Vancouver-based Addy has been hit with a $100,000 fine for trading securities without registering in one of the first major rulings by a Canadian regulator on fractional investing in real estate.
Vancouver-based Addy has been hit with a $100,000 fine for trading securities without registering in one of the first major rulings by a Canadian regulator on fractional investing in real estate.
Vancouver-based Addy has been hit with a $100,000 fine for trading securities without registering in one of the first major rulings by a Canadian regulator on fractional investing in real estate.
Addy complied with the investigation and fine, the British Columbia Securities Commission (BCSC) said, and is now working to register as a securities trading platform. The company acts as an intermediary in trades for real estate, and investors can buy into a property for only $1. Over the past five years, the company traded around $26 million in securities, an average of $700 per investor.
Talking Points
Fractional investment in real estate is slightly more commonplace in the U.S. There are around 59 real estate crowdfunding startups headquartered in the country, according to PitchBook data—though this includes companies that offer electronic Real Estate Investment Trusts, or REITs.
Concerns over legitimacy in the crypto industry have raised alarm among regulators when it comes to any unconventional or innovative dealers, said Warren Cass, securities and corporate law partner at Gowling WLG. “A lot of people lost a lot of money in crypto,” Cass said. Regulators want companies that are innovating in the space to “come through the front door” instead of skirting regulations.
Addy’s fine amounts to targeted action from regulators, rather than a bigger move to reign in the industry, said Alixe Cormick, a securities lawyer at Venture Law Corporation. The regulators reaffirmed the law rather than “signalling a policy shift,” she said.
Addy attempted to exempt itself from registering as a securities platform through the “crowdfunding” exemption, but the BCSC said some of the startups’s issuers have common principals with the company. Addy also solicited purchasers through emails and social media, so remaining unregistered was “contrary to national rules,” the BCSC said. The BCSC declined to comment about the status of the company’s settlement or any further details.
The firm didn’t register with the BCSC in the first place because it previously operated under exemptions, according to Kolina Kretzschmar, the company’s chief of operations. “As the company grew, the requirement became necessary,” she added.
Addy’s software is licensed by exempt market dealers—securities dealers who are required to register with the BCSC. It also brings in revenue by charging membership fees for certain features.
The startup has now applied to become an exempt market dealer itself, which Kretzschmar said will allow the company to develop new products and features. It can take six months to a year for a company to become registered with the securities commission, and then there is a “whole world of compliance obligations” to abide by, Cass said. “It’s a pretty stiff regime.”
Globally, there are currently around 170 companies globally in the real estate crowdfunding space, with US$3.38 billion invested, according to PitchBook. Addy appears to be one of the first fractional investment startups in Canada focused on real estate, though there are at least seven other companies in the real estate crowdfunding space.
Fractional investing is in some ways similar to a REIT, because they’re both indirect forms of investing and regulated by securities law. But REITs give investors exposure to multiple properties, while fractional investments are just a piece of one. On the other hand, traditional real estate doesn’t use an intermediary and is direct between the buyer and seller, so is governed by property law, Cormick said.
As the lines between technology and brokerage blur, it creates “regulatory lag” for enforcement around how to address these companies, Cormick added. As technology advances quicker than regulations can keep up, innovation is “under-regulated until issues arise,” she argued.
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