New Offering Structure for Debt Investments

Notes Fund and Indenture Trustee

Our RealtyShares platform will move to offering investors “borrower payment dependent notes” on all debt investments launched on or after Sept 6, 2015–similar to those used with powerhouse consumer credit lenders such as LendingClub and Prosper as well as certain other real estate marketplaces. We’ve gone a step further than many of those companies, though, by taking steps to increase investor confidence and security in this new offering structure. Note: this new structure will not apply to deals launched prior to Sept 6th, 2015.

Bankruptcy-remote design: All new offerings will be issued from one or more special purpose entities (SPEs) designed to be “bankruptcy remote” from RealtyShares itself. These SPEs are designed to minimize the risk of investors becoming merely general creditors in a bankruptcy case of an affiliate entity. In other words, in the unlikely event that something happened to RealtyShares, including a bankruptcy, the SPE’s obligations should continue unaffected. Except in certain cases, all borrower notes and investor notes will be held by one SPE.

Indenture Trustee: We’re signing an agreement with an indenture trustee that would step into the shoes of the SPE should it ever default on its obligations. That trustee will then make distributions to investors and service their investments should RealtyShares ever file for bankruptcy, dissolve, or have some other event of default.

Secured Investment: All of our debt offerings will now be secured by a pledge to the trustee of the underlying collateral of the underlying borrower loan – the promissory note, mortgage and related cash flows. To be clear, the collateral is not pledged directly to an investor as a holder of the borrower payment dependent note, but is instead pledged to an indenture trustee whose responsibility is to act on behalf of investors.

Perfection of Security Interest: In order to perfect our investors’ security interest and ensure the priority of that perfected security interest, the secured party must take possession of the promissory note. Therefore, the trustee will also take and maintain possession of the underlying loan collateral.

Public Notice: And lastly, to perfect the security interest and put third parties on notice, we will file UCC-1 statements that will put any potential third party creditors on notice that the underlying borrower loans have been pledged to the trustee for the benefit of investors.

The offering documents for our debt transactions will include a private placement memorandum and a form of promissory note from our SPE describing in more detail the terms of the borrower payment dependent notes and the relationship with the indenture trustee. We encourage investor education generally — so that our investors can make educated decisions, or so that their advisors have sufficient information to advise them – so we’re happy to provide these materials now, in advance of our future debt offerings, so that investors can have time to review the new structure.

As always, we appreciate your continued business and look forward to hearing from you.

Lawrence Fassler
Corporate Counsel
Lawrence has over 15 years' experience as a corporate attorney and has also run a real estate construction business. He previously worked with Realty Mogul, AVE (acquired for over $4 billion), Shearman & Sterling in NYC, and Cooley in their Sand Hill Road office.