Should Regulators in Canada Allow Real Estate Crowdfunding?

As it presently stands, only accredited investors are able to invest in private investments in Ontario (known as 'exempt market securities' since they are exempt from having to file a prospectus). So unless you happen to earn at least $200,000 annually or have net financial assets of over $1 Million, you're out of luck for the time being.

Thankfully, in March 2014 the Ontario Securities Commission (OSC) has proposed four new capital-raising exemptions that will allow more than just accredited investors to invest in private securities such as a limited partnership that owns commercial real estate. Open Avenue wrote a lengthy comment letter in response to the OSC's proposals in order to explain in detail why real estate is a great asset class for crowdfunding and why all types of investors, not just wealthy individuals, should have access to these types of investments.

The letter is published below and our official response can be viewed on the OSC's website.

Letter to the OSC

Attention: John Stevenson, Secretary

Dear Sirs and Mesdames:

Open Avenue is launching Canada’s first online real estate crowdfunding portal for accredited and eligible investors across the country except Ontario. Open Avenue would like to engage in equity real estate crowdfunding in those jurisdictions that are looking at the proposed equity crowdfunding framework set out in Proposed MI 45-108, however, the framework presently prohibits real estate transactions. This comment letter respectfully submits that not all real estate should be prohibited and specifically that income-producing real estate equity crowdfunding should be allowed since it:

  • rehabilitates communities;
  • creates jobs for small and medium-sized enterprises (SMEs);
  • allows investors to own a tangible real estate asset; and
  • provides regular cash distributions to investors in a known, accepted and easily understood asset class.
1. Crowdfunding brings investment opportunities to the masses

Both real estate development and the investment world are at the cusp of a new paradigm shift, riding on the waves of the Internet and a population capable of leveraging the power of technology. We believe that technology has the power to facilitate transparent, secure and reliable investment opportunities for all types of investors including real estate opportunities. Figure 1 below illustrates how the internet can bridge that gap and an explanation that follows.

real estate crowdfunding opportunity

Figure 1: The real estate crowdfunding opportunity

Many Canadian investors are interested in investing in direct real estate but do not have the full capital required for an individual project, nor do they have the time or experience to manage a real estate investment on their own. Through equity crowdfunding, Open Avenue plans to bring real estate investment opportunities to the masses so that everyone can participate in real estate investment at an amount that fits into one’s individual investment portfolio. There is a large opportunity for profitable real estate investments across Canada on projects that are out-of-reach of the Do-it-Yourself investment crowd but still too small for institutional investors. By pooling casual investors together, managed by an experienced real estate developer/property manager, we can invest in these projects and build our communities at the same time.

Real estate is a tangible asset that is easy for investors to understand and has a very simple and clear method of valuation. The funds required for a real estate project are well known at the initial pre-investment stage and can be accurately projected so that an investor has clear advance knowledge of where their funds are being allocated. This makes real estate an ideal candidate for equity crowdfunding.

2. Real estate investment has similar elements to traditional enterprises

A cash-flowing real estate investment is very similar to a traditional business. The asset generates income through rental income. It incurs traditional real estate expenses such as property tax, insurance, maintenance and property management. The asset will usually have a mortgage associated with it that must also be paid. When all expenses are paid including the mortgage, the asset generates cash-flow that is paid direct to investors. Investors also build additional equity in their investment through the mortgage principal amortization. Figure 2 below provides a sample real estate income statement and explains how real estate investments are similar to traditional enterprises with revenues and expenses and related returns. This is not new for investors.

Sample Real Estate Income Statement

Figure 2: Sample Real Estate Income Statement

Real estate investment is not modeled on a boom-bust scenario like many other asset classes – there are many profitable real estate investments that provide yield and cash flow to investors while not relying on speculation or market appreciation to provide returns.

Real estate also provides a built-in liquidity component which is a major benefit compared to a traditional start-up investment. Real estate investment offering documents will explicitly state the time period for the investment in detail. For example, many investments will be held for five to seven years, at which point the underlying asset will be sold on the open market and the proceeds will be returned to investors. Investors enter into the investment knowing when their investment will be returned.

3. Crowdfunding technology provides transparent access to investments.

As issuers, Open Avenue embraces disclosure and seeks to provide investors with very detailed levels of both accounting and operational transparency.

We have built a platform at Open Avenue that will disclose and make readily available on-line every single project contract and operating expense for investors, as well as detailed information about each tenant lease signed and rental income collected. An annual external audit will be conducted on each project to provide confirmation to investors that management has spent funds where they’ve been allocated. An illustration of a sample portfolio is set out in Figure 3 below.

Investor Management Dashboard

Figure 3: Open Avenue Investor Management Dashboard

Open Avenue believes in transparency and disclosure not because regulators require it but because we see it as prudent business practice that investors should and will demand. Open Avenue welcomes and embraces all disclosure requirements and would be happy to work with the Ontario Securities Commission (the OSC) and other CSA members to develop suitable requirements that will protect investors and enable them to comfortably and securely invest in private real estate projects.

Disclosure aside, we believe even simple measures like installing a 24/7 webcam on project construction sites can provide another dimension of transparency that is difficult to replicate in alternative crowdfunded asset classes.

4. Investors have protection.

Real estate is a great asset for crowdfunding because the vast majority of the investment capital is stored in a physical, secure asset. In the event of mismanagement or fraud, investors have definitive legal recourse rights to make claims against their properties in order to partially recover their investments. Liens and other recourse measures do not easily exist in other crowdfunded businesses that contain few tangible assets. Investors in crowdfunded real estate would have direct title to their asset as unitholders in a Limited Partnership that directly owns title to the asset. See the illustration of this ownership structure in Figure 4 below.

Real Estate Investment Structure

Figure 4: Real Estate Investment Structure

Building trust with the equity crowdfunding investment community will be vital in the early stages and we believe the security and transparency of real estate will be very beneficial in attracting early investors to prove the equity crowdfunding investment model to the wider investment community.

5. Crowdfunding empowers the investor to build their community

Real estate crowdfunding enables local investors to participate in projects that have a direct impact on their community. No longer will local development decisions be made exclusively by financiers who have no direct connection to their investments. Local investors can invest small amounts into projects that they believe will make a positive impact on their community, while at the same time providing an investment return to local investors. This ‘loca-investing’ is very important for communities and businesses.

For example, Figure 6 illustrates the refurbishment undertaken by a developer involving the Lang Tanning Company in Kitchener, ON. The Lang Tannery was established in the 1860s and grew to become the largest leather producer in the British Empire in the mid-twentieth century. With the manufacturing decline in the late-twentieth century, the tannery went out of business. In 2007, the building was bought by a real estate developer and transformed into an information and technology center, home to companies such as Google, Communitech, and Desire2Learn.

Community Building Opportunities

Figure 6: Community Building Opportunities in Kitchener-Waterloo

6. Crowdfunding creates opportunities and jobs for SMEs

Open Avenue firmly believes that equity real estate crowdfunding has the potential to provide a major lift to the Ontario economy. For example, if we raised $1.5 Million in equity crowdfunding, that would enable us to finance a real estate project worth $5.0 Million through the use of traditional leverage. In a typical $5.0 Million new development project, roughly $1.5 Million would account toward direct labour, benefiting many local SMEs. Through this single project, over 30 full-time jobs would be created at an annual salary of $60,000. Another $600-800 thousand dollars would be paid as development fees to the local municipality, as well as $200-300 thousand dollars in servicing fees to the local utilities. A sample budget for a new development is set out in Figure 7 below.

New Development Budget Sample

Figure 7: New Development Budget Sample

7. Potential Equity Crowdfunding Real Estate Opportunities

Through pre-launching Open Avenue and discussing the concept with many real estate developers across Canada, it has become apparent that there are a vast number of very lucrative development opportunities in our growing and intensifying cities but a lack of access to private capital to fund these projects.

Open Avenue believes that permitting real estate equity crowdfunding under Proposed MI 45-108 will not only offer a rewarding and profitable investment to the crowd, but it will release the capital required to help our cities meet their unique planning challenges as densities increase, affordable housing requirements grow and government budgets tighten, at no expense to the taxpayer.


Open Avenue applauds the OSC for its bold initiatives in the crowdfunding space and we believe Ontario is on the right path toward empowering both SMEs and investors alike in providing secure and profitable investment opportunities that will help shape and grow the Canadian economy for years to come.

We believe that real estate is a viable asset class for crowdfunding that will provide investors with stable and secure returns while supporting SMEs and creating jobs in the local economy.

As addressed in the comments above, we have a major concern about EMDs not being able to sell securities of related issuers through the OM exemption. We also believe that it is absolutely necessary that EMD portals be able to raise funds through both the proposed Crowdfunding Exemption and Accredited Investor Exemption in order to create a thriving crowdfunding ecosystem where the crowd invests alongside known accredited investors.

Lastly, we feel that the investment limits in the proposed OM exemption are not necessary when an EMD is conducting a suitability review for each investor.

We thank you for the opportunity to provide feedback and welcome any opportunity for further dialogue.


Tim McKillican
Open Avenue Inc.

Posted on September 10, 2014 in Crowdfunding

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About the Author

Tim McKillican is the Founder of Open Avenue and has a number of successful start-ups under his name, including Level Social Inc., a social media company. Tim is a University of Waterloo graduate in Computer Engineering and has been a lead investor in over $30M of commercial real estate. Tim has a passion for disruptive technologies and is excited to bring new real estate investment opportunities to the mass market.

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