Show Summary
You can’t talk about real estate finance without including crowdfunding in the conversation. Nathan Roach, CEO of MassVenture joins today to share how his platform is able to allow small, unaccredited investors to participate in funding deals with as little as $100. Unlike never before, investors looking to raise money for deals can tap into their network, and also unlike never before, the masses are able to help fund real estate deals right in their community without having to be wealthy, and without ever getting their hands dirty. It’s a fascinating space…don’t miss this FlipNerd episode to learn more!
Highlights of this show
- Meet Nathan Roach, CEO of MassVenture.com.
- Learn how Nathan’s company has enabled unaccredited investors to participate in funding real estate deals with as little as $100, and where the crowdfunding industry is headed.
- Join the conversation on the importance of your network as a real estate investor, and the power of raising money locally for your investing business.
Resources and Links from this show:
Listen to the Audio Version of this Episode
FlipNerd Show Transcript:
Mike: Hey, everyone. It’s Mike Hambright from FlipNerd.com. Welcome back for another exciting expert interview where I interview great guests from across the real estate investing industry to help you learn and inspire you. We’ve got a really interesting show today that I know you’re going to like. Today, I’m joined by Nathan Roach. He’s the CEO and Co -Founder of Mass Venture. It’s an innovative, new crowdfunding platform that allows almost anyone to participate in funding a deal. And if you watch my show religiously, you know that we’ve talked to other crowdfunding folks in the past. We’ve had other interviews, but this truly is different.
Mass venture is a platform that allows unaccredited investors in Texas right now, but rolling out probably too many more states if not the rest of the country, the early part of next year. It allows unaccredited investors to get involved in helping fund deals with as little as $100. It’s like Kickstarter for real estate investors. It really is a platform that enables individual real estate investors to use the Mass Venture platform to then go have their friends and family and other connections potentially help invest in their projects. So really fascinating and probably a much truer definition of crowdfunding. But we’re going to let Nathan tell us all about that. Before we get started, though, let’s take a moment or recognize our featured sponsors.
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Please note the views and opinions expressed by the individuals in this program do not necessarily reflect those of FlipNerd.com or any of its partners, advertisers or affiliates. Please consult professionals before making any investment or tax decisions, as real estate investing can be risky.
Mike: Hey, Nathan. Welcome to the show.
Nathan: Hey, thank you. That was a great introduction.
Mike: Yeah, it’s almost like I had planned that well in advance, but I’ll be honest with you I guess I’m just good at giving introductions because I’ve done it so many times now.
Nathan: Off the cuff remarks. That was fantastic.
Mike: Well, this is a really fascinating concept. Again, I don’t want to take anything away from the big crowdfunding platforms because many of them the sponsors of our show, have been sponsors in the past and they all have their place. But there’s something really fascinating about getting down to the individual people that live in your neighborhood or community that are actually investing in your in your project and I look forward to talking some more about that today.
Before we get started, can you maybe take a couple minutes, I know you have an interesting background as to how you got here as well, mostly a technology and legal background. I don’t want to steal your thunder. Can you share your background with us and tell us how you got to this point to where you launched Mass Venture?
Nathan: Sure. Well, it was definitely a long and roundabout path. I would say it’s a long series of coincidences that worked out in my favor, as life often is. But I started out my career as a computer programmer. I was working for a major hosting provider that grew out of San Antonio Texas and was really one of my first jobs out of college. And so I was writing Java code and building connection platforms for the hosting industry and started out this company called Rackspace Managed Hosting. And so I started out as employee number 19 back in the 90s. Literally itty bitty company and it was your typical startup, right? A bunch of guys around folding tables with RC cars and paper airplanes and the whole tech thing. And it grew very, very quickly, much to my surprise.
So I wound up moving into project management and then product management at Rackspace. And so by the time I left, we were up to about 250 people and I thought, “Man, this is a pretty big company.” Little did I know, they would wind up with 6,500 employees globally today.
Mike: Yeah. It’s a huge company now.
Nathan: It is a huge company now. But that really kind of got me interested in technology and what technology can do to change existing industries. After that point, I started another company with a friend of mine called Litigation Dynamics. And that was in the legal industry. Taking a lot of the same technology I had been working on, but moving it to a new industry. We worked on some really interesting cases. We had one case that was one of the first Merck cases with Vioxx, which was a big thing in the early 2000s and some of the liability that came with that.
We had a case that wound up getting a $45 million jury verdict. Ultimately, this is Texas so you never quite know what you’re going to get. That $45 million jury verdict went up on appeal, was reduced by the Appeals Court $18 million, and then the Texas Supreme Court got a hold of it and turned it into zero. Fortunately, we weren’t paid on commission or anything so it’s not like that really impacted us, but it was a fascinating business to be in because you’re taking a tech product and you’re going, “Okay. How can I use this to transform a different industry?”
So I did that up through 2005 and then we had a series of really good cases and really high profile cases right before tort reform can through Texas. Even though we worked mostly on the defense side of things, when the plaintiffs go away so does the defense work. The company changed to do a lot more traditional services like court reporting and what not. And that was a point where I said, “You know what? This is probably a good time for me to sell my interest in this and go do something else.”
So I went to law school and got licensed as an attorney. I was one of the older folks in my law school class coming back at it as a second career. But for me, it was something I was very passionate about and wound up working for a real estate boutique firm after law school. That kind of gave me a lot of the tools that coincidently would turn out to be useful in this endeavor down the road. I wound up building a law firm. I sold my law firm last year and have been working on Mass Venture actually since 2011, but really in depth, we did our seed financing around last year in 2014. That’s kind of how it got me to where I am now.
So it’s been a great opportunity to go back and exercise some of those tech chops that have gotten a little rusty. I don’t claim to be the genius that programmed the whole thing. I’ve got Ethan Jones, who I believe you’ve spoken with, who’s leading our tech platform and lot of talented programmers that work for him on that as well. But it was great to be able to use that, use the legal skills and the real estate background to be able to build something. The big problem, of course, was when we got started on this, we wanted to do crowdfunding, but it wasn’t legal. So we had to fix that first.
Mike: Yeah. What an interesting space. I mean there’s so much going on here that the real estate investing industry, especially the residential spaces, is still kind of the Wild West in a lot of ways. But the funding space in there is just ripe for innovation and opportunity. And there’s so much of that going on right now and what you guys are doing, even though there’s a lot of crowdfunding, you can’t talk about real estate financing without talking about crowdfunding these days.
As one of the things I was hoping you could clarify is there are different flavors of crowdfunding. There are the larger institutional players that are large lenders and they’re actually funding deals. And then there’s truly crowdfunding, which is more of what you’re doing, which is we’re actually rolling up small individuals that can participate. Can you clarify a little bit the different flavors of crowdfunding for us?
Nathan: Sure. Before the show, we were chatting and you mentioned that you guys had done some funding through Kiva for donations. That is one example of crowdfunding where you go and you make a donation, you don’t ever expect to see that money back again, but you’re investing it in the success of a micro-loan or a small business in Africa or wherever it might be to see things improve. That’s one kind of crowdfunding.
Then there’s the Kickstarters of the world. That’s product-based crowdfunding, right? If you’re selling a consumer product, you think, “Hey, I want to build this. A lot of people are going to want one. I can pre sell my product through crowdfunding.” So that’s crowdfunding.
And then there is also investment crowdfunding. That’s what you probably . . . if you’re in the real estate industry and you’ve been hearing about crowdfunding, that’s the kind we’re talking about. It’s actually making an investment in usually a special purpose vehicle for funding a real estate project.
One of the reasons why it’s always been, like you said, institutional players, for the most part, is because of the security laws in this country. We’ve got a very complicated set of rules that date actually back to the Great Depression, The Securities Act of 1933 or 1934. And that developed regulation around it. So anytime you’re selling an investment or selling an ownership interest in something, that can be considered to be a security. It doesn’t actually have to be a secured asset. It’s just that that word has developed to mean any of these kinds of interests. It also means debt.
A lot of times, peer to peer lending can be considered securities. And in fact, Funders Club, which IPOd for a billion dollars or had a billion-dollar valuation recently, they were shut down in 2008 because they were conducting the sale of securities without securities license and that was a big problem. So it’s been hard for regular people to be involved. One of the reasons the first kind of threshold test to be able to participate in securities offerings that are not publicly traded, not an Exxon or a Pepsi or somebody like that, is you have to be an accredited investor and that’s less than 2% of the US population.
Mike: Which is a shame. Right? There are so many people that would like to participate in this, but unless you’re wealthy by most measures and accredited, you can’t participate. But that’s changing, right?
Nathan: Yeah. I talk to people and especially before some of these changes came through, people said, “Oh, accredited investor, well, is there a test that I can take?” And like, “Well, no. It’s not actually a test. It doesn’t mean that you know anything specifically about investing. It just means you have a certain amount of money.” Most people, the accredited investor test is do you have a net worth greater than a million dollars? So you tally up all of your assets and you tally up all of your liabilities and then you have to take out the value of your primary residence. After you do that little bit of math, if that is greater than a million dollars then you’re an accredited investor.
You can also get there with income. If you make $300,000 a year if you file jointly, then you can be an accredited investor if you have a history of that income level. As you might imagine, one of the problems with that is you can have somebody who’s in the same industry, the same profession, lives in California and is easily accredited and you have someone that lives in west Texas and is not accredited. It’s not consistent.
The net effect of that is usually most investment companies said, “Look, if I don’t know that you’re a high net-worth individual, then it’s not worth the risk for me to engage in a transaction with you because if you let one non -accredited investor into a transaction, you can potentially wind up having to unwind the whole thing.” It’s been really limited to that accredited investor or qualified investor market.
Mike: On top of that, it’s a huge burden on the person raising money to see whether people are accredited or not and go through the process of proving that they’re accredited. It’s such a huge burden on the entire opportunity or transaction, I guess.
Nathan: Yeah. You have to collect information on who’s accredited and who’s not. In some cases, depending upon what rule set you’re using, they can be something as simple as, ‘Here’s an affidavit. Sign this affidavit and we know that you’re accredited.” But, in some offerings, the SEC has now said that not only do you have to collect that affirmation but you also have to get a letter from that person’s CPA or attorney or get a bank record or something that shows this person meets these requirements for accreditation. So it’s challenging. It’s maybe something you can do if you’ve got five investors, but you start increasing that number of investors and it gets really hard really quickly.
Mike: And then, of course, there’s the DNA sample where you send your hair sample in for DNA testing and all of that. I guess the beauty of the non-accredited investor route is, one, you get access to . . . and I’m not saying just the benefit of being able to tap into that market. It’s obviously a huge benefit for people that don’t have a net worth of a million dollars and don’t make at least $300,000 a year to participate in something that they have an interest in. But, effectively, now you kind of broaden the market greatly.
So kind of talk about . . . I know right now you’re only in Texas and that’s because you’re able to get approval from the state on some things that maybe you’re going to start to take place across the country. Can you share what you’ve done there and really what’s coming up in the space?
Nathan: Sure. This has really been a very interesting year for us. When I got started looking at crowdfunding in 2011, there was no way to do non-accredited investor crowdfunding. Your only choice was to go to accredited investors or institutional money. But, in any event, pretty large, large checks. There was some legislation that came through in the Jobs Act in 2012, it’s called Title III that said hey, here’s a framework that Congress agreed on for allowing non -accredited investors to participate in these small business issuances which can be real estate, it can be a business, all kinds of things. But that got stuck in Washington. It’s funny, though. The law itself said that particular provision would be passed within 270 days of the Jobs Act, which I believe was like April of 2012. You figure 270 days, that takes you to early 2013 something like that. Just this past October 30th of 2015, the SEC finally approved the final rules for Title III.
Mike: The rules got an extension?
Nathan: Yeah, and it’s still not live yet. It won’t be until the spring when Title III is going to be live for people to actually use. We saw the writing on the wall on this several years ago and we said, “Well, is there something that we can do in Texas to at least make this something that we can do it a state level?” And so we went to our local representative, who happened to be on the House Investment Services Committee. So certainly the right guy I know for that sort of thing and said, “Hey, look, is there something we can do to change this?” He put us with his staff and we worked with them and they sponsored what’s called an interim charge, which in Texas is basically in an instruction to the legislature that says we want to do something here; start looking at it. But, as you know, our legislative cycles are several years apart. So it’s a long process.
That charge caught the attention of the governor’s office. Their economic development folks looked at it and started talking to us. They said, “Hey, we think there’s a way to do this through the State Securities Board that doesn’t require going through the long legislative cycle because the Securities Board has the authority to make the kind of rules that you’re going to need to do this.” I joke with some of my partners that went through this with me as we were all kind of looking around like, “So we’ve got the Democrat sponsor, we got the Republican administration and they both agree that this is a good thing?” Like looking for the bolt of lightning or something.
But really, for us, it was a very easy processed by legislative standards. The Securities Board worked with us, they worked with other stakeholders and came out with a set of rules for Texas. And those were published last November, in November of 2014, which made Texas the largest crowdfunding market in the country. We’ve got more than 20 million people in Texas, 20 million residents, it’s like 27 million or something now, which when you think about that . . .
Mike: You are not saying anywhere from 20 million . . . everyone listening to the show because I’m in Texas too. You are not saying we went from 20 million to 27 million this year, are you? There is a mass influx of population in Texas, but I’m not sure it’s quite that fast.
Nathan: It’s big. Over the course of the years that we’ve been advocating for this, we keep updating that number. I always feel like, “What’s the number today?” It gets bigger and bigger every time. I think it was 24 when we started, now it’s 27. Whatever is, but that’s a tremendously large number of people that had previously been shut out of this market. Now you have all these people that can invest in projects in their community. And to me, that’s transformative. It really makes a difference.
Mike: So talk about . . . what a lot of people don’t really realize is, if you go out, let’s say you go and do a real estate deal, you go out and raise money from a few friends and buddies. You’re ultimately . . . legally, you’re selling a security, right?
Nathan: You can. It depends on how you structure it. If you’re all investing in something in your . . . I guess an example would be if I’ve got five buddies and we’re all going to go buy a house together. We each chip in our cash, we’re all tenants in common and we all go out there every Saturday and knock down walls. That’s probably not the sale of securities. That’s just a group of people running a business together.
But when you go and say, “Hey, I’m going to do this project and . . . hi, Robert, would you like to put in 20K into this project and I’ll give you a slice of it?” He’s just putting money and he’s not involved in running the business, then that is typically a sale of a security because you’re giving him an interest in a business that he’s not actively involved in running. And so it…the SEC and all these organizations that enforce this don’t have the resources in the attorneys to go chase after everybody that has taken money from a friend to go do something. But, conceivably, those could all be securities violations.
Mike: Absolutely. And your platform not only allows people to do that but it helps take care of all the reporting issues and all of the administrative crap that most real estate investors just don’t want to deal with.
Nathan: Right. A lot of this is on the venture side of things. It’s simplicity. Your typical . . . to do this right . . . a lot of people who’ve been doing syndication in the past have been through the process of working with their lawyer and their accountant to get a PPM, a private placement memo or an offering memorandum and that can take a lot of time at the lawyer, a lot of time at the CPA. And then a lot of time, even once you have that drafted, chasing signatures and making sure the person’s accredited and taking the money in.
You think about what it takes to do that with five or ten people, the thought that you could do that with dozens or hundreds of people, it gets unmanageable very, very quickly. But when you have a platform like Mass Venture where it’s all online, all that reporting is taken care of electronically. Every one of these projects is submitted to the Securities Board. So we file a registration of each of these projects with the Securities Board. All of that is done electronically and in a very efficient manner.
Our goal is, from the investor perspective, this should be just as easy as going online to something like an Etrade or an Ameritrade and picking the stocks that you want to invest in. Except rather than putting your money in some company that’s operating globally, you’re putting your money in a project in your community.
Mike: Yeah, that’s awesome. There are kind of two sides of this. From the investor standpoint, they can now go out to their network and raise money, could be friends family or friends of friends or friends of friends of friends or ultimately they can be people that they don’t even necessarily know right now as long as they’re in Texas, right? But that’ll change soon. Raise money from your network, I’ve said all the time on the show and it’s become a cheesy cliché in the real estate investing space, but your network is your net worth. Now, effectively, it’s actually more true than ever. So you can go raise money from your network. It’s great for investors and not have to deal with a lot of the administrative stuff.
On the other hand, for those that are listening to this that have an interest in a real estate investing and just haven’t been able to do it yourself for one reason or another, maybe you don’t have the funds, maybe you don’t have the time, maybe you’re scared, whatever it is, you can actually participate on almost a micro level of least $100 in projects right in your community now.
Nathan: Yeah and I think one of the biggest impediments to people that are getting started in real estate investing is the commitment level that’s required. You generally have to put a fair amount of your personal capital at risk in the beginning as you get started and you don’t necessarily have the expertise and that network of contractors and mentors and other people that can help you through the process. You have to put a lot of effort and money into getting started. And you maybe look at it and you say, “I know that once I’ve done five or six of these deals, then it’s going to be smooth sailing.” But those first few are probably very rocky for you. I’ve talked to so many people that . . . so I got started in real estate investing in things didn’t go my way and I knew that if the second time around I could iron a lot of that out, but I was just done with it.
In this sort of situation, you can actually come in, you can start with a small amount of money so it’s not a tremendous amount of risk. It can be $500’ it can be $5,000, but you’re able to go in and get started and we manage the projects that come onto the platform. Typically, someone that’s doing a deal on Mass Venture and putting a project up has a significant track record and has got a lot of experience. So this isn’t their first time, they’ve been through this, they’ve got a process, they’ve got their network of people. Like I was telling you, that network, a lot of times, is very localized.
I’ve got a family member who is doing a renovation here in San Antonio, moved in from out of state. Even though he’s been in the business for 40 years, had to completely to rebuild his network to find local, trustworthy people and had to do a lot of management and oversight to make sure things got done on time and to his standards.
Mike: That’s fascinating. We’ve got a few minutes left here, Nathan. Maybe you can talk about where things are going. I know that Title III is probably going to be more widely used in the spring. And talk about, one, how that opens things up for you, but how it opens things up for really the entire industry and where you see things going over . . . let’s say, at this point, within the crowdfunding space and some of the laws that have changed a year or two is a lifetime. So maybe just talk about where things are going over the next a year or two.
Nathan: For me, it feels like a saga and after I remind myself that what we’re doing now wasn’t even a thing 14 months ago. If you look at sort of a five-year horizon, I think this is going to be a tremendous, tremendous growth area. In the last year, we went from having no legal framework to having rules here in Texas, launching a platform, building it from scratch, getting it launched. We’ve got more than 1000 investors already on the platform. It’s been great growth for this first year. In August, we got our license or our registration in Colorado. One of my goals for the first half of 2016 is to launch our operations in Colorado as well. And then at the end of October, the SEC rules for Title III were passed, like you mentioned. So that sometime, probably summer of 2016, is going to take this model that we’ve been working on already and take it nationwide. So I think it’s going to be a really exciting time to be in crowdfunding.
One of the things that really struck me as I was talking to a young person in San Antonio, we office out of a co working space and she was there and she was like, “So what’s this Mass Venture thing?” I was explaining to her and she’s like, “What do you mean I couldn’t invest in real estate like that?” I am like, “Thank you.” That’s my exact point. When you look at what people want to do and how people want to interact with real estate investing, it’s not by faxing 40 pages of documents cross-country.
Mike: Right. Absolutely. Awesome. Well, Nathan, if folks want to learn more about you and the awesome stuff that’s going on at Mass Venture, tell us where they should go.
Nathan: Well, our Web site is www.MassVenture.com. That singular. You can go there and get started online right away. If you’re a Texas resident, we’ll verify you and you can get started. If you’re in one of the other states where we’re looking to expand in the near future, we’ve got MassVenture.co, which is our Colorado site, which is also accepting early registrations. Keep an eye on us as we grow this thing nationwide.
Mike: Awesome. Well, this is an exciting space and I think folks like you are kind of liberating the industry and really just people to be able to invest in real estate, which I don’t see . . . that should be almost a Go- given right I think, right?
Nathan: One of the things that really struck me is if I take $50,000 and I invest it in Apple stock, of that $50,000, a lot of it’s going to California, a lot of it’s going to China for manufacturing, some of it’s going to Europe. It gets spread out everywhere. Whereas if I invest $50,000 with a real estate project in my community, all of that money gets spent in my state, in my community with jobs here, sales here and it’s a way for people to amplify the economic wealth of their community. If you want a big picture vision, that’s my big picture vision is helping people actually grow their wealth and their community at the same time.
Mike: I think more than ever right now . . . I think there are so many people that are dismayed with the stock market because it just feels like it’s nonstop financial engineering. You don’t really know what you invest in. There’s no such thing as blue chip stocks anymore. Nothing is safe and not that what we’re talking about here is 100% safe, nothing is. People more and more like to invest in tangible assets like real estate and especially in their community where they can actually see it make a difference for sure. I think that’s just a huge movement that’s just kind of at the beginning stages of where that’s going.
Nathan: Yeah. I couldn’t agree more.
Mike: Awesome awesome. And you didn’t pay me to say that.
Nathan: No.
Mike: Awesome. We’ll add that link down below for obviously for MassVenture.com or just go to MassVenture.com But, Nathan, we appreciate your time. Thanks for being a leader in this space and definitely excited to maybe talk to you again in six months or a year or so when a lot of progress has been made, I’m sure.
Nathan: Yeah, thank you very much.
Mike: Awesome. Have a great day, my friend.
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Mass venture is a platform that allows unaccredited investors in Texas right now, but rolling out probably too many more states if not the rest of the country, the early part of next year. It allows unaccredited investors to get involved in helping fund deals with as little as $100. It’s like Kickstarter for real estate investors. It really is a platform that enables individual real estate investors to use the Mass Venture platform to then go have their friends and family and other connections potentially help invest in their projects. So really fascinating and probably a much truer definition of crowdfunding. But we’re going to let Nathan tell us all about that. Before we get started, though, let’s take a moment or recognize our featured sponsors.
B2R Finance makes loans tailored specifically for rental investors. They can help you unlock equity from your existing properties so you can get cash out to grow your rental portfolio. That’s huge. It opens up lots of opportunities previously not available to rental investors. Need a loan? Call (888) 472-0419 or visit FlipNerd.com/B2R today.
VirtualStaffNow.com is your source for done-for-you virtual assistants that specialize in helping you run your real estate investing business. They recruit, manage and train VAs for you so you can focus on growing your business. If you’re in growth mode, build your team fast at a cost you can’t beat by visiting VirtualStaffNow.com.
AceBusinessFunding.com can help you get up to $150,000 in revolving credit lines to fund your business with rates as low as 0% for the first 12 to 18 months. Use the funds for start-up costs, marketing, inventory, or heck, even buying houses and funding your rehabs. If they can’t get you funding, you don’t pay a dime. Get funds for your business today at AceBusinessFunding.com.
Please note the views and opinions expressed by the individuals in this program do not necessarily reflect those of FlipNerd.com or any of its partners, advertisers or affiliates. Please consult professionals before making any investment or tax decisions, as real estate investing can be risky.
Mike: Hey, Nathan. Welcome to the show.
Nathan: Hey, thank you. That was a great introduction.
Mike: Yeah, it’s almost like I had planned that well in advance, but I’ll be honest with you I guess I’m just good at giving introductions because I’ve done it so many times now.
Nathan: Off the cuff remarks. That was fantastic.
Mike: Well, this is a really fascinating concept. Again, I don’t want to take anything away from the big crowdfunding platforms because many of them the sponsors of our show, have been sponsors in the past and they all have their place. But there’s something really fascinating about getting down to the individual people that live in your neighborhood or community that are actually investing in your in your project and I look forward to talking some more about that today.
Before we get started, can you maybe take a couple minutes, I know you have an interesting background as to how you got here as well, mostly a technology and legal background. I don’t want to steal your thunder. Can you share your background with us and tell us how you got to this point to where you launched Mass Venture?
Nathan: Sure. Well, it was definitely a long and roundabout path. I would say it’s a long series of coincidences that worked out in my favor, as life often is. But I started out my career as a computer programmer. I was working for a major hosting provider that grew out of San Antonio Texas and was really one of my first jobs out of college. And so I was writing Java code and building connection platforms for the hosting industry and started out this company called Rackspace Managed Hosting. And so I started out as employee number 19 back in the 90s. Literally itty bitty company and it was your typical startup, right? A bunch of guys around folding tables with RC cars and paper airplanes and the whole tech thing. And it grew very, very quickly, much to my surprise.
So I wound up moving into project management and then product management at Rackspace. And so by the time I left, we were up to about 250 people and I thought, “Man, this is a pretty big company.” Little did I know, they would wind up with 6,500 employees globally today.
Mike: Yeah. It’s a huge company now.
Nathan: It is a huge company now. But that really kind of got me interested in technology and what technology can do to change existing industries. After that point, I started another company with a friend of mine called Litigation Dynamics. And that was in the legal industry. Taking a lot of the same technology I had been working on, but moving it to a new industry. We worked on some really interesting cases. We had one case that was one of the first Merck cases with Vioxx, which was a big thing in the early 2000s and some of the liability that came with that.
We had a case that wound up getting a $45 million jury verdict. Ultimately, this is Texas so you never quite know what you’re going to get. That $45 million jury verdict went up on appeal, was reduced by the Appeals Court $18 million, and then the Texas Supreme Court got a hold of it and turned it into zero. Fortunately, we weren’t paid on commission or anything so it’s not like that really impacted us, but it was a fascinating business to be in because you’re taking a tech product and you’re going, “Okay. How can I use this to transform a different industry?”
So I did that up through 2005 and then we had a series of really good cases and really high profile cases right before tort reform can through Texas. Even though we worked mostly on the defense side of things, when the plaintiffs go away so does the defense work. The company changed to do a lot more traditional services like court reporting and what not. And that was a point where I said, “You know what? This is probably a good time for me to sell my interest in this and go do something else.”
So I went to law school and got licensed as an attorney. I was one of the older folks in my law school class coming back at it as a second career. But for me, it was something I was very passionate about and wound up working for a real estate boutique firm after law school. That kind of gave me a lot of the tools that coincidently would turn out to be useful in this endeavor down the road. I wound up building a law firm. I sold my law firm last year and have been working on Mass Venture actually since 2011, but really in depth, we did our seed financing around last year in 2014. That’s kind of how it got me to where I am now.
So it’s been a great opportunity to go back and exercise some of those tech chops that have gotten a little rusty. I don’t claim to be the genius that programmed the whole thing. I’ve got Ethan Jones, who I believe you’ve spoken with, who’s leading our tech platform and lot of talented programmers that work for him on that as well. But it was great to be able to use that, use the legal skills and the real estate background to be able to build something. The big problem, of course, was when we got started on this, we wanted to do crowdfunding, but it wasn’t legal. So we had to fix that first.
Mike: Yeah. What an interesting space. I mean there’s so much going on here that the real estate investing industry, especially the residential spaces, is still kind of the Wild West in a lot of ways. But the funding space in there is just ripe for innovation and opportunity. And there’s so much of that going on right now and what you guys are doing, even though there’s a lot of crowdfunding, you can’t talk about real estate financing without talking about crowdfunding these days.
As one of the things I was hoping you could clarify is there are different flavors of crowdfunding. There are the larger institutional players that are large lenders and they’re actually funding deals. And then there’s truly crowdfunding, which is more of what you’re doing, which is we’re actually rolling up small individuals that can participate. Can you clarify a little bit the different flavors of crowdfunding for us?
Nathan: Sure. Before the show, we were chatting and you mentioned that you guys had done some funding through Kiva for donations. That is one example of crowdfunding where you go and you make a donation, you don’t ever expect to see that money back again, but you’re investing it in the success of a micro-loan or a small business in Africa or wherever it might be to see things improve. That’s one kind of crowdfunding.
Then there’s the Kickstarters of the world. That’s product-based crowdfunding, right? If you’re selling a consumer product, you think, “Hey, I want to build this. A lot of people are going to want one. I can pre sell my product through crowdfunding.” So that’s crowdfunding.
And then there is also investment crowdfunding. That’s what you probably . . . if you’re in the real estate industry and you’ve been hearing about crowdfunding, that’s the kind we’re talking about. It’s actually making an investment in usually a special purpose vehicle for funding a real estate project.
One of the reasons why it’s always been, like you said, institutional players, for the most part, is because of the security laws in this country. We’ve got a very complicated set of rules that date actually back to the Great Depression, The Securities Act of 1933 or 1934. And that developed regulation around it. So anytime you’re selling an investment or selling an ownership interest in something, that can be considered to be a security. It doesn’t actually have to be a secured asset. It’s just that that word has developed to mean any of these kinds of interests. It also means debt.
A lot of times, peer to peer lending can be considered securities. And in fact, Funders Club, which IPOd for a billion dollars or had a billion-dollar valuation recently, they were shut down in 2008 because they were conducting the sale of securities without securities license and that was a big problem. So it’s been hard for regular people to be involved. One of the reasons the first kind of threshold test to be able to participate in securities offerings that are not publicly traded, not an Exxon or a Pepsi or somebody like that, is you have to be an accredited investor and that’s less than 2% of the US population.
Mike: Which is a shame. Right? There are so many people that would like to participate in this, but unless you’re wealthy by most measures and accredited, you can’t participate. But that’s changing, right?
Nathan: Yeah. I talk to people and especially before some of these changes came through, people said, “Oh, accredited investor, well, is there a test that I can take?” And like, “Well, no. It’s not actually a test. It doesn’t mean that you know anything specifically about investing. It just means you have a certain amount of money.” Most people, the accredited investor test is do you have a net worth greater than a million dollars? So you tally up all of your assets and you tally up all of your liabilities and then you have to take out the value of your primary residence. After you do that little bit of math, if that is greater than a million dollars then you’re an accredited investor.
You can also get there with income. If you make $300,000 a year if you file jointly, then you can be an accredited investor if you have a history of that income level. As you might imagine, one of the problems with that is you can have somebody who’s in the same industry, the same profession, lives in California and is easily accredited and you have someone that lives in west Texas and is not accredited. It’s not consistent.
The net effect of that is usually most investment companies said, “Look, if I don’t know that you’re a high net-worth individual, then it’s not worth the risk for me to engage in a transaction with you because if you let one non -accredited investor into a transaction, you can potentially wind up having to unwind the whole thing.” It’s been really limited to that accredited investor or qualified investor market.
Mike: On top of that, it’s a huge burden on the person raising money to see whether people are accredited or not and go through the process of proving that they’re accredited. It’s such a huge burden on the entire opportunity or transaction, I guess.
Nathan: Yeah. You have to collect information on who’s accredited and who’s not. In some cases, depending upon what rule set you’re using, they can be something as simple as, ‘Here’s an affidavit. Sign this affidavit and we know that you’re accredited.” But, in some offerings, the SEC has now said that not only do you have to collect that affirmation but you also have to get a letter from that person’s CPA or attorney or get a bank record or something that shows this person meets these requirements for accreditation. So it’s challenging. It’s maybe something you can do if you’ve got five investors, but you start increasing that number of investors and it gets really hard really quickly.
Mike: And then, of course, there’s the DNA sample where you send your hair sample in for DNA testing and all of that. I guess the beauty of the non-accredited investor route is, one, you get access to . . . and I’m not saying just the benefit of being able to tap into that market. It’s obviously a huge benefit for people that don’t have a net worth of a million dollars and don’t make at least $300,000 a year to participate in something that they have an interest in. But, effectively, now you kind of broaden the market greatly.
So kind of talk about . . . I know right now you’re only in Texas and that’s because you’re able to get approval from the state on some things that maybe you’re going to start to take place across the country. Can you share what you’ve done there and really what’s coming up in the space?
Nathan: Sure. This has really been a very interesting year for us. When I got started looking at crowdfunding in 2011, there was no way to do non-accredited investor crowdfunding. Your only choice was to go to accredited investors or institutional money. But, in any event, pretty large, large checks. There was some legislation that came through in the Jobs Act in 2012, it’s called Title III that said hey, here’s a framework that Congress agreed on for allowing non -accredited investors to participate in these small business issuances which can be real estate, it can be a business, all kinds of things. But that got stuck in Washington. It’s funny, though. The law itself said that particular provision would be passed within 270 days of the Jobs Act, which I believe was like April of 2012. You figure 270 days, that takes you to early 2013 something like that. Just this past October 30th of 2015, the SEC finally approved the final rules for Title III.
Mike: The rules got an extension?
Nathan: Yeah, and it’s still not live yet. It won’t be until the spring when Title III is going to be live for people to actually use. We saw the writing on the wall on this several years ago and we said, “Well, is there something that we can do in Texas to at least make this something that we can do it a state level?” And so we went to our local representative, who happened to be on the House Investment Services Committee. So certainly the right guy I know for that sort of thing and said, “Hey, look, is there something we can do to change this?” He put us with his staff and we worked with them and they sponsored what’s called an interim charge, which in Texas is basically in an instruction to the legislature that says we want to do something here; start looking at it. But, as you know, our legislative cycles are several years apart. So it’s a long process.
That charge caught the attention of the governor’s office. Their economic development folks looked at it and started talking to us. They said, “Hey, we think there’s a way to do this through the State Securities Board that doesn’t require going through the long legislative cycle because the Securities Board has the authority to make the kind of rules that you’re going to need to do this.” I joke with some of my partners that went through this with me as we were all kind of looking around like, “So we’ve got the Democrat sponsor, we got the Republican administration and they both agree that this is a good thing?” Like looking for the bolt of lightning or something.
But really, for us, it was a very easy processed by legislative standards. The Securities Board worked with us, they worked with other stakeholders and came out with a set of rules for Texas. And those were published last November, in November of 2014, which made Texas the largest crowdfunding market in the country. We’ve got more than 20 million people in Texas, 20 million residents, it’s like 27 million or something now, which when you think about that . . .
Mike: You are not saying anywhere from 20 million . . . everyone listening to the show because I’m in Texas too. You are not saying we went from 20 million to 27 million this year, are you? There is a mass influx of population in Texas, but I’m not sure it’s quite that fast.
Nathan: It’s big. Over the course of the years that we’ve been advocating for this, we keep updating that number. I always feel like, “What’s the number today?” It gets bigger and bigger every time. I think it was 24 when we started, now it’s 27. Whatever is, but that’s a tremendously large number of people that had previously been shut out of this market. Now you have all these people that can invest in projects in their community. And to me, that’s transformative. It really makes a difference.
Mike: So talk about . . . what a lot of people don’t really realize is, if you go out, let’s say you go and do a real estate deal, you go out and raise money from a few friends and buddies. You’re ultimately . . . legally, you’re selling a security, right?
Nathan: You can. It depends on how you structure it. If you’re all investing in something in your . . . I guess an example would be if I’ve got five buddies and we’re all going to go buy a house together. We each chip in our cash, we’re all tenants in common and we all go out there every Saturday and knock down walls. That’s probably not the sale of securities. That’s just a group of people running a business together.
But when you go and say, “Hey, I’m going to do this project and . . . hi, Robert, would you like to put in 20K into this project and I’ll give you a slice of it?” He’s just putting money and he’s not involved in running the business, then that is typically a sale of a security because you’re giving him an interest in a business that he’s not actively involved in running. And so it…the SEC and all these organizations that enforce this don’t have the resources in the attorneys to go chase after everybody that has taken money from a friend to go do something. But, conceivably, those could all be securities violations.
Mike: Absolutely. And your platform not only allows people to do that but it helps take care of all the reporting issues and all of the administrative crap that most real estate investors just don’t want to deal with.
Nathan: Right. A lot of this is on the venture side of things. It’s simplicity. Your typical . . . to do this right . . . a lot of people who’ve been doing syndication in the past have been through the process of working with their lawyer and their accountant to get a PPM, a private placement memo or an offering memorandum and that can take a lot of time at the lawyer, a lot of time at the CPA. And then a lot of time, even once you have that drafted, chasing signatures and making sure the person’s accredited and taking the money in.
You think about what it takes to do that with five or ten people, the thought that you could do that with dozens or hundreds of people, it gets unmanageable very, very quickly. But when you have a platform like Mass Venture where it’s all online, all that reporting is taken care of electronically. Every one of these projects is submitted to the Securities Board. So we file a registration of each of these projects with the Securities Board. All of that is done electronically and in a very efficient manner.
Our goal is, from the investor perspective, this should be just as easy as going online to something like an Etrade or an Ameritrade and picking the stocks that you want to invest in. Except rather than putting your money in some company that’s operating globally, you’re putting your money in a project in your community.
Mike: Yeah, that’s awesome. There are kind of two sides of this. From the investor standpoint, they can now go out to their network and raise money, could be friends family or friends of friends or friends of friends of friends or ultimately they can be people that they don’t even necessarily know right now as long as they’re in Texas, right? But that’ll change soon. Raise money from your network, I’ve said all the time on the show and it’s become a cheesy cliché in the real estate investing space, but your network is your net worth. Now, effectively, it’s actually more true than ever. So you can go raise money from your network. It’s great for investors and not have to deal with a lot of the administrative stuff.
On the other hand, for those that are listening to this that have an interest in a real estate investing and just haven’t been able to do it yourself for one reason or another, maybe you don’t have the funds, maybe you don’t have the time, maybe you’re scared, whatever it is, you can actually participate on almost a micro level of least $100 in projects right in your community now.
Nathan: Yeah and I think one of the biggest impediments to people that are getting started in real estate investing is the commitment level that’s required. You generally have to put a fair amount of your personal capital at risk in the beginning as you get started and you don’t necessarily have the expertise and that network of contractors and mentors and other people that can help you through the process. You have to put a lot of effort and money into getting started. And you maybe look at it and you say, “I know that once I’ve done five or six of these deals, then it’s going to be smooth sailing.” But those first few are probably very rocky for you. I’ve talked to so many people that . . . so I got started in real estate investing in things didn’t go my way and I knew that if the second time around I could iron a lot of that out, but I was just done with it.
In this sort of situation, you can actually come in, you can start with a small amount of money so it’s not a tremendous amount of risk. It can be $500’ it can be $5,000, but you’re able to go in and get started and we manage the projects that come onto the platform. Typically, someone that’s doing a deal on Mass Venture and putting a project up has a significant track record and has got a lot of experience. So this isn’t their first time, they’ve been through this, they’ve got a process, they’ve got their network of people. Like I was telling you, that network, a lot of times, is very localized.
I’ve got a family member who is doing a renovation here in San Antonio, moved in from out of state. Even though he’s been in the business for 40 years, had to completely to rebuild his network to find local, trustworthy people and had to do a lot of management and oversight to make sure things got done on time and to his standards.
Mike: That’s fascinating. We’ve got a few minutes left here, Nathan. Maybe you can talk about where things are going. I know that Title III is probably going to be more widely used in the spring. And talk about, one, how that opens things up for you, but how it opens things up for really the entire industry and where you see things going over . . . let’s say, at this point, within the crowdfunding space and some of the laws that have changed a year or two is a lifetime. So maybe just talk about where things are going over the next a year or two.
Nathan: For me, it feels like a saga and after I remind myself that what we’re doing now wasn’t even a thing 14 months ago. If you look at sort of a five-year horizon, I think this is going to be a tremendous, tremendous growth area. In the last year, we went from having no legal framework to having rules here in Texas, launching a platform, building it from scratch, getting it launched. We’ve got more than 1000 investors already on the platform. It’s been great growth for this first year. In August, we got our license or our registration in Colorado. One of my goals for the first half of 2016 is to launch our operations in Colorado as well. And then at the end of October, the SEC rules for Title III were passed, like you mentioned. So that sometime, probably summer of 2016, is going to take this model that we’ve been working on already and take it nationwide. So I think it’s going to be a really exciting time to be in crowdfunding.
One of the things that really struck me as I was talking to a young person in San Antonio, we office out of a co working space and she was there and she was like, “So what’s this Mass Venture thing?” I was explaining to her and she’s like, “What do you mean I couldn’t invest in real estate like that?” I am like, “Thank you.” That’s my exact point. When you look at what people want to do and how people want to interact with real estate investing, it’s not by faxing 40 pages of documents cross-country.
Mike: Right. Absolutely. Awesome. Well, Nathan, if folks want to learn more about you and the awesome stuff that’s going on at Mass Venture, tell us where they should go.
Nathan: Well, our Web site is www.MassVenture.com. That singular. You can go there and get started online right away. If you’re a Texas resident, we’ll verify you and you can get started. If you’re in one of the other states where we’re looking to expand in the near future, we’ve got MassVenture.co, which is our Colorado site, which is also accepting early registrations. Keep an eye on us as we grow this thing nationwide.
Mike: Awesome. Well, this is an exciting space and I think folks like you are kind of liberating the industry and really just people to be able to invest in real estate, which I don’t see . . . that should be almost a Go- given right I think, right?
Nathan: One of the things that really struck me is if I take $50,000 and I invest it in Apple stock, of that $50,000, a lot of it’s going to California, a lot of it’s going to China for manufacturing, some of it’s going to Europe. It gets spread out everywhere. Whereas if I invest $50,000 with a real estate project in my community, all of that money gets spent in my state, in my community with jobs here, sales here and it’s a way for people to amplify the economic wealth of their community. If you want a big picture vision, that’s my big picture vision is helping people actually grow their wealth and their community at the same time.
Mike: I think more than ever right now . . . I think there are so many people that are dismayed with the stock market because it just feels like it’s nonstop financial engineering. You don’t really know what you invest in. There’s no such thing as blue chip stocks anymore. Nothing is safe and not that what we’re talking about here is 100% safe, nothing is. People more and more like to invest in tangible assets like real estate and especially in their community where they can actually see it make a difference for sure. I think that’s just a huge movement that’s just kind of at the beginning stages of where that’s going.
Nathan: Yeah. I couldn’t agree more.
Mike: Awesome awesome. And you didn’t pay me to say that.
Nathan: No.
Mike: Awesome. We’ll add that link down below for obviously for MassVenture.com or just go to MassVenture.com But, Nathan, we appreciate your time. Thanks for being a leader in this space and definitely excited to maybe talk to you again in six months or a year or so when a lot of progress has been made, I’m sure.
Nathan: Yeah, thank you very much.
Mike: Awesome. Have a great day, my friend.
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