33) The Nightingale Crowdfunding Fiasco
Real estate crowdfunding started after the passage of the JOBS Act in 2012, which allowed for the advertising and solicitation of investors for real estate investments⁴. Some of the first real estate crowdfunding platforms, such as Fundrise and Patch of Land, launched in 2012, while others like RealtyMogul and CrowdStreet launched in 2013 and 2014 respectively¹.
Nightingale Properties is a New York-based investment firm that was founded in 2005 by Elie Schwartz and Simon Singer¹. The company has accumulated a commercial real estate portfolio spanning millions of square feet across 22 states¹. Elie Schwartz is the CEO of Nightingale Properties¹. He met Simon Singer, who was working as an in-house counsel for a real estate firm, when Singer’s firm hired Schwartz’s IT services firm. They later teamed up to build Nightingale Properties.
CrowdStreet is a real estate crowdfunding platform that was founded in 2013 in Portland, Oregon¹. The platform has grown to have an investor community of over 100,000 strong and has facilitated total investments of over $300 million in value across over 250 offerings¹.
In July 2023, CrowdStreet came under fire after tens of millions of investor dollars allegedly went missing from accounts connected to Nightingale Properties⁵. The disclosure was made by a fiduciary for the retail investors and related to two Nightingale deals in Atlanta and Miami Beach for which Nightingale raised more than $60 million from over 800 investors⁵. Both deals never closed, and entities connected to Nightingale CEO Elie Schwartz allegedly “misappropriated” the funds, according to the fiduciary⁵.
Nightingale was in financial distress before the Crowdstreet fiasco. One of its largest properties is in receivership, two others are scheduled for foreclosure auctions next month and a Lower Manhattan skyscraper it sank a half-billion dollars into sits empty.
This issue has raised questions about the safety and security of real estate crowdfunding platforms. It highlights the importance of transparency and accountability in these platforms, as well as the need for proper safeguards to protect investor funds. CrowdStreet has since amended its escrow policy, with deals now being funded through third-party escrow accounts as part of the firm’s transition to acting as a securities broker⁵. The funds in the escrow accounts will only be released when the sponsor is set to close on the deal⁵. This incident could potentially affect investor trust in real estate crowdfunding platforms and highlights the need for proper regulation and oversight in this industry.
Crowdstreet identifies a three step process in vetting the sponsors, the deal and all the legal documents before they allow the deal to be on their platform. https://www.crowdstreet.com/deal-review.
The question being asked is, where did this process breakdown? Why wasn’t Nighingale’s distress taken into account during the vetting process? We will learn more as the SEC and the FBI investigate this further.