12 Jul The Democratization of Capital
It’s been 80 years since entrepreneurs could legally perform a general solicitation. Getting slapped with some of the hard rules laid out by the SEC has been the fear of Investment Bankers and Private Equity funds alike for the last near-century. Luckily, this week’s JOBS act changes many of the rules revolving around what soliciting capital for investment opportunities. The accountants and attorneys will spend plenty of time telling us repeatedly what we can’t do (that’s their job after all). But there are some interesting, creative and excellent opportunities that will be coming soon, thanks to the ban on general solicitation, something Axial Markets calls the Democratization of Capital–a term originating from the microfinance boom of a decade ago.
General Solicitation & The Positive Feedback Loop
One day investors, entrepreneurs and those who raise capital for business start-ups will eventually look back on former times and comment with something like, “remember when we could only pitch to ‘accredited’ investors.” I image–by today’s standards–an obvious question would ensue, “what is an accredited investor?” By today’s standards those with $1M in assets above the value of their home or who have made a minimum of $200K a year for the last two years qualifies one as an accredited investor.
Being accredited is not the only thing that changes. Prior to the JOBS Act, any solicitation could not be made generally. That is, if you wanted others to know about your business for investment purposes to raise capital, then you couldn’t put up a post on Facebook or email anyone other than your rich uncle. In other words, the limitations were vast. And rightly so, snake-oil salesman always seem to surface when there’s low hanging fruit. Even those who’ve wholeheartedly supported the new legislation admit that fraud instances are bound to rise, but because I would only be worried about something like that occurring with my grandmother, I think the instances of fraud will (hopefully) be limited.
There are other benefits as well, most of which I would call something of a positive feedback loop. Because entrepreneurs will have easier access to funding, we’ll probably see more of them. More entrepreneurs means more deal opportunities for investors. Which, I hope, would also mean more investors may surface as well. It certainly will mean that investors will now have access to deals heretofore unknown. Think of the accredited investor millionaire who owns a farm in Jackson Hole, WY. Will he get wind of an excellent growing start-up deal in Boston? Ne’er shall the twain meet, as the saying goes.
More deal opportunities also means, the cream may take longer to float to the top, but it could also mean there will be more cream to go around. The reverse is also true. More deals could mean more sour milk at the bottom of the pale, perhaps more than we’ve ever seen.
“Real” investors will just need to be more selective, more picky and more rapid in saying “no” in their decision making when it comes to providing capital to new growing companies.
Social Media & Crowdfunding
I’m no stranger to the power of social media. However, I’ve been a bit reticent at adopting many of the social channels as I feel in too many instances, they can be huge time vacuums. Imagine some of our best portals being turned over to general solicitation requests. Linkedin, Facebook, Twitter and even the standard blog post could include data on the “latest deal.” In many instances, the good deals could see greater uptake as feeding frenzies ensue.
Furthermore, currently-operational crowdfunding sites such as Kickstarter are a bit ahead of the wave of funding options. However, other more PE-focused crowdfunding options are cropping up as well. Circleup is one such venture, brought to you by the fame of Fed Wilson.
The dust has not quite settled yet as to what all the nuances will be in the treatment of solicitations. The aforementioned Axial post speaks of “hucksters” setting up call centers to raise money from every Peter, Paul and Mary. This is certainly a possibility, but when you start herding cats, things get a bit more complex and emotional. Let’s just hope those who’re willing to throw their money away in the lottery can now shift gears a bit and perhaps throw some dough at the start-up scene. It would at least provide more productive use of the capital. That is, unless you think the state-run lottery system uses the cash “efficiently.”
Sell-side Mergers & Acquisitions
Yes, the most obvious boon for the JOBS act comes directly to the scrappy start-up world (and not just tech start-ups I might add). We sometimes overlook some of the other areas in which crowdfunding and general solicitation can help in existing businesses looking to perform some sell-side M&A.
In the hype of it all, most have failed to consider some of the positive impacts the changes will have on sell-side transaction liquidity. We’ve run through the numbers before about how many individual business owners will be selling in the coming demographic shift instigated by the retiring boomers. Millions of existing, profitable businesses will be sold over the next two to three decades. Unfortunately, many small businesses fail to sell and the owners are often forced to walk away from a descent profit-center when it comes time to retire. Then comes the JOBS Act.
The latest legislation will offer a “get out of my business easier” card. With general solicitation possible, business owners can perform ESOP-like corporate succession offerings to the general public, providing a means for them to feel more comfortable in retirement and giving some investors a more reliable source of cash. Many smart and conservative retail investors will most likely be comfortable with steady-state than start-up.
Sure, fraud instances will occur. But the general consensus is that the landscape for doing deals has been greatly altered by a shrinking of information gaps and technological advances, especially over the last two decades. I can certainly see green as capital and investment power is placed back into the hands of the people.