A conflict has erupted in the investment sector, set off by the news of Nightingale Properties’ notorious blunder that transpired on the CrowdStreet real estate crowdfunding platform. Investors, who had collectively lost over $1.5 million in Nightingale’s disastrous attempt to acquire the Atlanta Financial Center, are now focusing their frustrated sights on CrowdStreet, demanding a recourse. Joshua Kons, Andrew Stoltmann, Joseph Wojciechowski, and Sara Hanley, reputed securities litigators, have lodged an arbitration claim on behalf of the dozen investors with the respected Financial Industry Regulatory Authority (FINRA) against CrowdStreet. They are demanding more than $3 million in damages and an injunction that could potentially cease CrowdStreet’s operations.
Court Claims against CrowdStreet
The fresh legal claim, secured by Bisnow, though unreported until now, pointed an accusatory finger at CrowdStreet, accusing it of acting as an unlicensed broker-dealer and alleging it failed to perform due diligence when evaluating Nightingale’s offerings on the platform. The plaintiffs also claimed that CrowdStreet’s failure to ask for investment funds to be placed in escrow accounts until deals were executed indicates negligence in protecting its clients’ assets.
“Not having an escrow account to hold those funds, I believe, is a fatal fact for CrowdStreet,” opined Wojciechowski. The investor group is seeking an order from FINRA arbitrators compelling CrowdStreet to refund their investments, in addition to punitive damages and a declaration that the platform “willfully violated federal securities laws.”
Battle of Statements
In response to the claims and allegations of operating as an unlicensed broker-dealer, a CrowdStreet spokesperson retorted, “Any claim that CrowdStreet acted as a broker in connection to Nightingale’s offerings is inaccurate.” A FINRA spokesperson declined to comment.
It’s important to note that under the Securities Exchange Act of 1934, any individual or organization that trades securities on behalf of clients is deemed a broker-dealer and must register with the Securities and Exchange Commission (SEC). Despite CrowdStreet’s protestations of neutrality, if a firm engages in marketing and selling securities, even if it isn’t certified as a broker-dealer, it must comply with the regulations established by the Securities Exchange Act, as stated by several independent securities law experts.
Diverting the Blame
CrowdStreet has consistently defended itself, arguing it played a neutral role and did not promote or endorse investments. It claimed that it operated only as a marketplace, despite sending marketing emails to customers extolling Nightingale’s prospective deals as a “trophy asset with huge potential”.
However, experts suggest that the issue may not be as straightforward as it seems. Adam Gower, a consultant for real estate crowdfunding, pointed out a fascinating paradox. “It’s a hard thing to say, ‘We’ve done our homework and this isn’t a recommendation to invest,’” he stated, highlighting the difficult position that real estate crowdfunding platforms can find themselves in.
If the past is any indication, this isn’t the first time investors have been caught in the crossfire due to alleged failings by CrowdStreet. In 2018, MG Capital, a New York-based firm, came under scrutiny when it was revealed that it had fabricated the firm’s track record, defrauding investors of $58M. While CrowdStreet was never directly implicated by the SEC, the platform was sued by several unidentified investors over the issue.
The depth of CrowdStreet’s legal exposure remains uncertain. However, the growing discontent among investors and mounting allegations could launch a wave of legal challenges that could potentially upend its operations.