Now that solar power is competitive with the grid both within the U.S. and globally, the challenge becomes finding enough financing to build projects. First Solar (NASDAQ:FSLR), SunPower (NASDAQ:SPWR), and SolarCity (NASDAQ:SCTY.DL) have access to hundreds of millions of dollars of capital to fund both utility-scale and residential solar projects, but what about financing outside of the big industry players?
The solar mortgage has been offered by SunPower and others, but that hasn't yet gained a lot of traction. One opportunity that's opening up is crowdfunding of solar projects. Mosaic is leading the charge on this front, so is this an investment that will change solar or open up a new investment option? I talked with Mosaic's CIO Greg Rosen recently to get some insights into this new financing model.
What is Mosaic?
Mosaic is essentially a financing company that connects medium-sized solar project developers with a group of small investors. These investors pool resources into a Special Purpose Entity in increments as small as $25 to provide debt to a solar project and are paid an interest rate of 4.5% to 6.5% for that investment. This allows small investors to invest in individual solar projects and brings low-cost funding to projects that may otherwise find a hard time getting it.
This is very different from First Solar, SunPower, or SolarCity because investors don't hold an equity portion of the project, so there's no worry about tax equity or depreciation rules. Those benefits go to the project owner. This is strictly debt financing, which actually simplifies the investment.
When investors are deciding on a project, they get a prospectus of the development that detail terms and risk information, although I thought the details about projected energy production and cash flows were pretty sparse. The data isn't comparable to what First Solar, SunPower, or SolarCity has or details to investors, so there's an opportunity for improvement there.
Right now, Mosaic is only licensed to offer this debt to unaccredited investors in California and New York, but accredited investors don't have the same restrictions and have already invested from 45 states.
What's the downside?
On the surface, this seems like a win for everyone. Developers get financing for solar projects, investors get a low-risk return on investment, and Mosaic makes its 1% management fee. But there's a reason not every state is jumping for joy at the prospect of small investors pooling money for solar projects.
First, investors have no recourse against project developers who they are financing. The note explicitly says, "The Notes will be unsecured obligations of MSI, and you will not have any security interest in any of MSI's assets, including the Loan, nor will the Notes be secured by any assets of the Project or its owner."
Project assets do back the loan Mosaic makes to the project developer, just not the loan small investors make to the fund. This is done so that hundreds of small investors don't sue a project owner, but it puts the onus on Mosaic to pick projects that will pay on time and go after owners who may not pay in the interest of note holders. That's putting a lot of responsibility and risk on Mosaic.
The big risk with a platform like Mosaic is the same as it is with any other crowdfunding platform. Not only do you have the risk above -- if the manager is a less-than-trustworthy businessperson, they could misrepresent projects or commit fraud on unsuspecting investors. Basically, this new financing option is only as good as the company running the fund.
You can look at this the same way as a hedge fund. There are thousands of very successful and safe hedge funds that unsophisticated investors have invested in very profitably. But it only takes one Bernie Madoff to sully the reputation of the entire industry. The same goes for solar crowdfunding. For that reason more than any other, investors even considering solar crowdfunding should learn as much as they can about the company they're investing in, because that's the biggest risk in this investment.
Is Mosaic a model for the future?
On a small level, Mosaic has been very successful proving the crowdfunding solar financing model. Three thousand people have invested $6 million in projects, and so far they have made 100% of scheduled payments.
This could potentially be a model that will increase demand for projects from SunPower, First Solar, SolarCity, and others. But I don't think they'll try to do crowdfunding themselves. Instead, they'll go to larger investors, who will take a lower yield.
What developers should like about this model is having another financing option for their project. The more financing options, the more solar will be built, because each project will have different financing needs.
From the investor side, Mosaic may be a great company but I would be cautious investing in solar crowdfunding, simply because you don't have the same protections that stocks offer. That doesn't mean it can't be profitable -- just that you need to do a lot of due diligence and not invest blindly. That's really the big risk for all of crowdfunding.
Fool contributor Travis Hoium manages an account that owns shares of SunPower and personally owns shares and has the following options: long January 2015 $5 calls on SunPower, long January 2015 $7 calls on SunPower, long January 2015 $15 calls on SunPower, long January 2015 $25 calls on SunPower, and long January 2015 $40 calls on SunPower. The Motley Fool recommends and owns shares of SolarCity. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.