Grant Cardone and his investment firm Cardone Capital have come under serious scrutiny this year following revelations about his business model that may lead to losses in Cardone’s real estate “empire” and leaving investors with substantial losses.
Cardone Capital, launched in 2017, markets its business model as follows: first, Cardone Capital finds real estate opportunities and negotiates and closes their purchase and financing, second, investors become partners in the real estate projects, third, the properties generate rent, and fourth, the Cardone funds pay cash distributions to investors (see the “How it works?” section of Cardone Capital’s website). Cardone Capital’s website boasts a portfolio of multi-tenant properties across the United States.
Cardone May Have Made False Promises And Omissions To Market And Sell Investments In Various Real Estate Funds
Cardone sold investors interests in various real estate projects titled “Cardone Equity Fund”. According to one class action lawsuit already on file against Grant Cardone and Cardone Capital, Cardone used social media and various other marketing materials to solicit investors for his funds. Through these statements, Cardone promised investors they would double or triple their investments, promised steady distribution payments, and represented that invested capital would be “safe”.
Cardone bragged on social media that Cardone Equity Fund V raised $50 million. Cardone Capital’s offices are in Dade County, Florida.
Cardone made these public offerings under Regulation A of the Securities Act, which, among other things, prohibits the making of material misrepresentations and omissions by a seller in connection with the offer or sale of securities involving a prospectus or oral communications.
Grant Cardone Released A Series Of YouTube Videos That Revealed His Business Model May Be Destined To Fail
In April 2020, Cardone released a series of videos on YouTube (which have since been removed), which described his business models. Here are some of the key takeaways:
- To finance the purchase of portfolio properties, Cardone gets ten-year loans in which the first five years are interest only; and
- Cardone said he owes $1 billion to lenders and publicly available documents show he pays an average interest rate of 3.75% on the debt. Cardone’s description of incoming cash flow from portfolio properties makes it seemingly impossible to keep up with ballooning interest payments.
The bottom line is that based on these financials, over the next few years Cardone Capital must substantially increase the size of its real estate portfolio, raising millions more in capital from investors, and for a “nothing can go wrong” real estate environment that results in high occupancy rates and steady stream of rental income to repay investors.
According to reports, Cardone Capital suspended distributions to investors in April 2020, laid off half of its staff, and withdrew its proposed offering for Cardone Equity Fund IX.
Cardone’s Offerings Were Required To Comply With Regulation A
Under federal securities laws, the offer or sale of a security must either be registered with the Securities and Exchange Commission (SEC) or it must fall under one of the securities laws’ enumerated exceptions.
Cardone’s offerings were under Regulation A, one of the exemptions from registration. In order to qualify under Regulation A, a securities offering must meet certain eligibility requirements and make certain disclosures. And as is the case for all securities requirements, these transactions and certain statements made in conjunction with them must not be false, misleading, or contain omissions that are false or misleading.
Subject to certain requirements and limits, Regulation A offerings are available to accredited investors and non-accredited investors. An accredited investor includes many institutional investors and corporate entities, as well as high-income, high-net-worth individuals whom the SEC has deemed sophisticated enough and having the financial wherewithal to participate in these higher-risk, more speculative investments.
Cardone’s ability to raise funds from non-accredited investors may have been a large contributor to his ability to raise substantial funds from middle-class, main street investors through grassroots social media marketing.
Are You Concerned About Your Investment In A Grant Cardone Investment Fund?
If you invested in in one of Grant Cardone’s real estate funds, contact Silver Law Group for a confidential consultation. Silver Law Group represents investors in securities and investment fraud cases nationwide to help recover investment losses due to fraud, Ponzi schemes, and other financial misconduct. We work on a contingency fee basis, meaning you won’t pay us any legal fees unless we are successful. Call us toll free at (866) 442-3601 or email email@example.com to get in touch.