YieldTalk news and links - 24 September 2021
This week: Investing in exotic collectibles; single-family rentals come of age; the pernicious influence of the "financial-literacy industrial complex"
New/Updated Platform Reviews
Modiv is among a growing crop of investment crowdfunding platforms offering a “public, non-listed REIT” (PNLR) leveraging various parts of the 2012 JOBS Act, including Reg A+. Founded in 2006 as a more traditional REIT, they rebranded in 2016 as “Rich Uncles” as part of a strategy to offer REITs via direct marketing to smaller investors (ie, crowdfunding), and more recently have rebranded again as “Modiv”, following the merger of Rich Uncles with RW Holdings NNN REIT Inc. (which itself acquired its former sponsor, BrixInvest LLC). Our rating: Excellent
Reg CF (“Regulation Crowdfunding”) is finding a nice niche serving the kinds of businesses that aren’t likely to attract interest from traditional venture capital, like restaurants, retail, and entertainment. SMBX follows the lead of LocalStake and Mainvest in squarely targeting just those kinds of businesses with their investment offerings, primarily focusing on small and local brick-and-mortar businesses. Our rating: Very Good
When you invest on Rally, you’re investing in fractional ownership of a specific collectible. Rally offers a diverse range of collectibles, from exotic cars to fine wine and whiskey to rare books to baseball cards to NFTs. According to Rally they intend to hold the items for an extended period of time and then resell at a profit, though they also offer their own secondary market where you can buy and sell individual shares during limited trading windows. Our rating: Excellent.
- Masterworks (our review) is offering a painting from Albert Oehlen which was part of “series of inkjet-printed works, which were inspired by computer-generated drawings the artist completed using his first laptop in the 1990s.” According to Masterworks, similar works have appreciated at a 24.1% annualized rate from 2006 to 2020. Minimum is $15,000, open to all investors. 🎨 More at Masterworks.
- On Small Change (our review), Shared States is raising $1.95M to purchase a luxury rental vacation property in the Berkshires “to make the property available for year-round nightly rental of the entire estate, along with special event bookings and unique room rentals.” Minimum is $1,000, open to all investors. 🏠 More at Small Change
- Responsum is raising $1.07M on Republic (our review). “Responsum creates and manages free, disease-specific apps for people with chronic conditions—designed to improve knowledge, support needs and concerns, and facilitate the organization and coordination of healthcare information. Their current platforms address the needs of people with Pulmonary Fibrosis, Chronic Kidney Disease, Fibroids, Glaucoma, and Long COVID.” Minimum investment is $100, and open to all investors. 🩺 More at Republic.
- YieldStreet (our review) has opened up Supply Chain Financing I.M., offering an 8.5% targeted yield for “a supply chain financing facility provided to a global conglomerate in the consumer goods industry with annual revenues of over $2 billion dollars”. Accredited investors only. 💵 More at YieldStreet.
Worth Reading this Week
A lot of investors who put money into alternative investments do so using a “self-directed” retirement account, such as a self-directed solo 401K or IRA. Naturally, some very wealthy people have figured out how to rather aggressively maximize the use of self-directed retirement accounts and minimize their tax liabilities on sometimes-massive gains from startups and other private investments. The current draft of the $3.5T infrastructure bill meandering its way through Congress includes some provisions that as written would significantly curtail the ability for investors to use self-directed retirement accounts to invest in many alternative assets (like startups and cryptocurrency). You can read more here, including tools and templates for contacting your senators and representatives.
The Regulation Crowdfunding ecosystem has grown significantly over the past few years, and largely without any significant examples of fraud. Until now. The SEC has formally charged several people (along with an issuer and a crowdfunding portal, TruCrowd, and its CEO) “with conducting a fraudulent scheme to sell nearly $2 million of unregistered securities through two crowdfunding offerings”. At issue seems to be that those involved actively concealed the prior criminal history of one of the principals in two cannabis-related real estate companies, and then (surprise!) those same people diverted investor funds:
According to the SEC’s complaint, Robert Shumake, alongside associates Nicole Birch and Willard Jackson, conducted fraudulent and unregistered crowdfunding offerings through two cannabis and hemp companies, Transatlantic Real Estate LLC and 420 Real Estate LLC. Shumake, with assistance from Birch and Jackson, allegedly hid his involvement in the offerings from the public out of concern that his prior criminal conviction could deter prospective investors. The complaint alleges that Shumake and Birch raised $1,020,100 from retail investors through Transatlantic Real Estate, and Shumake and Jackson raised $888,180 through 420 Real Estate. Shumake, Birch, and Jackson allegedly diverted investor funds for personal use rather than using the funds for the purposes disclosed to investors. As alleged, TruCrowd Inc., a registered funding portal, and its CEO, Vincent Petrescu, hosted the Transatlantic Real Estate and 420 Real Estate offerings on TruCrowd’s platform. Petrescu allegedly failed to address red flags including Shumake’s criminal history and involvement in the crowdfunding offerings, and otherwise failed to reduce the risk of fraud to investors.
Regular readers will know this is far from the only recent example of fraud in the private investment ecosystem (fraud also exists in public markets!), and as the investment crowdfunding space continues growing, this is arguably another indication that it’s becoming part of the mainstream (in other words, useful and very rarely fraudy).
🏠 Wealth Management says Single Family Rentals (SFRs) are coming of age, expanding their appeal beyond the traditional “mom-and-pop” landlords to more institutional investors (though those still make up barely 1% of the country’s 23 million SFRs):
These trends included the maturation of millennials, which would lead to marriage, child rearing and a desire for good neighborhoods, good schools, more living space and a yard. At the same time, many of these same millennials were locked out of homeownership by heavy student debt burdens, which made it difficult to save for a down payment, and by the imposition of strict mortgage underwriting standards following the Great Recession. From 2006 to 2018, the number of single-family rentals in the U.S. grew 30.1 percent to nearly 14.7 million, according to the Urban Institute. Institutional ownership in the sector has risen rapidly as well, and new players continue to enter the market.
In many of the asset classes now opening up to everyday investors (real estate, venture, art, wine and more), there’s often an undercurrent of disdain among the incumbent players: an attitude that crowdfunding is only for the leftovers. This may be true for the kind of offerings that already fit the mental models of those incumbents, but as this piece from HBR points out, that leaves a lot of room for those willing to challenge those mental models:
Because of the first-mover advantage inherent in this approach, latecomers to Silicon Valley were doomed to be the also-rans of the VC industry. But one firm, Draper Fisher Jurvetson (DFJ), spotted an inherent weakness in the model: The ideas of the people in elite networks tended to converge as the networks did not change much, which trapped them in their prior experiences and made them less likely to evaluate new ideas differently from the way they had evaluated prior ideas. DFJ avoided the trap by focusing on fields that the incumbents wouldn’t touch and by adopting a more inclusive approach to identifying and evaluating projects. (Emphasis added)
This is an interesting look at how the VC landscape has evolved over the past 25 years (and especially in the last 10). It’s worth noting that 10 years ago, it was very difficult to invest in early-stage companies unless you had at least $100K or more in investable cash! Not only is it much “cheaper” (in dollar terms, not necessarily valuation) to invest in startups now, it’s also much cheaper to start companies, thanks to the rise of cloud computing. Needless to say, these things have changed the VC ecosystem!
The market today would barely be recognizable by a time traveler from 2011. For starters, a16z was only 2 years old then (as was Bitcoin). Today you have funders focused exclusively on “Day 0” startups or ones that aren’t even created yet. They might be ideas they hatch internally (via a Foundry) or a founder who just left SpaceX and raises money to search for an idea. The legends of Silicon Valley — two founders in a garage — (HP Style) are dead. The most connected and high-potential founders start with wads of cash. And they need it because nobody senior at Stripe, Discord, Coinbase or for that matter Facebook, Google or Snap is leaving without a ton of incentives to do so.
A takedown of “the financial literacy industrial complex”, highlighting just how much of what currently passes for personal finance education is a product of an industry not always known for keeping customer’s interests first:
Today’s financial literacy education doesn’t work because virtually all major financial literacy resources are developed or shaped by businesses that benefit when consumers make money mistakes.
💸 Even with a truly innovative technology, a talented team, and oodles of name-brand VC money, startup success can remain elusive. InfoWorld published a fascinating deep dive into what happened with Docker, once one of the hottest enterprise tech names in the world:
The combination of huge amounts of venture funding, a quickly growing competitive landscape, and the looming shadow of cloud industry giants all wanting a piece of the pie created a pressure cooker environment for the young company to operate within.
Odds and Ends
- Real estate platform Groundfloor (our review) has formally launched their mobile app “Stairs”: “All Stairs deposits qualify for 4% interest, and now you can earn an additional 2% interest by setting up Recurring Transfers (+1%) and by turning on Round Ups (+1%)”
- StartEngine’s latest fundraising round (this time using Reg A+) has topped $7M of their goal of $55M
- Commercial Real Estate investment platform EquityMultiple (our review) announced the launch of Short Term Notes, offering short-term liquidity (the first series has a 180-day term)
- Crypto investment platform BlockFi (our review) has formally launched their Bitcoin rewards credit card
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