Last year’s JOBS Act radically rewrote the rules for “general solicitation,” making it easier for businesses to raise venture capital and for would-be investors to participate in these deals. The logic was both simple and compelling: ease the flow of capital to flourishing businesses, and you’ll jump-start job creation across the nation. What progress have we made since then?
Quite a lot, actually. According to the SEC, through June 30, 2014, there were 1,310 offers under Rule 506(c), raising $14.1 billion, and an additional 9,200 offerings under Rule 506(b), raising over $233 billion.
That’s a promising start, but only the beginning of a huge opportunity. Experts estimate that JOBS Act rule changes could unlock $18 trillion-plus in alternative investments - which suggests only a fraction of promising, fund-able alternative investments got funded last year.
While there are reasons some private securities issuers and investors remain on the sidelines, there’s evidence everywhere that the boulder is rolling. Let’s start with a thumbnail sketch of the rule changes themselves; by understanding these we can better parse how they’ve influenced the motivations of everyone involved.
Most alternative investments are private placements of securities that don’t have to be registered with the SEC - as opposed to public companies and mutual funds, which do. These private placements must comply with SEC Regulation D. The intention of this regulation is to protect the investing public by making unregistered securities available only to investors sophisticated enough to understand them.
Most sponsors rely on Rule 506 under Reg D to guide their placements. This rule said sponsors could not advertise to the general public, but could only offer private placements to investors they knew to be institutions or wealthy, knowledgeable individuals – what the market terms “accredited” investors. Alternately, sponsors could work with agents who have these significant relationships. The JOBS Act expanded Rule 506 to permit solicitation to the general public, so long as the sponsor (or an agent, like my firm Venovate) verifies that all investors are accredited at the time they invest. Sponsors can use the old-school Rule 506(b), or opt for the new emerging standard, Rule 506(c). Under Rule 506(b), sponsors must rigorously monitor all activities to ensure their general solicitation is only presented to verified, accredited investors. Rule 506(c) is a bit more flexible, allowing issuers to engage freely in general solicitation and publicly promote their fundraise, but they are responsible for the new requirements to ensure all investors are indeed accredited.
Put in plainer terms: if sponsors or their agents verify they’re advertising only to accredited investors, they can engage a much larger universe of potential investors. Enter online platforms like Venovate, which connect verified accredited investors with quality deals worthy of those investors’ attention. Not only are we upping the odds of making these magic connections, Venovate’s secure online platform ensures an efficient, fully compliant fundraising process, from initial solicitation to final money transfer.
It’s a big change from how alternative investments have traditionally been handled. But online models in private placements create tremendous efficiencies for both sides of the transaction. Old-school practices may die hard, but the new online era of alternative investing has definitely arrived.
Issuers and investors who’ve held back might be surprised to find nearly all of their lingering concerns are addressed by firms like Venovate. Issuers worry about efficiency: Will new players in private securities placement take companies through a complicated process correctly? If smaller, deserving companies aren’t large enough to capture attention from the Goldmans of the world, how can they get a fair valuation and a smooth fundraise?
Investors have concerns of their own. As hedge and venture funds and advisors get larger, rules preclude them from investing in smaller or younger alternative funds. Where can they turn to find alternative investment opportunities that’ll deliver alpha to their clients?
The online era of “crowdfinancing” solves all these problems - and then some. Sponsors can rely on online platforms like Venovate to verify accredited-investor status, increasing their access to investors while smoothing the logistical process. Investors, in turn, can deliver differentiating alpha to their clients again. We give investors the opportunity to prove their brilliance - and their value - to their client base.
The short term still presents some hurdles. However, sponsors have shown a willingness to navigate the new rules – especially if the deal is big enough. The result? A generation of smaller startups with Airbnb or Uber potential – all potential job-engines – will move, in time, from having less access to capital to having access to capital commensurate with their value add and ultimate promise.
What will it take to unclog the pipeline? Greater access, transparency and efficiency. The technology is already in place to provide the access and transparency we need. And our regulatory groups have a decade or more of experience in working with brokerages to allow for greater efficiencies while enforcing compliance. The framework is in place. It’s now up to investors and issuers to seize the prime opportunity that lies before them.
Michael Raneri is CEO of Venovate, an online platform for investing in alternative assets.