A successful business matches its goods and services with the market most likely to benefit the most from them. That business then succeeds by identifying pain points in those markets and creating solutions to eliminate them.
Let's take a look at the private capital market, for example. Private capital formation is messy. And it’s regulated. And it’s very expensive for the entity raising capital. According to the SEC, about $1.3 trillion annually is invested in private offerings; almost exclusively utilizing one of the Regulation D exemptions. The vast majority of that sum is funds—pooled investments by hedge and private equity funds—predominantly from large institutional investors.
A few years ago, Congress recognized two things: 1) most jobs are created by small businesses, and 2) small businesses were capital constrained by the recent financial crisis. This grasp of reality gave rise to the JOBS Act with its stated intent to ease regulatory constraints for small businesses raising capital so that they could create jobs. Much has been written about the opportunities the JOBS Act will create. The JOBS Act is intended to ease regulations thus encouraging investment in small business from investors previously shut out of the Reg D private placement market. This includes investors who primarily invested in instruments, unrelated to private capital formation, i.e., savings accounts, mutual funds, managed IRAs, etc. The intent is to grow the $1.3T private capital market to fund small businesses that are arguably the last in line at the private capital trough.
Many are racing to address this ‘new’ piece of the private capital market enabled by these changing regulations. Attorneys and accountants are teeing up new Reg A+ offerings, while many have created online crowdfunding portals where small business aspirations can be displayed for the investing public’s consumption, soon to be enabled by Title III. Only time will tell if the changes in legislation will translate into positive results. The irony is that the job creation legislation, developed as a result of the Great Recession, is being fully implemented at a time when unemployment rates continue to set contemporary lows.
But what about the existing, pre-JOBS Act pain points for non-financial issuers? About 25% of the $1.3T market results from non-financial issuers; $350B or so each year. These capital raises occur for a specific purpose. It could be for expansion capital for a company, equity funding for a real estate project, syndicated debt offering or a special purpose vehicle to acquire an asset for a select group of investors. While the examples may vary, there are a number of common factors among offerings such as these. They are created for a specific purpose or project with a fixed timeline and a singular focus by the issuer for success in completion of the offering. In my opinion, these are the most interesting and powerful capital raises.
The JOBS Act did not aspire to create efficiency or reduce pain for this already existing market. It’s still a highly regulated process. It’s still lacks transparency. It’s still not very efficient—those pain points are ripe for attention.
Traditionally, private placement transactions were paper-based. Offering documents were published, printed, serialized, and mailed to the members of an investment banker’s Rolodex. If those potential investors were interested, a paper subscription document was printed and mailed. Then, only if the investor completed the subscription document accurately and returned a check to the banker, an investment was recorded. It’s similar to checking accounts fifteen years ago, or public equity brokerage transactions, or even a trip to the DMV for an automobile registration renewal.
Almost universally, a debit card and online transactions have replaced paper checks, saving time and transaction error. E-Trade certainly took a chunk out of the $100 per transaction brokerage fees. Even the DMV allows you to renew your auto registration online. In each case, accuracy is increased; both transaction time and duration is reduced; and cost is reduced in a transformative way.
WealthForge is doing the same for the non-financial issuers’ purpose-specific private capital formation. We developed our technology to address the non-financial Reg D private securities issuers’ identified pain points.
Our mission is to empower those issuers who raise capital for a specific purpose or project. These issuers are just as involved in business expansion, job creation, private capital formation and fueling the entrepreneurial spirit in the US as those the JOBS Act targeted. However, for this overlooked niche, there has been little regulatory relief. This is the group that supports the middle market of assets in the US. It is this group that brings together investors to purchase $20mm office buildings or enters into alternative energy development or expands a small to mid-size business in need of growth capital.
WealthForge reduces many of the hassles inherent in the sale of a private security; such as distributing offering materials, chasing paper documents and checks, verifying or accrediting investors, and maintaining the records of the transaction. That hassle and expense is reduced to an ‘Invest Button’ which can be added to a website or embedded in an email.
Our goal is to simplify a traditionally risky, heavily regulated, non-transparent and expensive process. The Invest Button is our solution to address those pain points, especially for an overlooked niche. It is only through our unique combination of technology, process and compliance that we can help to maximize the potential for success for firms raising private capital.
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.