Pacaso, the fractional real estate marketplace, is making a last-ditch appeal to Main Street to save its struggling business. In December 2023, the company launched a $72.4 million Regulation A+ offering, selling non-voting Class D common stock to retail investors. In its offering, Pacaso touts a compounding “gross profits” (a red flag mentioned by others) and the opportunity to invest alongside A-list investors such as Softbank, Greycroft, and Howard Schulz.  Yet beneath the marketing lies a troubling reality that sophisticated investors appear to have already recognized.

The Regulation A+ Hustle

Regulation A+ (sometimes called Reg A+) is a streamlined path for smaller companies to raise up to $75 million in a 12-month period, split into two tiers with varying regulatory requirements. The JOBS Act of 2012 revamped these rules to “democratize” investment, letting both accredited and non-accredited individuals buy into early-stage ventures.

In principle, this should open the door to promising startups. In practice, Reg A+ is increasingly used as a fallback by companies unable to secure traditional venture funding. A Barron’s article once captured the state of play: “We were supposed to get new jobs and new industries. Instead, we’ve gotten GoFundMe-style websites hawking penny stocks and professional wrestlers shilling shares on TV.”

Indeed, even when these firms manage to list on major exchanges, their stock prices typically plunge by an average of 40% within six months—an underperformance of about 50 percentage points relative to the broader market.

Personally, When I asked ChatGPT what were some notable Reg A offerings, three out of the five it mentioned had gone bankrupt—Elio Motors never delivered on its three-wheeled vehicle promises, ShiftPixy’s gig economy platform ended in bankruptcy, while Chicken Soup for the Soul Entertainment’s streaming ambitions collapsed into Chapter 11. These aren’t outliers. Now Pacaso, once a darling among Silicon Valley investors, is tapping Reg A+—which raises the question: Why can’t it tap more traditional funding?”

Pacaso’s Rise and Stumble

Pacaso was founded in 2020 by former Zillow executives, billing itself as a more affordable way to own a luxury vacation home. Early on, it moved lightning-fast: in 2021, it reportedly became the quickest company in Silicon Valley to reach a $1 billion valuation, powered by SoftBank’s backing. As pandemic-fueled enthusiasm for real estate soared, its valuation hit $1.5 billion.

But that momentum didn’t last. In 2022, Pacaso posted $219.1 million in revenue. By 2023, that number had dropped to $90.1 million—a 59% plunge. Although part of that decline was due to the company slowing its pace of property acquisitions, the properties it did buy and resell in 2023 lost about $11,724 per transaction (a margin of -0.80%), down from nearly 4% in earlier margins.₁

Meanwhile, Pacaso’s cash on hand stood at just $39.6 million as of December 31, 2023. That’s a precariously thin cushion for a company with substantial operating costs.

Pacaso’s own offering circular underscores the situation: “The Company believes that its revenues and current cash will be sufficient to continue to fund its operations beyond the next 12 months. The Company intends to raise capital through its Regulation A offering and is not dependent on the Regulation A proceeds to operate for the next 12 months.” But reading between the lines, Pacaso will likely need more funding by early 2025—if not sooner. The company could burn through its available runway even faster if growth remains sluggish.

Even If Pacaso raises the full $70 million from its current Reg A+ offering, it might scrape by until 2026 under a “no-growth” scenario—but it would be running on fumes by then.₂To actually reach break-even in that same window, Pacaso would need to increase its resales by about 18.11% annually. Achieving that growth is no small feat when high-margin vacation property sales are slowing. In a downside scenario—where demand sputters or property prices soften—Pacaso’s coffers could run dry well before 2026.

A Flawed Business Model Under Pressure

Pacaso’s core model—buying premier vacation homes, carving them into fractional shares, and reselling those shares at a premium—worked while the economy was running hot. When capital was cheap and second-home demand soared, Pacaso could flip shares quickly and keep carrying costs low.

But conditions have changed. Rising interest rates are cooling off once red-hot vacation markets. And if high-end consumers grow skittish about pricey getaways, fractional shares become a tougher sell. Meanwhile, the overhead of managing multiple top-tier properties is substantial, making it difficult for Pacaso to pivot or downsize.

This is precisely why savvy institutional investors appear reluctant to cut another check. For Main Street investors, the terms are even worse: no voting rights, no tag-along rights, no board seats, and no protective provisions. Insiders keep all the control while asking everyday folks to put in the cash. That’s a glaring red flag when the big-money players have already made their exit.

Beware of Greeks… and Startups Bearing Gifts

Pacaso isn’t just a cautionary tale about one company’s fate; it’s an example of how market dynamics can shift risk from well-informed institutions to less-equipped retail investors. Regulation A+—meant to democratize finance—has too often become a gateway for firms that can’t raise money any other way.

Should retail investors be able to invest in early-stage ventures? Perhaps. But with Pacaso, it’s worth asking why so many sophisticated investors have decided to sit this one out. When professional capital opts out, there’s usually a reason.

1  The author created the forecast for the company based on its 2023 offering Circular and past performance. While these estimates are not perfectly accurate, they are similar to H1 2024 report the company recently released. Therefore, while not perfect, there is high confidence that it presents a reasonably accurate picture of the company.

2  Based on the same projections.