price. We replace that net-
work of 50 to 100 people with thousands,
making it available to people who would
never have the opportunity to invest in this
asset class.”
The passing of the Jobs Act in 2012
brought about several new crowdfunding
platforms, including GroundBreaker, a
general solicitation platform for real estate
projects. According to founder Stefano
D’Aniello, the Jobs Act allowed issuers who
choose to advertise a deal to no longer be
limited to selling to a limited number of
unaccredited investors, as dictated by the
Securities Act of 1933. Crowdfunding pro-
vides a mechanism for unaccredited inves-
tors to invest in these deals, but “these
crowdfunding rules are still being drafted
by the SEC, and we do not expect them
anytime soon.”
Hooper says it probably will be the mid-
dle to end of next year before the SEC and
FINRA are finished examining the Jobs Act
and determining how crowdfunding should
be impacted, but he is cautiously optimistic.
One change that has positively impacted
crowdfunding is that solicitation has been
given the green light. “Crowdfunding firms
can now advertise with the specific offerings
that we’re raising money for,” says Hooper.
“This is a huge shift.”
When crowdfunding proper for non-
accredited investors opens up, “it can be
more revolutionary and have more impact
than even solicitations,” Hooper adds. “It’ll
be interesting to see how it all plays out for
the next couple of years; we’re excited to see
where it all goes.”—Carrie Rossenfeld

The recent media firestorm surrounding the controversy engendered by Edward Snowden, the former CIA contractor who exposed highly sensitive government data, underscores the growing uneasiness we all have with living in the modern-technology world. In the past 30 days alone, book sales of George Orwell’s 1984 have spiked a whopping 7,000%.

While technological innovations have obviously spurred major advances across all communication media, they have an equally powerful, indirect effect of exposing our most sensitive data to the cyber-criminal community. Real estate attorneys often hold other parties’ funds—valued in the millions on dollars—in their attorney trust accounts and are not technology experts. And while the greatest threats of a security breach usually are internal, every real estate firm can take practical measures to protect itself and its clients in this modern-day era of cyber-crime.

Attorneys must monitor operating and IOLTA (attorney trust) accounts daily for any suspicious activity. It is no longer acceptable to delegate the duties of monitoring your accounts to someone who does not have a real-time understanding of the various closings, bulk sale escrows, contract signings (with significant buyer deposits) and retainers for new files. Of course, your firm controller should reconcile your accounts at the end of each month for accounting purposes, but it is the job of those who have their pulse on actual, real-time deal flow to implement a system for proper daily monitoring.

Just because the culture of hacking conjures up images of brilliant programmers in a dark basement room, with more knowledge of hacking than you will ever possess, doesn’t mean you can’t thwart many attacks simply by applying common sense. For example, make sure you have the most current versions of antivirus software installed by a professional on your computer system.

Speak with your banker about processes he or she may already have in place to protect you. For example, as a shield against check fraud, some banks offer “reverse positive pay” which permits you to receive email notifications for your approval each time a check is presented for payment. If you can obtain a “key fob,” which automatically refreshes your online security passcode every 10 to 15 seconds, your chances of being victimized are reduced (although not entirely eliminated).

You must also have a solid grip on the multitude of passwords in your “ cyber-life.” Carefully consider how to track them, differentiate them, how often to change them and who else may need access (or limited access) to them.

The cliché is true: “failing to plan is planning to fail.” Create an institutional culture of awareness about cyber theft and promote internal best practices with your banking team, attorneys and administrative staff for keeping your clients’ information and funds secure.

Without a plan, a law firm’s chances of capping a loss and favorably positioning itself are slim. An incident response plan equips employees with the knowledge of whom to call and what to do when they suspect fraud.

As with a fire drill, practice helps your employees nail down the process and timing of a response plan. This can have a meaningful impact on your ability to stem any losses and protect your clients’ interests.

Aaron Y. Strauss is the founder and a partner at law firm A.Y. Strauss, with offices in Roseland, NJ and New York City. David DePietto is CEO of NexFirm, based in New York City. They may be contacted at ays@aystrauss.com and dd@nexfirm.com, respectively. The views expressed here are the authors’ own.