Since 2006, P2P & online lending have enjoyed explosive growth. Lending Club and Prosper, America’s two largest P2P lenders have now surpassed $2B in loan origination, and P2P has captured the attention of industry legends, the financial media, the investing public and even today’s technology giants.
Lending Club’s board is comprised of such recognized leaders as former Visa Inc. President Hans Morris; the former U.S. Secretary of the Treasury Lawrence H. Summers; Morgan Stanley Chairman Emeritus John Mack and Kleiner Perkins Caufield & Byers general partner Mary Meeker. Prominent venture capitalist firms invested in the sector include: Draper Fisher Jurvetson, Accel Partners, Sequoia Capital, Union Square Ventures, Foundation Capital, Thomvest and Kleiner Perkins Caufield & Buyers.
But the industry reached a new pinnacle last Thursday when Google announced it has led a $125 million deal to buy a stake in Lending Club from existing investors. This transaction values Lending Club at $1.55 billion – nearly tripling the valuation of its last fund-raising round less than a year ago.
Upon the announcement hitting the wires, @lendingclub enjoyed well over 5,000 mentions on Twitter (compared with 5-10 on a typical day), and at its peak averaged 5-7 tweets per minute.
“Google’s investment into Lending Club is further evidence of the current sea change that has begun in financial services. It signals a decisive moment for the validity of P2P lending, the disruption of traditional banking as well as the convergence of finance and information technology. I look forward to hearing Lending Club’s CEO, Renaud Laplanche, discuss the implications of the Google investment at next month’s LendIt conference, the world’s first conference dedicated exclusively to the P2P & online lending industry,” stated Peter Renton, Founder of Lend Academy & author of The Lending Club Story, the definitive guide to the world’s leading peer-to-peer lender.
Although momentous for the consumer credit sector, many have been wondering how P2P’s triumphs relate to securities-based crowdfunding. The fact is, because P2P lending is the precursor to securities-based crowdfunding, its achievements are not only dramatically impacting the emerging crowdfunding industry, they are helping shape it. Securities-based crowdfunding or “Peer-to-Business (P2B)” is simply the next iteration of P2P. However, instead of peers providing personal loans to its peers, securities-based crowdfunding will allow peers to invest in the businesses of its fellow peers in exchange for equity or debt. By demonstrating that people are more efficient at financing each other through the use of social media than with conventional banking intermediaries, P2P has effectively validated the “crowdfinance” model for the entire industry, even compelling the financial establishment to enter the fray.
In just seven years, P2P lending has not only awakened Wall Street and secured funding from many of the same venture capitalists that had the foresight to fund some of the most disruptive industries in history, it has attracted the attention and capital from the world’s most prominent Internet company. While we can all speculate on what interest a search engine would have in social finance, one cannot help but view Google’s assimilation of P2P as a defining moment for the global financial markets. As the next evolution of “fintech” (the union between finance and technology) descends rapidly upon us, traditional banking methods and financing structures are about to become as obsolete as the phone booth.
Much like P2P’s prominence began escalating after the SEC effected the rules for P2P lending in 2008, upon the implementation of title III of the JOBS Act, expect securities-crowdfunding to quickly garner similar enthusiasm from the Street, the venture community, and yes, even tech behemoths. As P2P continues to mark major milestones, it is paving the way for the mainstream adoption of securities-based crowdfunding. As such, P2P’s achievements should be carefully observed as well as celebrated by the entire crowdfunding movement. Securities-based crowdfunding is tomorrow’s P2P.
For an inside look at the incredible growth of P2P & online lending, feel free to join us for a free webinar on May 30th at 1pm EST where industry thought leader, Peter Renton, will also interpret Google’s recent investments into both Lending Club as well as On Deck Capital. For those investors who have not already signed up for LendIt, please register at
http://lendit2013.eventbrite.com/ . For institutional investors who qualify, tickets can be purchased with soft dollars. Please contact attendees@lendit.co for details.
Hey, bootstrapped entrepreneurs and struggling small businesses, what’s all this lying around sh*t?
So what if the banks aren’t lending? Who cares if the public markets continue to exclude you? Boo hoo that the SEC is dragging its feet on implementing key components of the JOBS Act such as crowdfund investing? Are you going to let these factors impede you from accessing the funding that would allow your business grow? Hell no! Cue John Belushi’s famous “Animal House” rallying cry.
Entrepreneurs need not despair, for a wave of financial innovation is sweeping across Wall Street and leaving a number of preferable financing mechanisms in its wake. Some are so novel that many industry veterans aren’t even aware of them. Yet, these neoteric methods are reshaping the financial markets and forever changing the way companies capitalize their businesses. NowStreet, a company on the forefront of this revolution, is pleased to illustrate four cutting-edge financing techniques that can provide immediate funding to emerging businesses.
1. Perks-based aka reward-based Crowdfunding:
While it is not yet to legal to give funders securities in exchange for their money, it is perfectly permissible to reward them with other items such as a company’s products or even thoughtful souvenirs. If a business is providing value to its community or society at large, some funders are happy to simply receive a baseball hat in exchange for the capital. If you think that this altruistic funding approach will never succeed, think again. According to Crowdsourcing.org, the leading resource for crowdfunding analytics, “On Kickstarter alone, last year, 2,241,475 people pledged a total of $319,786,629 to campaigns on the platform. That’s $606.76 per minute, a 221 percent increase from 2011. Backers successfully funded 18,109 projects, which cumulatively raked in $274,391,721.”
COST OF CAPITAL:
In comparison to traditional financings, the company’s cost of capital with perks-based crowdfunding is pretty minuscule. A business could expect to pay, on average, a 5% success fee and a 4% credit card processing fee. Some crowdfunding portals may also charge fees for a campaign failing to meet its minimum goal. This “failure” fee can range approximately 8 or 9%.
BENEFITS:
This method is not only “in vogue”, it allows the company to retain 100% of its equity and maintain a clean, debt-free balance sheet.
CHALLENGES:
Although it looks easy, you need more than a great product and vision to be triumphant. You need creativity, authenticity and ingenuity. Although it helps to possess an expansive social network, despite what many believe, it is not a prerequisite for success. NowStreet has featured a number of crowdfunding success stories at its industry events. Interestingly, they all possess one commonality: impassioned funders. Unlike many publicly-traded stocks that are artificially pumped with paid media placements and other disingenuous PR strategies, we have found that crowdfunders possess a sincere interest in the company’s products. In one instance, a notable gadget blogger from another continent, stumbled upon a cool device on Kickstarter called the Tiltpod which enables users to capture the perfect picture from any angle with any camera or phone. He wrote a blog about the product, not because he was being paid to, but because he genuinely liked it. Soon after, the Tiltpod’s funding campaign was six-times oversubscribed. Since most crowdfunding campaigns aren’t picked up by renowned bloggers, it would behoove capital raisers to constantly be strengthening the social presence of its company as well as its management. (See part I of NowStreet’s Capitalizing on Financial Innovation Series: Preparing for the Crowdfunding Revolution.)
RECOMMENDED CROWDFUNDING PORTALS:
NowStreet suggests checking out the three most well-known perks-based platforms: IndieGoGo, Kickstarter and Rockethub.
2. Peer Lending, Social Lending, P2P Lending, P2B Lending
Peer Lending (peer-to-peer lending, peer-to-business lending) is the practice of allowing individuals to lend money directly to other individuals or businesses. Instead of using conventional intermediaries such as banks, the entire transaction occurs via online lending platforms. Miserly banking institutions are helping peer lending become the new normal. In an environment where interest rates are at all-time lows and banks are hording cash, the peer lending market is accelerating. In fact, Lending Club, the largest peer-to-peer lending company in the U.S., recently surpassed one billion dollars of loans funded. Additionally, many new peer-to-business lending platforms are beginning to propagate the marketplace.
COST OF CAPITAL:
Although interest rates vary based on credit scores, borrowers with better credit scores (720 or higher) can expect to pay somewhere between 7 and 13%. Other fees may also include success fees, unsuccessful payment fees, late fees and/or check processing fees.
BENEFITS:
The lender receives a much better return on his money than a traditional savings account or CD, and the borrower gets a lower interest rate than he would through a traditional bank loan or credit card. The process is fairly quick with many loans closing as early as 14 days.
CHALLENGES:
Most lending portals require a minimum credit score in the mid-600s. As with conventional loans, late fees are charged to borrowers and default notices are sent to credit reporting bureaus. To avoid penalties and credit score reduction, loan payments should always be made on time.
RECOMMENDED LENDING PLATFORMS:
For a personal loan that can then be used to fund a startup, we recommend either Lending Club or Prosper – both provide a much more attractive alternative to using a credit card. For direct business loans, we suggest exploring niche P2B portals. SoMoLend is the platform with a big heart that caters to underserved small businesses such as women or minority led companies. SoMoLend is unique in that borrowers can leverage their social connections and personal relationships to secure additional funding from local community banks. We also really like Quarterspot, a P2B lending portal that enables businesses to obtain loans on the basis of its cash flow. Quarterspot, slated for launch in Q1, 2013, is ideal for both brick and mortar companies and online merchants, particularly those that have found traditional receivable financing structures too cost prohibitive.
3. Accredited Crowdfunding
Also known as “Reg D Crowdfunding”, Accredited Crowdfunding is essentially Reg D exempt securities (either equity or debt) that are offered only to accredited investors through a registered portal. Accredited Crowdfunding allows businesses to raise capital from like-minded qualified individuals.
COST OF CAPITAL:
Banking fees usually vary based on deal size; however, an issuer can expect to pay anywhere from 5 to 12% of the offering. Companies should also expect to pay additional due diligence fees and offering expenses which can range from a few hundred to multiple thousands of dollars.
BENEFITS:
Accredited Crowdfunding is far less expensive, timely and cumbersome than completing a registered offering. Furthermore, once the general solicitation ban is lifted, Reg D issuers will also have the ability to advertise their offering and reach new accredited investors.
CHALLENGES:
It is important to note that Reg D investors WILL count toward the recently raised 2,000 investor threshold established under the amended Rule 12(g) under U.S. Exchange Act of 1934. Once a company exceeds 2,000 shareholders, it WILL be required to file with the S.E.C.
RECOMMENDED ACCREDITED PLATFORMS:
We suggest considering the following platforms:
CircleUp: Offering securities through the legendary Bill Hambrecht’s WR Hambrecht + Co, CircleUp is the ideal platform for consumer companies.
Crowdfunder: Crowdfunder offers securities through GATE US LLC, a New York based broker dealer and a member of FINRA and SIPC that is well-known in crowdfunding circles.
EarlyShares: EarlyShares offers securities through FINRA regulated Point Capital Partners, a designated veteran-owned merchant bank that donates a portion of its revenue to military and veteran charitable organizations.
MicroVentures: MicroVentures is an investment bank for startups that conducts its own due diligence prior to raising capital with its angel network.
RockThePost is a crowdfunding portal catering to traditional VC-quality companies that no longer fit a changed VC paradigm. RockThePost offers securities through Bendigo Securities’ regulatory-compliant CrowdClear platform. CrowdClear provides a suite of back office solutions that enables funding portals to raise capital for entrepreneurs in a more efficient manner.
Another accredited crowdfunding alternative that is worth exploring is EquityNet’s crowdfunding marketplace. Instead of a commission, EquityNet receives a nominal annual fee to provide entrepreneurs with direct access to qualified angels as well as a suite of tools designed to capture investor attention.
4. Self-Directed IRAs
For the agoraphobic issuer who prefers to stay away from the crowds, here is an out-of-the-box financing strategy unbeknownst to most financial advisors. It essentially entails utilizing one’s retirement account to fund one’s own small business. A self-Directed IRA (SDIRA), or Rollover for Business Startups (“ROB”), is an individual 401k set up for one’s own startup company or business. As the Manager of the ROB, the business owner act as the Trustee for the Plan’s monies.
HOW IT WORKS:
First, an LLC or C Corp as well as Trust and Plan documents are created. Monies are then rolled over from a former 401K or IRA, and checking accounts for the plan are established. Direct investments can then be made into the entity by purchasing membership or stock in the business.
COSTS:
The start-up costs can range from $2,000 to 3,000. There are also annual fees of a few hundred dollars.
BENEFITS:
SDIRAs allow the business owner to maintain complete autonomy and control over investments as well as the checkbook. Since the investments reside within a title holding company, away from the rest of the business owner’s estate, litigation threats are reduced. Once the entity begins generating income, salaries can be paid and annual plan contributions of up to $50,000 can be made.
CHALLENGES:
All proper IRS documents must be filed for the Plan both initially as well as annually. Prohibited transactions including receiving immediate personal benefits outside of the 401k can lead to total taxable distribution and penalties of the 401k. In order to avoid penalization, it is the imperative that the business owner’s administrator and custodian possess extensive experience in establishing and maintaining ROBs.
For assistance on ROB structuring or guidance on which alternative financing mechanism and/or portal would most appropriately serve your business, please contact newagefinancing@nowstreetjournal.com. To understand the tax implications of each structure, please contact Richard Salute at Richard.Salute@CohnReznick.com.
Since the passage of the overwhelmingly bipartisan Jumpstart Our Business Startups Act (the “JOBS Act”) on April 5, 2012, the curiosity of a revolutionary small business financing mechanism called, Crowdfunding (also referred to as Title III of the JOBS Act, “Crowdfund Investing” or “CrowdInvesting”), has intensified.
For those out-of-the-know, “Crowdfunding” is a process of raising capital, usually via the Internet, to fund a private venture by pooling small amounts of monies from multiple funders who share similar passions and ideologies. Crowdfunding is currently being utilized to finance charities, the arts, political campaigns and even startup businesses. However, laws dating back to 1933 have made it illegal for funders to receive securities in exchange for their investment. The S.E.C.’s implementation of Title III of the JOBS Act will ultimately legalize “CrowdFund Investing”, thereby allowing today’s investors, who are starving for yield, the opportunity to invest in the smaller private companies that are willing to provide it.
Because conventional financings are no longer viable options for small businesses, many have been desperately seeking alternative methods for accessing capital. “Crowdfund Investing” is rapidly emerging as a promising solution. Although most industry experts don’t foresee “Crowdfund Investing” legally employable until at least 2014, companies interested in ultimately employing the “Crowdfund exemption” should begin making preparations now in order to help ensure a successful offering.
NowStreet, a company on the forefront of financial innovation, has released the following guideline to help businesses properly prepare for the forthcoming CrowdInvesting Revolution.
1. Get your financial house in order. Issuers raising between $100,000 to $500,000 will need to have its financial statements reviewed by an independent auditor. Crowdfund Offerings greater than $500,000 will require a full financial audit. Because reviews and audits can be time consuming (weeks to months), it makes sense to begin the process now. It is important for companies to hire an accounting firm that not only adheres to generally accepted accounting principles (GAAP) and generally accepted auditing standards (GAAS), but one that also possesses extensive knowledge of the JOBS Act. For this reason, we recommend CohnReznick, an accounting, tax and business advisory firm with deep expertise in servicing smaller private companies.
2. Learn the law. Like Spicoli was advised in Fast Times at Ridgemont High, “Learn it. Know it. Live it.” Or at least retain a law firm that does. We recommend engaging a legal team that possesses a dedicated crowdfund practice such as Ellenoff Grossman & Schole LLP. Partner, Doug Ellenoff, not only continues to play an active role in DC working with regulators; he eats, breathes and sleeps Title III.
3. Complete your business plan. The crowd won’t give you capital without a viable business plan – no matter how friendly or good looking you are. If you need assistance, we suggest The Funding Roadmap, a leading resource engine for entrepreneurs that enables them to convert their vision into a crowdfund-compliant company.
4. Make Friends. Join new social networks and expand your existing ones. Find online communities possessing similar business interests. If you are in the toy business, make sure you become a member of all toy-related LinkedIn groups. Find the leading bloggers in your field and follow them on Twitter. Tweet often and make sure to mention @key influencers in your tweets!
5. Keep Friends: Unlike public stock issuers who treat its shareholders as strangers, crowdfund issuers need to regard its stakeholders as friends. Like you would with your friends, you need to keep the lines of communications open with your shareholders. Being exempt from public reporting is not a license to withhold information from shareholders. Like friends, crowdfund investors provide ongoing support. Their objective is to grow with your company, not trade it for a new ticker. Treat them right and they will see you through subsequent rounds. Hide from them and they will turn against you on a dime. They will understand pivots; they will loathe silence. It’s really quite simple: if you have no interest in communicating regularly with shareholders, then you shouldn’t be accepting capital from anyone, including your friends!
Most importantly, always crowdfund respectably and honorably. Being investigated for unscrupulous behavior by the SEC pales in comparison to being hunted down by an angry mob of wronged crowdfund investors and having your name smeared on the Internet for all eternity!
Most people don’t realize that crowdfund Investing is guided by the very same principles that transformed America from a vast farmland into the greatest economic engine that the world had ever encountered. Enacted with the proper blend of decorum and incentives, crowdfunding has the ability to inspire a similar economic revolution. But, imagine the possibilities of one that fosters social consciousness in addition to prosperity. Imagine.
For further direction on preparing for the crowdfunding revolution, check out the replay of our March 27th webinar by clicking here. The Power Point can be downloaded here.
NowStreet’s new webinar series, “Capitalizing on Financial Innovation” is designed to help broker-dealers, investment bankers, financial advisors, issuers and investors capitalize on this surge of industry disruption. Part I of this timely webinar series focused on crowdfunding and was aimed at properly preparing investors, asset allocators and issuers for the forthcoming Crowdfunding Revolution. Webinar participants were armed with the latest financial and legal knowledge from renowned crowdfund industry experts. They also learned how to employ the social tools needed to succeed in this emerging industry.
Thanks to all of you entrepreneurs, visionaries, financiers, bankers, legislators, tax, legal and regulatory experts who came together this past year to institute colossal Wall Street reform. When historians look back on the 2012, it will be recognized as the year that not only laid the foundation for the next period of economic expansion, but gave rise to a new era of capital consciousness.
NowStreet began last year with the privilege of introducing a new crowd-investing methodology to the Wall Street establishment at its premiere industry conference on January 23rd in NYC. The event, which was headlined by Congressman Patrick McHenry (R-NC), author of the initial crowdfunding bill, brought together many of today’s principal crowdfunding leaders for the very first time and led to the eventual formation of two of the industry’s leadership organizations, CFIRA and CfPA.
Throughout the course of the year, NowStreet went on to produce ten more acclaimed industry events in cities across the country as well as unleash some of the most provocative market commentary highlighting the dysfunction and injustice in today’s financial markets. NowStreet readers discovered how Facebook’s IPO exemplified flawed market structure and investor inequality, how its IPO debacle could have been averted, and most importantly, how historic legislation coupled with unprecedented advancements in mass communications is effectuating a paradigm shift in global financial markets. As we head into 2013, NowStreet remains steadfast in its commitment to advancing a regeneration of Wall Street where all socio-economic classes are granted equal opportunities to prosper.
As the year progressed, it became clear that every subsequent event was more successful than the last and each new article provoked more meaningful dialogue and debate. While I could feel the momentum growing, I did not foresee 2012 culminating with a banner event that would not only exceed all of my expectations, but affirm women’s imminent leadership role in reshaping America’s economic landscape.
Held at Chadbourne & Parke’s beautiful conference suite overlooking a seasonally festive Rockefeller Center, our December 11thWomen Transforming Our Financial Markets Symposium was so awe-inspiring that I briefly contemplated changing our name from NowStreet to WOWStreet! Many were hailing the event as, “Wall Street’s first daylong slumber party” where participants laughed, cried, shared, learned and most importantly – genuinely CONNECTED!
Each presentation and panel session was as enlightening as the next, and kept our audience engaged from morning until night. The interaction was simply energizing. In fact, some of the most interesting of exchanges were those that transpired between the speakers and attendees. The inquisitiveness was so infectious that, two weeks after the event, the opening presentation was the most talked about Slideshare on both Facebook and LinkedIn.
Funding guru, Judy Robinett, kicked-off the discussions carrying us through the mindset of a typical angel investor and highlighting the importance of relationship building. Her presentation resonated as much with the entrepreneurs as it did with the investors in the audience. Legendary Michaela Walsh, Honorary Trustee of Women’s World Banking and accomplished author, concluded the day with a remarkable account of how she helped establish the first global financial network for women. I was honestly spellbound from beginning to end.
All of our panelists and moderators did an exceptional job feeding a knowledge-hungry crowd. Founders of leading crowdfunding portals, angels, venture capitalists, social media specialists and wealth managers all shared their unique perspectives on the direction of the markets, and showed us where to uncover new opportunities. Our legal experts not only detailed fresh methods of capitalizing small businesses, they provided valuable insight into the timing of the JOBS Act implementation. Most notably, they discussed procedures for fostering issuer transparency and facilitating the due diligence process as promising new fraud-detection resources such as CrowdCheck were introduced.
Candace Klein, CEO of SomoLend and McKenzie M. Slaughter, Founder & CEO of Prohaus Group touched us with their personal stories of triumph as well as with their narrative of how after meeting at a NowStreet event a few months earlier, McKenzie was able to raise the startup capital needed to launch her Beauty & The Bull Magazine employing SomoLend’s lending platform.
Gene Massey, CEO of MediaShares provided a revealing look at the historic women who shaped Wall Street that included a beautiful tribute to Muriel Siebert, the first woman to own a seat on the New York Stock Exchange. We’ve certainly come a long way, baby!
Bestselling author, speaker, and professor, Gloria Feldt delivered a powerful and stirring keynote that gave both genders a new understanding of power. Her “Women, Power and Leadership” workshop, following her presentation, was met with rave reviews.
Flipping the management pyramid, Greg Slamowitz, Co-CEO of Ambrose Employer Group, gave a commanding presentation showing small business owners how to create a workforce that is engaged, aligned, empowered and on fire!
With pinpoint accuracy, Global economist, Constance Hunter, predicted a scenario that would look more like a fiscal bunny slope than a fiscal cliff.
Jim Jones, Director of Business Development at Accuplan and Founder of AlternativeAssetsIRA, detailed an innovative approach to funding startups, attracting investors and regaining investment control utilizing self-directed IRAs. Particularly with returns in conventional asset classes languishing, Jim gave a persuasive account of how self directed IRA’s will ultimately prevent a looming retirement crisis by helping hardworking Americans recapture portfolio yield.
Speaking of recapturing yield, Jason Jones, Portfolio Manager of HighStep Capital, made a strong case for why P2P lending will see a dramatic surge and further disrupt the banking industry in 2013. Other predictions included Apple (NASDAQ: AAPL) surprising the market with a new service and Amazon (NASDAQ: AMZN) continuing to crush retail.
The day drew to an gratifying close with an entire segment devoted to capital consciousness or what world renowned futurist, evolutionary economist and worldwide syndicated columnist Hazel Henderson refers to as, The Love Economy.
Karla D’Alleva Valas, Managing Director, Fidelity Charitable began by illustrating how to leverage appreciation in illiquid assets for tax-efficient charitable giving. I was fascinated to learn the growing number of entrepreneurs and investors using their appreciated assets to fund philanthropic endeavors.
Amy Cortese, accomplished journalist, speaker and author of Locavesting, demonstrated a number of heartwarming accounts of communities coming together to fund small local businesses and foster regional economic development.
The most inspirational photo, depicting statues breaking free, came from Diana Ayton-Shenker’s presentation, “Abundant Living, Mindful Giving”. Diana, founder of Global Momenta and the Fast Forward Fund, also hosts fast forward+, a curated HangoutOnAir series featuring high impact leaders and social ventures. Check it out at
http://www.fastforwardfund.org !
Monika Mitchell, CEO of Good Business International and raffle winner of the bottle of the Billecart-Salmon Rose Champagne supplied by the awesome Mike Cagle and Acker Merrall & Condit, began her speech reminding us that the end of the world was a mere ten days away. As a result, I squandered the next week and a half preparing for this Mayan Apocalypse by clearing all of the Hostess products and Marlboro lights from the shelves of my local bodega. Suffering the worst carb and tobacco induced hangover since my first Pink Floyd concert, I awoke on December 22nd to find that the world as I knew it had indeed ended, but fortunately per Monika’s forecast, a beautiful new one was just beginning.
I am going to conclude by echoing Monika’s sentiments: I am thankful for the end of the old world which had been characterized by selfishness, greed and a lack of compassion for anyone or anything. I view the JOBS Act as the beginning of a shift in consciousness where a more humane and prosperous world awaits us.
You can click here to view the event photos, presentations as well as the program that showcases our esteemed speakers and their incredible work. The complete video footage of the symposium will be available online shortly. Below you can also find links to some of our speakers’ books. They are all great reads and invaluable resources for anyone looking to launch a new business, raise capital, grasp crowdfunding methodologies or simply further ones career.
Thank you again for joining us on this exciting journey that will continue in 2013 with the launch of our game-changing event platform destined to revolutionize Wall Street conferences. Stay tuned for further details and for the release of our 2013 event calendar which will include more women-centric conferences and culminate with the world’s most influential crowdfunding event encompassing the largest gathering of industry leaders.
As we step into another year and onto a planet made pure by the recent Armageddon, I look forward to working with you all on propagating a different financial culture – one that strengthens our economy and uplifts our society.
I am writing this letter not only as an unrelenting advocate for Wall Street reform, but more poignantly as a concerned citizen and a devoted mother of two young children. Like me, my parents before me and my grandparents before them, I want to see my children grow up in a prospering America. Sadly though, unless significant change is made in all facets our culture, prosperity for future generations will remain a pipedream.
We can no longer tolerate our national debt spiraling out of control. We cannot afford to remain apathetic as our dysfunctional financial markets continue to serve a privileged few and fail the vast majority. Nor must we allow our leaders to instigate class rivalry over trivial dollar amounts incapable of solving the nation’s fiscal problems.
I realize that most of us are too busy sharing offensive but funny ecards on Facebook, voting for the next idol and cheering for an overweight contestant to burn off a recently eaten Oreo cookie to even notice how severely America is deteriorating, but the more oblivious we remain, the greater the likelihood of our children inheriting a financially and morally bankrupt country.
Although I am guilty of posting my fair share of distasteful ecards on Facebook, I simply won’t sit idly by while my children’s future is at risk. So today, instead of reading my cousin’s politically charged and radically biased Facebook posts, untagging unflattering photos of myself from my awkward teenage years or watching another episode of “How I Met Your Mother”, I am compelled to write this letter. You deserve to know why our economy is weakening, why our nation’s wealth disparity is widening and why our society is decomposing. But instead of hearing it from a politician or a partisan pundit, you are going to hear it from a Mom – a Mom with 20 years of extensive Wall Street experience. Unlike most of what you read in the mainstream media which is tainted red or blue, I am going to supply you with a sobering purple-tinged truth. Although some of it may be difficult to swallow, I will not sugarcoat it. For, unless we are bribing our children, sugar is useless to us Moms.
THE UNSWEETENED REALITY
Remember that nation that enabled waves of innovation to transform it from a vast farmland to an industrial power and then to global technology leader? Remember how throughout those transformations it was able to improve the quality of life and create substantial wealth for its citizens – even for those who were born into poverty? Remember how its patriots, trailblazers and dedicated workforce continued to persevere even through periods of war, depression, recession and inflation?
That nation consistently prevailed because it upheld one fundamental principle: the notion that the greater the risk, the larger the potential reward. By incentivizing its risk takers and not rewarding its risk averters, that nation encouraged the innovation and motivation that fueled economic prosperity for generations.
Regrettably, as soon as its citizens discovered ways to vote themselves riskless rewards, the very fabric of America began to unravel. The land of opportunity and the home of the brave became the land of opportunists and the home of the complacent. As the risk/reward ratio began to invert, America morphed into an entitlement society where both its poor as well as its rich expect some type of remuneration regardless of whether it was rightly earned.
Instead of the fruits of one’s labor, the impoverished have become accustomed to living off the handouts of others, while Wall Street’s elite comfortably pursue new ways of manipulating the markets in order to guarantee themselves larger investment returns for taking less and less risk. In some cases, they don’t even risk their own capital at all. They risk ours!
In much the same way that the poor have come to depend on their welfare checks, Wall Street’s privileged have come to rely on its ill-gotten gains. Unlike in Benjamin Franklin’s day where the only things certain in life were death and taxes, today people can count on death, taxes as well as entitlements and profits. Ain’t America grand?
Excuse the cliché, but would anyone, rich or poor, be dumb enough to pay cash for a cow when they can get the milk for free?
MEET AMERICA’S MIDDLE CLASS – THE SUCKERS BUYING THE COWS
In between the destitute and the affluent is a forsaken middle class that is too “well-off” to receive Government aid but not nearly wealthy enough to get in on the Wall Street freebies like hot IPOs, death spirals, and let’s not forget those bailouts.
These folks in the middle are just your average Americans, buying the cows and supplying the milk. They are the people struggling to save for retirement and longing for the double digit returns they were collecting back in the days when companies went public prior to major growth spurts and interest rates weren’t regularly being reduced to satisfy political agendas. These “middletons” are also America’s 27.9M small business owners willing to provide meaty returns in exchange for the expansion capital that would allow them to bring products to consumers and jobs to the underemployed.
Now, if only those Americans starving for yield were allowed to invest in those emerging growth companies desperate to replace the capital that the banks and public stock exchanges are no longer willing or able to provide.
If only we didn’t have impractical securities rules that prohibit the majority of Americans from investing their OWN money into private growth companies.
If only those middle class Americans weren’t confined to investing in conventional assets like publicly-traded stocks, bonds and mutual funds where appreciation has been hindered by the annihilation of small-cap IPOs and ineffectual monetary policies that keep interest rates low and the dollar devalued.
If only all Americans were granted the same investing freedoms.
If only I can stop myself from starting sentences with the phrase, “if only”.
If only.
America has made great progress eradicating religious, gender and racial persecution, yet it continues to allow discrimination based on net worth and income levels. Presently, only “accredited investors” – those persons possessing a net worth of at least $1M excluding the value of one’s primary residence or have annual income of at least $200,000 (or $300,000 together with his or her spouse) – are legally permitted to invest in private companies. Unaccredited investors are forced to wait until companies register with the SEC and begin trading on public stock exchanges.
20 years ago when companies went public as young emerging businesses, smaller investors weren’t put at a disadvantage by having to wait for an IPO in order to invest. In fact, 99% of Microsoft’s stock appreciation was realized after it had gone public. Conversely, by the time most of today’s companies go public, the bulk of their growth is long behind them. Case in point, 100% of Facebook’s stock appreciation was realized in the private markets prior to its IPO where only accredited investors were afforded the opportunity to partake in its dramatic climb. By the time America’s cow buyers were given the chance to own Facebook stock, its shares had already been put out to pasture.
In today’s topsy-turvy risk/reward environment where new issue upside has been dramatically curtailed, today’s average public market investor is left assuming more capital appreciation risk than ever before. It sickens me to think about all of the middle class wealth that might have been created from September 2004 to May 2012 when Facebook grew from a mere $5M in market capitalization to its IPO valuation of $104B.
Why would a statute as undemocratic as the accredited investor rule even exist at all? Because the Government seems to feel that certain investors require more “protecting” than others, particularly from small-cap issuers. You see, regulators are programmed to view entrepreneurs not as innovators or as job creators, but as shysters. To be frank, they believe that less-financially endowed Americans are too stupid to differentiate between a viable business opportunity and a con. Only in America would The Jersey Shore’s Snooki be considered more qualified to finance start-ups than a financially strapped, yet fully licensed, asset manager.
The great irony is that regulators are so bent on shielding investors from the young Steve Jobs’, Bill Gates’ and Mark Zuckerbergs of the world that they completely overlook the Enrons, Worldcoms and Madoffs. Regulators are authorized to police fraud, not to impose risk tolerances on the American people. Their job is to divert scams, not to prevent securities losses. Failure to make these distinctions is contributing to the erosion of our free-market system and impeding economic growth.
In the name of “protection”, the U.S. Government has effectively succeeded in denying its less affluent citizens the freedom to assume risk, thereby forcing them to forgo any possible upside. At the same time, it abets in securing riskless returns for its financially privileged. These policies, no matter how well-intentioned, have done nothing but help capsize the productive risk/reward ratio and ensure the widening of the nation’s wealth divide.
Ever wonder why the rich keep getting richer as more and more Americans are dropping out of the middle class? The answer does not lie in the 73,608 pages of U.S. tax code. Blaming tax structure for the wealth disparity is like blaming Denver’s high altitude on Obama’s poor first debate performance. Tax loopholes never have nor ever will produce new revenue for the wealthy. They merely allow them to keep more of their money previously earned through salaries, commissions and yes, good investment decisions. Although I am in favor of eliminating many of them, making people believe that simply removing loopholes and increasing tax rates will resolve America’s financial woes is not only disingenuous, it is obstructive. The solution is not forcing the rich to pay more but in empowering the non-affluent to earn more. It is both unproductive and fiscally irresponsible to be wasting valuable time and resources impugning tax structure instead of resolving the actual problem – unconstitutional market structure.
America desperately needs to open its financial markets and allow capital to flow back to its smaller investors and issuers. That is precisely what the Jumpstart Our Business Startups Act (the “JOBS Act”) was designed to accomplish. Even though it is one of the most economic restorative pieces of legislation in modern history, if you’re not reading political or financial trades, you’ve probably never even heard of it. What’s more, because it passed with an overwhelmingly bipartisan majority, the JOBS Act received limited main street media coverage. It is utterly shameful that the policies which divide us get more attention than the legislation that unites us.
The JOBS Act helps emerging businesses access capital by improving the “on-ramp” and making it easier for smaller companies to go public. And since, according to Forbes, small businesses generated over 65% of new jobs during the past 17 years, it is imperative that America’s capital markets serve as a conduit to small-cap funding, not as a barrier.
But, facilitating the IPO entrance is just not enough. The truth is, it is far less challenging for companies to become public than it is for them to stay public, particularly in a marketplace dominated by high frequency traders and inadequate aftermarket support. According to research conducted by David Weild IV, Head of Capital Markets at Grant Thornton and CEO of Capital Markets Advisory Partners, U.S. stock markets have lost 43.5% of all listed companies since 1997.
Without re-establishing an ecosystem to support companies being public at smaller valuations by enthusiastic investors as opposed to detached traders, the demand will never be strong enough to meet the supply in the marketplace. Hence, unless the “highway” is completely renovated, the public markets will remain dysfunctional.
The “Crowdfunding” component of the JOBS Act provides the most viable and democratic solution. Its community-style, social investing methodologies furnish built-in aftermarket support. “Crowdfund Investing” not only grants the 99% with the same investing freedoms as the 1%, it fortifies the relationship between investor and investment, encourages longer term investing principles and ultimately helps restore appropriate risk/reward ratios.
Although it was signed into law on April 5th, “Crowdfund investing” won’t be officially legal until the SEC implements the new rules. Given its history of failing to meet deadlines, it is most likely that the SEC will exceed its Government mandated January 1, 2013 deadline. To the further detriment of the middle class, many fear that regulators will attempt to drag their feet indefinitely. We simply cannot allow this to happen, for as long as one class of citizens continues to receive superior investment opportunities and better investing odds, there will never be true equality in the United States.
“UNLESS SOMEONE LIKE YOU CARES A WHOLE AWFUL LOT, NOTHING IS GOING TO GET BETTER. IT’S NOT.”- DR. SUESS
The United States will never be able to stabilize its deficit or neutralize its wealth imbalance without recalibrating its distorted risk/reward ratio. Re-indoctrinating an indulged nation could very well be our greatest and most crucial challenge. It may even take generations for people to re-learn how to value the effort as much as the prize.
We should begin by helping our children become self-reliant, encouraging them to take chances and allowing them to fail so that they can embrace failures for what they are: stepping stones to successes. As Robert F. Kennedy once said, “Only those who dare to fail greatly can ever achieve greatly.”
If not for the plight of the entrepreneur, it would be impossible for mankind to advance through innovation. Instead of condemning America’s entrepreneurs, we should be thanking them for assuming the risks most would never dare. They are the last of our true pioneers. Unlike salaried employees who have the luxury of safety nets, there are no unemployment checks awaiting entrepreneurs should they fail. It is our laws upholding capitalism – not our roads and bridges – that lay the foundation for small business success. As such, it is up to “we the people” to fight for legislation that emboldens America’s entrepreneurs and contest those laws which discourage them.
I urge you to write your local legislators and insist that they hold the SEC accountable for implementing the overwhelmingly bipartisan JOBS Act in a timely fashion. Demand that legislation be introduced to remove the unconstitutional Accredited Investor Rule 501(a) of Regulation D under the Securities Act of 1933.
If you really want to coerce Wall Street to change its gluttonous ways, rather than parade your discontent by camping out and getting high, simply refuse to support its mega-cap IPOs and prove that you are no longer willing to be the exit strategy for the 1%. We can succeed in bringing democracy to the financial markets by coming together and commanding equal investing privileges and access to comparable growth opportunities.
It wouldn’t be the first time in American history that unjust laws were amended. Prior to 1920, women were denied the right to vote. The same discriminatory logic that prohibits today’s middle class Americans from venture investing once banned women from the political process. Both instances delineate certain individuals as incapable of making intelligent decisions. Ironically, it’s an inflating government, not one’s poor judgment, that U.S. citizens need protection against.
In the same way that American women went on to redefine the political landscape and help our nation progress, it will be today’s middle class entrepreneurs and willing venture investors who will rebuild our economy and lead America back to prosperity. Our children’s tomorrow is depending on it.
Sincerely,
A Wall Street Mom
Dara Albright, a Wall Street Mom, is the founder of NowStreet, a leading advocate for financial markets’ reform. She is a thought provoker and frequent speaker on topics relating to market structure, private-share markets and crowdfunding. She is the editor of the NowStreet Journal, a primary provider of analysis and insight into the private company marketplace as well as the legislation and innovation currently fueling it. Based on her original hypothesis that directly correlates advancements in mass communications with stock market growth, NowStreet highlights the dynamic economic impact of a reputable new small-cap growth marketplace rising during the most ground-breaking period of mass media and regulatory reform. A full bio can be found at:
http://nowstreetjournal.com/about-2/
Don’t stop the press. Really, don’t. The SEC’s previously postponed meeting to implement the overdue rule eliminating the prohibition against general solicitation and general advertising finally occurred yesterday, resulting in yet another delay tactic – “the rule proposal”. By the time this rule is finalized it will be so far into the future that companies will be able to market their offerings to us telepathically, rendering advertising as we know it completely useless anyway.
Instead of following this story, your time would have been better spent glued to the 24 hour weather channel watching Hurricane Isaac crawl across on the gulf.
The “proposed” rule that would allow general solicitation and advertising in certain securities offerings, as mandated by the Jumpstart Our Business Startups (JOBS) Act, can be summarized as follows:
The prohibition against general solicitation and general advertising would not apply to offers and sales of securities made pursuant to Rule 506, provided that all purchasers of the securities are accredited investors. The onus will fall on the issuer to take reasonable steps to verify that the purchasers are accredited investors. Issuers will also be required on Form D to indicate whether they are using general solicitation or general advertising in a Rule 506 offering.
As far as Rule144A is concerned, the solicitation ban would be lifted provided that the securities are sold only to persons that the seller and any person acting on behalf of the seller reasonably believe are QIBs (qualified institutional buyers).
When I inquired about the realistic timing of rule execution, Vince Molinari, CEO of Gate Technologies and expert congressional witness on capital formation, stated, “The SEC will be receiving comments over the next 30 days. I am optimistic that we will see these new rules employed by year end.”
I guess we should just be thankful that the SEC accepts its obligation to apply the law whether or not it acknowledges its deadline to administer it. In the SEC’s defense, they were left with little choice after being attacked from groups like the North American Securities Administrators Association (NASAA) and Americans for Financial Reform (AFR) for attempting to implement the final rules prior to issuing rule proposals. Yes, the NASAA is the same organization that just this week listed Crowdfunding as its top new investor “threat”.
While, everyone can pretty much agree that investing in start-ups is risky, to label it a “threat” is a complete and utter denunciation of entrepreneurism. The only thing I see being threatened here is innovation, job creation and American prosperity. NASAA’s fear-mongering needs to stop and this war on small business owners needs to end. NOW!
NASAA fails to warn us of legitimate investor threats like Enron, Worldcom, AAA-rated auction rate & mortgage back securities, Madoff and the economic ramifications of precluding the 99% from accessing the same growth opportunities as the 1%. Yet they have absolutely no concerns about stripping a yield-starved investing public of its right to invest in emerging growth opportunities.
It is an unfortunate reality that the growth we were once able to capture in the public markets simply does not exist anymore. 99% of Microsoft’s appreciation was realized AFTER it went public. ALL of Facebook’s appreciation was realized BEFORE. The longer the regulators cut off the general public’s access to growth investments while handing them to the privileged on a silver platter, the greater the wealth divide and the more hopeless the economic outlook. There’s a word for a system that only allows capital to flow to and from a nation’s favored and it ain’t called capitalism. With social security predicted to be bankrupt and retirement portfolios gravely underperforming because of the lack of growth in conventional asset classes, I’d like to know if NASAA would be willing to take on the responsibility of financially supporting tomorrow’s retirees.
As the SEC prepares to procrastinate, I mean effectuate, the new rules for Crowdfund Offerings, they should be viewing the entrepreneur as an inventor not a swindler. They should be arming the investing public with knowledge not fear. They need to protect investors from fraud not become a barrier to prosperity. Our entire economic future is at stake.
The views expressed in this article are independent of any organization. They are simply the opinions of a Mom on Wall Street, striving to ensure that her children inherit a thriving America.
With all of the recent financial scandals and trading losses, the last thing Wall Street needed was another humiliation, but those black eyes just keep on coming for public trading markets. Last week, Knight Capital, known for its electronic execution and high-frequency trading algorithms, suffered massive losses when a software glitch sent out a stream of unintended trades. This debacle came just weeks after Knight posted dismal quarterly earnings, in part, due to Nasdaq’s technology malfunction that slaughtered Facebook’s IPO.
Nasdaq’s technical “glitch” cost market makers upwards of $500 million in losses. Knight’s trading “glitch” triggered an estimated loss of $440 million (nearly four times its last year’s profit). Some estimate that the losses incurred by JPMorgan’s London Whale could total as much as $9 billion. With billions vanishing into thin air, I was wondering when we could stop sugarcoating the mutilation of the financial markets by referring to some of these computer failures as “glitches” and start labeling them, more appropriately, “breakdowns”.
Today, Wall Street looks worse than Rocky Balboa’s blood-drenched face when he delivered his “Yo, Adrian!” speech. How many more market capitalizations do we need to watch disintegrate before we can admit that our public markets are no longer functional?
Instead of fearing Grandma receiving a stock cert in exchange for doling out $2000 to a Crowdfunding campaign, we should be terrified of the high frequency trading that continues to destroy the markets and impede economic growth.
And why the hell are we allowing computers to run amok with our capital markets anyway? Soulless machines should not be “investing” in human-run businesses. Sometimes the brain is more adept at making decisions than the appliance. Geez, didn’t we learn anything from the movie, WarGames?
Now, I am not prejudice against robots, or to be politically correct, “Automated Americans”. In truth, I treasure technology and value how it advances global communications. However, there is nothing to be gained by de-humanizing the investing process. Computers get it wrong. And they get it wrong a lot. Otherwise my mobile phone’s spell-corrector would not be directing me to Whore Foods for my organic kale.
America’s businesses extend far beyond ledgers and trading volumes. You can’t see creativity, ingenuity or personality in a balance sheet. You won’t find vision on a “confirm”. The next world-changing product may at this very moment be lurking in the mind of an employee of a company whose stock continuously drops through its support level. Apple (AAPL) was once on the verge of bankruptcy and Steve Jobs was written off as a failure.
We can no longer afford to allow machines to dominate the financial markets. While it may enable a guy named Al (Al Gorithm) to vastly increase his wealth, American businesses will continuously lose their ability to expand, compete in a global economy and innovate.
Since becoming Al’s electronic playground, the public markets are incapable of facilitating growth investing. Once upon a time companies went public and used the capital they raised for expansion. Public market investors were able to capitalize on that expansion. 99% of Microsoft’s appreciation occurred after it had gone public. All of Facebook’s appreciation was realized in the private markets before ever going public. Today’s IPO just ends up becoming another one of Al’s play toys at the expense of the small retail investor who is legally prohibited from investing his own money in emerging private companies.
From 1990 to 1999, the S&P averaged a 19% annual return. From 2000 to 2009, it averaged a mere 1%. Treasuries are yielding a whopping 1.5%! You can generate more interest keeping your money under your mattress than in a bank savings account. With inflation over 3%, unless smaller investors are given the freedom to invest in growth opportunities, America is going to be facing an entire generation of retirees with zero savings and no social security to fall back on.
Fortunately, a Knight in shining armor has come to our rescue. He has arrived in the form of a nascent marketplace for private company stock which is being fueled by unprecedented advancements mass communications and the most economic restorative legislation in modern history.
Join us in Atlanta on August 21st for our upcoming Evolving Capital Markets & Crowdfunding Symposium and learn how the amalgamation of new regulation resulting from the passage of the “Jumpstart our Business Start-ups Act” (JOBS Act), social media and the rising private company marketplace is transforming our financial markets and leading America toward a new era of economic prosperity. Registration is only open for another few days. Click here to register today.
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Great radio segment on how Crowdfunding is helping local businesses access capital
