The Fundrise Scandal Explained: What Actually Happened?

Executive Summary:

Fundrise is an investment platform that allows retail investors to put their money into real estate assets and high-growth companies.

The former CFO of its REIT product accused the company of mishandling customer assets. However, the allegations were never proven to be true.

How Fundrise Works

In order to better understand the issues that Fundrise went through, we first need to establish a common understanding of what the firm actually does.

Essentially, Fundrise is an investment platform that enables retail investors to put their money into real estate assets and high-growth companies.

The core product that Fundrise offers is a so-called real estate investment trust (REIT), which means the firm purchases income-generating real estate assets on behalf of its investors.

So far, Fundrise has acquired more than 200 assets, collectively worth more than $5.1 Billion, on behalf of its investors.

These not only include single and multi-family housing houses but also warehouses and other types of industrial properties.

In recent times, Fundrise has also launched a fund that puts money into how-growth companies that aren’t public yet.

Retail investors, in exchange for getting access to those asset classes, pay Fundrise a percentage-based management fee.

For example, Fundrise charges an annual fee of 0.15 percent for its REIT product, meaning if you invest $1,000, then the annual cost is equal to $1.50.

Fundrise has completed over 140 real estate projects thus far while managing client assets (AUM) worth $3.2 billion.

Explaining the Fundrise Scandal

A change in regulation is one of the biggest reasons why Fundrise even exists. Back in 2012, the JOBS Act, and more precisely Reg A+, enabled firms to raise up to $50 million per year from non-accredited investors.

What was previously reserved for hedge funds and asset managers now became available to regular people like you and me.

Three years after the legislation passed, in November 2015, Fundrise filed with the Securities and Exchange Commission (SEC), stating that it sought up to $50 million to form a real estate investment trust.

Dubbed e-REIT, investors could get into the fund with a minimum commitment of $1,000. However, they did not have a say in the properties the e-REIT would end up investing in.

Retail investors ate up the opportunity and quickly poured millions into the trust, in large part due to its comparatively low fee structure and promised returns.

Unfortunately, a mere three months into the fund, things took a turn for the worse. On February 9th, 2016, Fundrise filed a complaint with the SEC and addressed its shareholders in the following manner:

“Strategic Investors & Advisors —

I am saddened to have to inform you that an employee of our company has engaged in what we believe to be an attempt to extort over $1M from the company. As part of this, he claims the company acted inappropriately concerning two real estate deals. Though we believe there is no merit to his claims, we take any allegation with the utmost seriousness.

As a result, we have engaged a third-party financial audit firm to conduct a thorough investigation concerning his allegations. We are pursuing all appropriate and precautionary steps to protect our investors and our organization.

Furthermore, we are contacting the appropriate law enforcement agency to report what we believe to be his criminal behavior.”

The employee in question was chief financial officer and treasurer Michael McCord, 27, who joined Fundrise in 2014 after spending the previous few years at auditing firm KPMG.

Fundrise founder Ben Miller temporarily assumed McCord’s position until the matter was sorted out. Meanwhile, McCord went on the offense to win in the court of public opinion.

Weeks later, in March, the Washington Post published an interview with McCord where he made the following statements:

“The extortion allegations are baseless, and nothing more than a pathetic deflection attempt from the real story. On February 8, 2016 at 10:00 a.m., I repeated my concerns about what I believed constituted serious fraudulent behavior at the company to Benjamin Miller, CEO, and told him that I would not participate in it. We exchanged severance proposals without agreement.

By 11:00 a.m. and without any further communication from anyone, the company constructively terminated my employment by removing me from their website, discontinuing access to essential information systems, removing access to critical company files, and terminating email access.

I have been and will remain willing to fully participate in any legitimate investigation by the SEC or other authorities. The outpouring of support I’ve received from people both inside and outside of the company has been incredible, and I’d like to thank everyone who has reached out.”

Fundrise swiftly responded and issued the following statement to the Post:

“Over a month ago, we terminated McCord after what we believe to be a criminal extortion attempt, where McCord threatened to hurt the company by making wild accusations unless we agreed within two hours to pay him nearly $1 million and give him more stock in the company. We took immediate steps to protect our investors by reporting the matter to the Securities and Exchange Commission and the police department, as well as by opening our books to a top-10 independent accounting firm.”

McCord even showed up with two other unnamed individuals at Fundrise’s Washington offices, which Ben Miller did not know, to execute his alleged extortion attempt.

Another police person in the article essentially acknowledged Fundrise’s claim but denied any evidence of a crime.

The allegations were somewhat amplified by the fact that Dan Miller, Ben’s brother and Fundrise’s other co-founder, departed from the firm without any reasoning just months prior.

Interestingly, despite expectations of the contrary, this was the last we heard of the dispute between McCord and his former employer. But what exactly happened after?

The Aftermath

Both parties, namely Fundrise and McCord, seemed to have largely resolved their dispute. Whether they settled out of court has not been disclosed.

However, if that settlement was material or at least acknowledged that Fundrise was without fault, then the company likely would have disclosed its outcome. In all likeliness, both parties did have some dirt on them, which they were happy to move past.

With that being said, Fundrise went on to become one of the leading platforms of its kind. All of its public REITs have achieved cumulative annual returns of more than 4 percent according to its website.

The firm went on to raise hundreds of millions of dollars, invested in other properties such as warehouses, and even started a $1 billion growth equity fund to invest in late-stage tech startups.

Today, close to 400,000 people have put their money with Fundrise, which has facilitated transactions totaling $7 billion.  

And as far as McCord is concerned: he first went on to work as a CFO for McQueen Farms in North Carolina.

He then started two different investment firms such as Alumshares, which enables retail investors to pour money into companies from their alma mater.  

Interestingly, McCord’s time at Fundrise is simply described as ‘Fintech group’ on his LinkedIn profile.

Hi folks, Viktor checking in! Years of experience in various tech-related roles have led me to start this blog, which I hope provides you with as much enjoyment to read as I have writing the content.