Key Risks

The client’s money is held in a separate client account with Emirates NBD and is administered by SmartCrowd.

SmartCrowd has conducted due diligence on Emirates NBD’s custodial systems and controls and has deemed them fit and proper to hold client money on its behalf. Emirates NBD is regulated by the UAE Central Bank.

While Emirates NBD is responsible to SmartCrowd for the safekeeping of its clients’ money, Emirates NBD has no direct relationship with clients. Therefore, SmartCrowd is fully responsible to maintain proper segregation of customer monies deposited in the ENBD account.

Clients are subject to the protection afforded by the DFSA’s client money provisions, and in the event of an insolvency, liquidation, or other distribution relating to SmartCrowd, which is a DFSA regulated firm, Client Money will be subject to the DFSA Client Money Distribution Rules.

Flip Product Risks and Disclosures

Over and beyond the Risks and Disclosures set out above for the Standard Product on the Smart Crowd crowdfunding platform there are the following Risks and Disclosures for investors investing in the Flip Product:

1. Market Risk:
   1. The inherent unpredictability of the real estate market represents the primary risk associated with the Flip Product. Upon renovation the selling price may not meet the initial expectations which could lead to reduced returns to investors.
   2. The property in the Flip Product may not sell immediately upon renovation and Smart Crowd may require to rent the property which would delay the sale even further as buyers prefer vacant possession.
   3. The value of properties can fluctuate, potentially resulting in financial losses for investors especially as the Flip Product is a shorter-term investments.
   4. Mitigation: a meticulous selection of undervalued properties in desirable locales characterized by strong appreciation potential can partially mitigate this risk.
2. Operational Risk:
   1. Sourcing discounted properties has its risks as the property may have defects that are not immediately recognizable and could push the renovation costs higher once the work begins.
   2. securing necessary approvals may take longer than anticipated and would prolong the investment term of the Flip Product reducing the returns to investors.
   3. completing renovations within designated timelines may not be possible due to delays by contractors which would prolong the investment term of the Flip Product reducing the returns to investors.
   4. budgets may present operational challenges if not effectively prepared by the Sponsor and Project Manager at the inception of the Flip Product. This can be mitigated by the contractual arrangements with the Sponsor holding them liable for any cost overruns.
   5. Mitigations:
      1. Diligent due diligence, collaboration with reputable real estate firms, and robust project management practices can help effectively manage these operational risks. To mitigate these risks, strict adherence to regulatory standards, transparent communication with investors regarding associated risks, and close collaboration with regulators for ongoing monitoring are vital measures.
      2. A notable aspect contributing to risk mitigation within the proposed property flipping model is the possibility of generating rental income from a renovated property if an immediate sale is not realized. This secondary income stream acts as a safety net, providing investors with increased protection and flexibility, distinguishing the Flip opportunity from alternative investment options.

• Choosing the appropriate real estate company and contractor is pivotal to minimizing operational risks within Flip projects. Effective due diligence on contractor and sponsoring entities can significantly mitigate project risks.

1. Examples of due diligence done are as follows: Check Licenses and Insurance, ensure Performance Guarantees are in place, Verify References, Examine the Portfolio, Conducting a Background Check and Hold detailed Meetings with the Sponsor, Project Manager and Contractors.

3. Project Management Risk: There is a risk the project will not be managed effectively and the detailed project plan milestones not met, so Smart Crowd is committed to ensuring effective project management by undertaking the following measures. Developing a Detailed Project Plan with the Project Manager, having regular project updates from the Project Manager and issuing the Investors detailed updates on the progress of the Flip Product.
4. Third-Party due diligence:
   1. As per section 2 above, Smart Crowd will conduct due diligence on all third parties involved in the Flip Product so the risk of underperformance or fraud is mitigated when using third party Sponsors, Project Managers and Contractors. Smart Crowd will work to ensure all conflicts of interests between the Investors, Sponsors, Contractors and Project Managers are identified and mitigated and made aware to the investors.
   2. Smart Crowd will conduct due diligence on the Sponsors, Project Managers and Contractors by checking their references, their track record in delivering renovation projects, financial history, credit history and their reputation.
5. Conflict of Interest: Smart Crowd has a conflicts of interest policy to ensure all conflicts are reported and mitigated.
6. Valuation Risks: Complying with DFSA regulations, an independent valuation report for the property is mandated during the crowdfunding campaign. However, given the dynamic nature of property flipping, potential market fluctuations, and the necessity of projecting post-refurbishment values, inherent risks accompany valuing properties at the time of resale. As such independent valuations will be performed when buying the Flip property and at the time of selling the Flip property.
7. Market fluctuations Risk: There are risks stemming from changing economic conditions, demand-supply dynamics, and other external factors which can reduce the selling price of the property after renovation or delay the sale of the renovated property. This risk is effectively managed through the following approach: To counteract this challenge, our strategy involves maintaining continuous communications with investors, ensuring they remain informed about market fluctuations. Regular updates on property valuations will be conducted throughout the property’s holding period, allowing us to monitor any shifts in its value closely. By implementing this proactive approach, we can effectively address the impact of market volatility and keep investors well-informed about the property’s performance.
8. Fees:
   1. Fees for the Flip Product are different from the Standard Product on the Smart Crowd Crowdfunding platform. There will be an entry fee of 1.5% of the total value of the Flip project (Purchase price of the Flip property + Renovation costs) and a performance fee of 40% of the profits at the sale of the Flip Product if the profits exceed 10%. This 40% performance fee would be split 2% for Smart Crowd and 38% by the Sponsor. This is a much larger fee than the fees in the Standard Products on the Smart Crowd platform and reflect that large amounts of risk and work required to be put in by Smart Crowd and the Sponsor.
   2. As it is in the interest of the Sponsor to come within the budget amount for the renovations (as any cost over-runs will be borne by them) there is the potential conflict of interest that they could reduce the quality of the renovations which would negatively impact the sale price upon renovation. This is mitigated by the larger success fee for the Sponsor which incentivizes them to get the highest possible sale price for the property upon renovations being completed.
9. Cost Over-runs: As is the nature of renovations and construction, there can be costs which were not budgeted by the Sponsor/Project Manager. Smart Crowd has worked with the Sponsor/Project Manager to ensure there are contractual provisions that any cost over-runs are borne by the Sponsor/Project Manager and not the investors.
10. Costs: For each Flip Product, every fee will be detailed in the Investment Case. These fees will include fees for renovation approvals, costs of renovations, brokerage fees, admin fees, Smart Crowd fees, Sponsors fees, etc.
11. Term: The Flip Product is intended to be a shorter term investment however there are a number of scenarios which could prolong this investment:
    1. If there are delays in the renovation this would prolong the investment and potentially decrease returns to investors

If the market softens, there could be a struggle to sell the property which would require Smart Crowd to lease the property which could prolong the investment and reduce returns