I recently attended the national ADISA conference held this year in Las Vegas and once again was amazed at both the frenetic activity within the alternative investment community as well as the lack of clarity as to what the future holds for the world of raising private capital.
ADISA is the largest trade organization in the alternative investment industry with more than 4,000 members comprised of issuers, broker dealers, attorneys and other professionals. Their group influences over 30,000 industry participants and has been a leader in setting standards of quality and ethics as well as providing a forum for education. I was asked to be a speaker on one of the panels at the event to discuss how firms taking advantage of the latest regulation changes and technology raise private capital. The tongue in cheek title of the panel was “Can We Be Frenemies?”, reflecting the general reluctance of the industry to adapt to new trends. Yet, the industry is one that was built upon new trends.
Alternative investments, as the name implies, came about initially as a segment of asset allocation and eventually became an industry in its own right due to the demand by investors to find more efficient methods for their capital to find predictable returns. As a former financial adviser and RIA, I can personally attest to the importance of alternative investment strategies in the design and implementation of effective investment portfolios for accredited investors.
The purpose of the panel was to provide a forum to discuss how changes in regulations and the adoption of technology are changing the way private capital is being raised as well as how accredited investors allocate capital. There are many names floating around regarding this trend such as crowdfunding, peer to peer lending, and direct investing, to name a few. They all relate to one fundamental principal—making the process of raising private capital more efficient. Issuers reduce their overhead, translating into better returns for their investors. With the opportunity to gain better returns, investors are more likely to allocate additional capital to these alternative strategies, making it easier for issuers to create more investment opportunities. Lowering the cost of capital will lead to more capital flowing into the industry—and hopefully better returns overall. A win-win situation for all participants.
As a member of the senior management team at WealthForge, I am asked to speak at a number of these types of conferences and panels. WealthForge is an alternative investment innovation leader providing a full service platform allowing issuers and intermediaries to lower their cost of capital while providing an outsourced risk management solution to maintain compliance according to the latest rules and regulations. In our role, we’re at the forefront of the movement. The topics at these events are usually similar, regardless of the conference, driven by a desire to understand the latest trends in the industry along with their effects. People want to know what’s changing and how to take advantage and, more importantly, profit from it. History clearly shows the potential advantages of incorporating the latest technologies and trends as well as the pitfalls of being left behind. For the past couple of years, I’ve been sharing the same insights and vision for how the industry is slowly but surely transforming.
While I heard many interesting questions and discussions during the panel as well as the overall conference, I was a bit surprised to hear so many common misconceptions about the future of raising private capital as it relates to Reg D transactions. I felt it was important to shed some insight and clarity to some of these topics.
Below is a list of the top 5 misconceptions that I observed:
Misconception #1: Online portals are “crowdfunding” and soliciting to any type of investor.
While the JOBS Act has been passed and is often referred to as “crowdfunding”, the only aspects that have been enacted are related to traditional Reg D private offerings and the newly enacted Reg A+ offerings. While an issuer is now able to use the 506(c) exemption to generally solicit an offering, it does not mean that anyone can invest. The rules are very specific and in the case of 506(c), restrict investment only to accredited investors. The 506(c) exemption cannot be utilized for non-accredited investors therefore it does not open these investments to be made available to the public “crowd”. The 506(b) exemption as well as Reg A+ can be utilized for non-accredited investors, but even these have specific rules that must be followed.
Misconception #2: Technology has replaced the functions of a broker dealer.
Technology has not become a replacement for the traditional process and procedures required by the SEC and FINRA. Instead, it serves as a mechanism to provide more efficiency. A good analogy would be what occurred in the late 90’s with online retail websites. Even though the consumer completed a transaction online, behind the scenes, there were still people processing the order, a warehouse needed for storage and a system to collect payment. The compelling proposition for the consumer was that technology allowed them to engage on their time schedule and at their personal pace while for the retailer, they were able to use technology to lower their overhead costs and reduce their selling price. The technology doesn’t replace the transaction process but rather makes it more efficient for all parties. The same is true within the private securities industry. Technology merely allows an existing process to become more efficient.
Misconception #3: Online securities transactions are only for Millennials and will never be widely adopted by accredited investors and seasoned professionals.
The data is telling a different story. Of course, Millennials are always the first to adopt new technology since they are the first generation to be born into a world where technology is part of their everyday life. However, we’re seeing adoption across all ages. Again, there are some analogues we can look to for guidance. Let’s use the banking industry as an example. Banking services and basic transactions are all moving online even by the largest and most conservative banks. Why? Because it’s easier and much more convenient for the consumer while the bank gets to replace relatively higher salaried employees necessary to move paper and confirm transactions. Clients are happier and the banks reduce costs. Speak to any CPA or financial adviser and they will tell you that their 60- and 70-something year old clients prefer to go online to see their statements or view their balances. Technology knows no age requirements when it comes to making it easier to access information and interact.
Misconception #4: An online approach may work for small issuers raising a few million dollars, but it will never work for larger issuers looking to raise tens or hundreds of millions of dollars.
This is something I hear all of the time when I’m out speaking to issuers and broker dealers that have resisted integrating technology into their businesses. They believe that only the status quo will work and anything new won’t be accepted. The power of moving private security transactions online is that it actually benefits the larger issuer even more than the smaller ones. Technology makes it easier to organize information, communicate, maintain tracking of documents and messages while providing dashboards for real time visibility and auditing. All of these items are more appreciated by larger issuers that require all of these services. With an online approach, issuers can easily manage multiple offerings, investors, escrow accounts, and document libraries as well as communicate with their investors in a secure manner.
Misconception #5: Integrating technology and utilizing the latest regulatory changes represent a new and different business line for an issuer.
Out of all of the misconceptions, this is one of the most common and one that firms should be careful not to adopt. Seemingly every day, there are many new portals that have been created from scratch to take advantage of this disruptive trend. A few of them have even become rather successful attracting significant amounts of venture capital with valuations that rival their much more mature and larger traditional industry counterparts. But, it doesn’t mean that to be successful, an existing business needs to reinvent itself and start over. Just the opposite is true. Again, let’s look at history in a couple of analogues. Both the retail and banking industries experienced a dramatic transformation due to changes in technology and industry trends. Looking at the prevailing business models for each of those industries in 1995 and then again in 2015 will yield drastically different results. But, the transformations for each were evolutionary, not revolutionary. Yes, there were a few major players that emerged simply because they were able to start quickly and be innovative. But they were few and far between, with most of them failing. Only those companies that integrated new technologies into their existing businesses were able to benefit. Successful companies always strive to improve their client experiences while making their businesses operate more efficiently. Every company that is raising private capital can benefit from the latest trends to lower their cost of capital and provide a better investor experience—today.
I look forward to attending the ADISA conference again next year. The organization is committed in their efforts to continue to set the highest standards for all those involved in alternative investments. Most interestingly for me, their events, as well as all of the other industry conferences, allow us to watch the power of transformation occur over time. When I attended my first industry event, the topic of changes in regulations and its effect on technology adoption was limited to a line of questions within a panel. Then it expanded into a panel topic. Today, there are dedicated conferences that are sold out just to focus on understanding what’s happening. I can’t wait to continue to watch the evolution in the industry in real time.
Disclaimer: WealthForge provides this information to our clients and other friends for educational purposes only. It should not be construed or relied upon as legal advice.
Disclaimer: Altigo provides this information for educational purposes only. It should not be construed or relied upon as legal or tax advice.