How leveraging blockchain can provide value right now
A private placement offering is used to raise funding directly from a variety of qualified capital sources, which include Institutions, Real Estate Funds, Family Offices and High Net Worth Individuals. By leveraging blockchain, tokenizing private placement offerings provides increased access to capital, flexibility, and control for issuers, as well as a previously unattainable liquidity for investors.
For this article we are going to provide basic insight into the traditional issuer and investor perspectives and how RealBlocks provides value via tokenized real estate private placements.
Issuer Perspective
By utilizing a private placement offering, issuers aim to raise funds at a faster rate, incur less fees and avoid extensive regulation and reporting requirements — compared to public raises. With public raises, such as an IPO or stock listing, issuers are subject to stricter financial reporting (SEC regulations), higher fees, and a longer capital raising timeline, though benefit from a much broader marketing effort. Marketing private placements within the US, on the other hand, must be limited to accredited retail investors or institutions.
Investor Perspective
The investors of private placement offerings within the US are generally limited to accredited investors, which in 2016 equaled almost 10% of American households. While 10% may not seem high, these individuals controlled roughly 75% of US private net worth.
Two common ways for a US citizen to be considered an accredited investor, according to the SEC, are having a net worth of $1M in liquid assets (not including your primary residence) or $200K in annual income for at least two years, and $300K if married. However, not every offering is limited to only accredited investors. Depending on the regulations of the offering, up to 35 non-accredited investors are able to participate. Under specific securities regulations, international investors can also participate in the private placements.
When it comes to investing in private placements, a tremendous advantage is the potentially high return associated with the investment. With that said, a disadvantage for investors has been the illiquidity component. In a traditional private placement offering, the options for investors to get liquidity are rather limited.
RealBlocks‘ Solution
RealBlocks will provide institutions, family offices and developers the ability to raise capital to form an investment fund, for a prospective construction project, or raise additional capital for an existing fund via tokenized private placement offerings. This solution provides issuers accelerated offering timelines, democratized access to a global pool of qualified investors, plus flexibility and control of the offering (through buybacks or further liquidation depending on the token net asset value, or NAV).
On the demand side — domestic, international, and cryptocurrency — investors will be able to purchase fractional shares of real estate portfolios, receive passive income based on their pro-rata share, and seamlessly liquidate their holdings, which is a major differentiator between this offering strategy and the traditional route. Investment minimums will be specific to each offering.
Our approach to secondary trading will consist of a short-term and long-term solution. In the short term, we will provide a bulletin board on the platform for investors to participate in peer-to-peer trading. In the long-term, we will integrate with an exchange where security tokens can be traded.
In terms of regulatory compliance, security tokens are subject to SEC regulations and compliant with Federal Securities Laws from day one. Know Your Customer (KYC) and Anti-Money Laundering (AML) compliances will be programmed into security tokens, which will verify the credibility and ability of the investor to purchase and trade security tokens. After purchasing security tokens, accredited investors must wait 90 days to trade with other accredited investors.
Tokenizing Real Estate Private Placements will allow for:
- Liquidity for fractional interest in real estate
- Issuers to raise more capital/further liquidate holdings if token is trading above NAV during offering
- Issuers to repurchase asset ownership at lower price if token is trading below NAV during offering
- Exposure to global audience
- Automated compliance from day 1
- Accelerated issuance timelines
- Fractional ownership of underlying real estate
- Passive income based on pro-rata share of the ownership
- Appreciation in the token market value