Prodigy Network hopes to raise $31M in equity to crowdfund a Manhattan Hotel

ManhattanA New York real-estate company that has been a leader in crowdfunding in South America plans to replicate that strategy in the U.S.

Prodigy Network—known for raising $171 million in $20,000 increments for a mixed-use skyscraper development under way in Bogotá, Colombia—hopes to raise $31 million in equity, $100,000 at a time, for a hotel project in downtown Manhattan, according to a person familiar with the plans. The developer plans to convert the apartment building at 17 John St. to an extended-stay hotel.

Prodigy is trying to take advantage of the Securities and Exchange Commission’s move to lift a decades-old ban on private companies advertising investments that aren’t registered with the SEC. The change is scheduled to go into effect on Sept. 23.

Prodigy wants to convert an apartment building at 17 John Street in Manhattan to an extended-stay hotel.

Rodrigo Niño, Prodigy’s chief executive, said the SEC’s move to relax fundraising restrictions will have major repercussions for investors and developers alike. “We have learned that crowdfunding not only democratizes investments, it also makes projects viable that otherwise would not be possible,” he said.

The new SEC rules were required by the 2012 Jumpstart Our Business Startups, or JOBS, Act, which was designed to loosen up capital to spur business development and create jobs. Proponents say fundraising restrictions in the 1933 Securities Act were outdated for the Internet age, and precluded small investors from many opportunities. Some critics, though, have raised concerns that it might lead to scams on unsophisticated investors.

The change that goes into effect next week allows investment companies to publicly advertise deals to the estimated 8.5 million “accredited” investor households, those headed by people with annual incomes of $200,000 or a net worth of at least $1 million. The SEC is planning to ease rules even further in the coming months.

Crowdfunding on the Internet is becoming an increasingly popular source of capital. Web sites such as Indiegogo Inc. and Kickstarter Inc. have emerged to give artists and others a way to raise money for books, films, inventions and other endeavors.

These efforts aren’t regulated by the SEC because typically, investors don’t receive a financial return on their investment. SEC rules begin to apply once there is a monetary reward.

Real-estate companies that have jumped into the crowdfunding pool are working within the SEC’s guidelines. For example, Fundrise Fund LLC has registered some of its offerings with the SEC to solicit unaccredited investors for $100 minimum investments in small, locally based projects. Realty Mogul Co. requires a $5,000 minimum investment, but like Prodigy, it only allows accredited investors to participate.

Executives at both Fundrise and Realty Mogul say that they will launch advertising campaigns and other efforts to solicit investments after Sept. 23, as firms use the rule change to begin reaching out to a broader swath of the investing public.

Under the JOBS Act, those firms will be able to raise up to $1 million in equity per investment from unaccredited investors.

Prodigy plans to stick to accredited investors for now. Currently, Prodigy salesmen deal by phone, email or in person with potential investors, but they envision a day when vetted investors will be able to make commitments with the click of a mouse.

A native of Colombia, Mr. Niño got into real estate primarily as a residential broker in New York and Miami. He says he began exploring crowdfunding because he felt that the returns offered by condos were so low that there would be strong demand among small investors for other real-estate deals.

His first crowdfunding effort was for BD Bacata, the 66-story, 1.2-million-square-foot Bogota development that will include office space, retail, apartments and a hotel. The building, slated to be Bogota’s tallest, is being developed by BD Promotores. It is being financed completely with money Prodigy raised through Prodigy’s network of brokers and by advertising extensively in Colombia, where rules around raising money are different from those in the U.S.

Prodigy also has raised $16 million for a 108-room limited-service hotel in Bogotá and $12 million for an office building near the city’s airport. Neither project has broken ground. To assure potential investors, Prodigy typically employs a third-party firm that controls how their money is spent.

Prodigy has used its fund-raising strategy for a deal in the U.S. before. Last year, the company raised $24.5 million in equity from 48 investors—who had to put in a minimum of $250,000—to buy another downtown Manhattan building, 84 William St., that it plans to turn into a hotel. In that case, it didn’t openly solicit American investors so it didn’t face SEC rules on marketing and advertising. Prodigy is buying 17 John and 84 William from Metro Lofts LLC, according to Nathan Berman, that company’s chief executive.

Source: Melvin Backman – Wall Street Journal


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