Weighing the New IPO-Lite Option of the JOBS Act

Pros and Cons of Raising Growth Capital Under SEC Regulation A+

If you’re looking for growth capital to fund your private company’s ambitions, you have a range of options. Spurred by the 2012 JOBS Act, and following the introduction of “general solicitation” under SEC Regulation D in 2013, we’re now seeing additional new ways to raise growth capital under the new Regulation A+ rules, most notably opening up this so-called ‘IPO-Lite’ to non-accredited investors.

Let’s take a closer look at Reg A+, and examine how an IPO-Lite compares to a full IPO. 

The Cost of Going Public

Going public through a full IPO has become a very expensive and time-consuming process. Consequently, many private companies are waiting until much later in their growth trajectory to go public than before, as exemplified by the record number of businesses in the billion-dollar club that are still private.

In contrast, an IPO-Lite under Reg A+ is much less costly. Between legal, auditing, filing, reporting, and other fees, an IPO-Lite is more likely to cost in the range of high five to low six figures. That is relatively modest compared to a full IPO, which costs well over a million dollars according to PWC data.

Still, preparing an IPO-Lite takes time. The disclosure requirements are lighter than those for an IPO S-1, but they’re still significant. Plus, the process of SEC review will take several months from the day of filing to getting “qualified” to raise capital, whether directly, through a placement agent, or a broker-dealer.

Tier 1 and 2 of Reg A+

The old Reg A had such a low fundraising limit and high compliance cost that it was almost never used – Ben & Jerry’s being a notable exception back in the 1980s. Companies could only raise up to $5 million in capital, from accredited investors only, and they had to file the offering in every state in which they were selling their investment opportunity (the so-called ‘blue sky laws’).

The new Reg A+ now allows private companies to raise more capital, and from both accredited and non-accredited investors. It comes in two flavors: Tier 1 and 2.

The New IPO-Lite Options

Tier 1 is for fundraises up to $20 million, yet still requires state registration. Under Tier 2, companies can raise up to $50 million, and offerings do not have to be reviewed by every state, which significantly reduces the cost of compliance.

Other differences between Tier 1 and 2 are related to the SEC requirements for initial filing and ongoing reporting, with Tier 2 generally being more strict and burdensome.

Deciding if Reg A+ Is Right For Your Company

Reg A+ won’t suit every company, or growth stage. Reg A+ can be the right solution for companies in a later stage in their growth trajectory, by providing an intermediate step between traditional venture capital funding and going fully public. Yet, Reg A+ is not necessarily the appropriate fundraising option for early stage startups. Why not?

The Reg A+ preparation, filing, and reporting requirements aren’t as rigorous as those for a full IPO, yet they are a significant step beyond the business plans and budgets startups typically show angel investors or VC firms. For many early stage companies, meeting these requirements will be too expensive or too time-consuming to be practical.

That’s why Reg A+ is most useful for a mature, later stage private company that is prepared to do the work, take the time, and bear the cost required for this more formal type of offering.

Stages of a Reg A+ Offering

Companies that are considering conducting a Reg A+ offering should understand the five key stages of the process, from start to finish, and beyond:

  1. Getting Ready
  2. Testing the Waters
  3. Filing with the SEC
  4. Conducting the Offering
  5. Filing Ongoing Reports

Stage 1. Before you embark on a Reg A+ offering, you’ll want to make sure your company is structured properly, that you’re ready to take on a new group of shareholders, and that your intellectual property is secure enough that you feel comfortable releasing information to the public.

Stage 2. You’ll be able to “test the waters” before undertaking the time-intensive process of creating a full offering statement. This means you can publically promote your potential offering and gather indications of interest – after which you can decide to proceed (or not).

There are rules regarding what can and can’t be said during this preliminary interest-gathering phase, so working with a securities specialist to review all communications is essential. For instance, as soon as a Reg A+ offering is filed with the SEC (Stage 3), you need to communicate your filing documents.

Stage 3. Depending on the type of Reg A+ offering (Tier 1 or 2), your company may need to file audited financials, as well as an offering circular, with the SEC. These materials have to be filed through EDGAR, the SEC’s online filing system.

The SEC will review the offering circular, ask questions, and request amendments to the disclosure, and then “qualify” it, allowing you to proceed. Note that SEC “qualification” by no means should be interpreted as a recommendation – it simply means that you are allowed to make an actual Reg A+ offering now.

Stage 4. Once your offering circular has been “qualified,” you can’t test the waters anymore. At this point, you’ll need to be working with a licensed broker-dealer who can legally sell the securities you’re offering.

Stage 5. After your offering has closed, depending on the type of offering, you may need to continue filing ongoing reports, including semi-annual and annual financial reports and current event reports. Events that require reporting include for instance a principal executive leaving the company, a private sale of a large number of outstanding shares, or changes in the rights of shareholders.

Those are just the basics of the five stages of course, each warranting a much more elaborate examination.

Conclusion

Reg A+ offers private companies looking for growth capital meaningful new avenues for substantial funding, while complying with reasonable and manageable reporting requirements.

Reg A+ can especially be an attractive new option for mature private companies that want to raise capital without going fully public (yet), providing liquidity for early investors, and creating an intermediate capital formation step on the road to a full IPO.

Slowly but surely, the JOBS Act is changing the investing landscape for the better, for issuers and investors alike.

Nasdaq and the Capital Markets: The More Things Change, the More They Stay the Same

Last Friday, April 10, I had the opportunity to attend the ringing of the Nasdaq opening bell. That morning’s opening represented a monumental achievementfor one of the founding members of Nasdaq. In the spotlight stood the team of Boenning & Scattergood, a company that has been operating since 1914 and is now celebrating its 100-year anniversary.

NASDAQ Opening BellThink about that for a moment – how many of today’s firms have that much history?

The capital markets have been the facilitator of innovation, directing capital to the best ideas since the dawn of capitalism. Boenning & Scattergood, and the 3 CEOs that led it over the past 100 years, witnessed a staggering amount of innovation, disruption, and change.

We saw the emergence of the assembly line, the discovery of penicillin, the beginnings of space exploration, the human genome project, and several catastrophic financial crises.

These events were coupled with some of history’s greatest inventions, including “talking” pictures, television, sliced bread, jet engines, the ballpoint pen, the nuclear reactor, the silicon chip, the personal computer, the mobile phone, the Internet, and, more recently, Google search, Wi-Fi, the iPod, and Facebook. Some of the companies and visionaries responsible have shared the same podium that the Boenning & Scattergood leadership stood on.

We often take for granted the acceleration of innovation. I am writing this on my laptop, on a cross-country flight from New York back to San Francisco, connected to the Internet to post it from the comfort of my reclined seat – the fodder for science fiction in the 1970s.

What has been consistent throughout is that innovation and great ideas need investment capital to cultivate them, and the capital markets have consistently facilitated the flow of these investments.

What has changed are the processes and mechanisms to do that. The fact that I was in what is essentially a studio to witness the Nasdaq opening bell, and not on the floor of the NYSE, is an example of that change.

I started my own career on the trading floor, as part of a training program, and sawafew bell ringing moments that were followed by the roar of a crowd of thousands of people who worked there. At that time, the NASD was literally an association of desperate securities dealers reinventing the concept of an exchange. It evolved to Nasdaq, centralizing the nationally associated securities dealers via an automated quotation system, which is what the Nasdaq acronym stands for. Further innovation created the ECNs, or electronic communication networks, allowing firms to trade directly with each other.

Now, I think it is time for the capital markets to change again. This process has started with the 2012 JOBS Act, and may accelerate with the recent changes to Regulation A+ approved by the SEC. Why is this important? In the last couple of years, the flow of capital has been constipated for earlier stage companies.

There was a time when an early stage company could more easily raise public funds for growth. Today, it has become very complex and expensive to raise money publicly. Companies that go public today often are larger, already have enormous scale, and go public to provide liquidity for their early stage investors. As a consequence, the opportunity for a broader investor segment to participate in the steepest part of a company’s growth curve has been removed from the public markets. It has been replaced by private equity, which provides growth capital at a potentially very lucrative time in a company’s evolution. The problem with this is that only a relatively small, very exclusive group of investors have access.

What has stayed the same is that great ideas need capital to flourish and grow. What is changing is the way these ideas receive capital and from whom. With Venovate Marketplace, the online brokerage platform that matches investors and fundraisers of private securities, we’re striving to be at the forefront of that change.

SEC Reg D vs Reg A+ (Or How to Capitalize on the New Rules for Private Company Fundraising)

Exciting news from the SEC: the ‘IPO-Lite’ is coming!

Earlier this week, on March 25, 2015, the SEC voted unanimously (5-0) to introduce new regulations that will enable small and medium-sized private companies to raise larger amounts of money from investors before going public. These changes to the little-used SEC Regulation A will create an attractive new option for mature, private companies that want to provide liquidity for early investors and/or raise capital without going public. The new Regulation A+ rules − also referred to as the ‘IPO-Lite’ – are slated to go into effect 60 days from the date the new rules are published in the Federal Register.

SEC Reg D vs Reg A+

At Venovate, like many others, we were highly anticipating the new rules. Inspired by the SEC decision, we are expanding our partnership with the investment due-diligence and disclosure experts at CrowdCheck to assure full compliance with the new regulations, as well as support issuers to leverage the new options to raise capital.

In the table above, we have summed up the key aspects of, and differences between the new Reg A+ and Reg D, the other key change triggered by the 2012 JOBS Act.

Are you looking forward to the new Regulation A+ taking effect, either as issuer or investor? I’m curious about your take on this exciting new development.

Alternative Investing Article in Forbes: “5 Reasons Why 2015 Is Looking Like a Breakout Year for Alternative Investments”

Michael Raneri on ForbesIn this exclusive Forbes article, I’m presenting my rationale for why 2015 is poised to be the turning point for alternative investments, marking their emergence as a viable and prominent asset class for far more investors than ever before.

From volatility in the stock market to the state of IPOs, I’m addressing the diminishing opportunities in the public markets for significant growth, and how that is opening up new avenues in the alternatives space.

“I’m sure some mutual fund managers would disagree, but let’s be honest: it wasn’t too difficult to make money in the public stock market last year. The S&P 500 rose more than 11% and Apple (AAPL) for instance, a popular pick among retail investors and analysts alike, gained even more. But, after a strong 2014, the public markets have been off to a choppy start in 2015. This year, savvy investors may be looking for alpha elsewhere. For many institutions and high-net-worth individuals, alternative investments are an attractive option…”

Click here to read more, and follow me on Forbes for upcoming articles on alternative investing.

Is the JOBS Act Working, One Year Since Key Changes to Rule 506 of Regulation D Went into Effect?

I’ve talked a lot about the JOBs Act on our blog, because it’s game-changing legislation that is having a profound impact on how money is raised privately, spurring new economic activity and job creation. The JOBS Act is permitting issuers of private securities to talk publically about their offer, and allows them to advertise that they are raising capital.

SEC LogoIt has been one year since the SEC issued key changes to Rule 506 of Regulation D, which created two paths for an issuer to raise capital for private securities. The old rule that most issuers already used is now Rule 506(b) and the new, emerging standard is Rule 506(c).

  • Under Rule 506(c), issuers can freely engage in general solicitation and advertising so long as they, or a FINRA registered broker-dealer, verify that all investors are accredited at the time they invest.
  • Under Rule 506(b), issuers must rigorously monitor their activities, and the activities of those acting on their behalf, to ensure they are not violating the prohibition on general solicitation and advertising.

The new rule is having a material impact on the private securities market. According to the SEC, through June 30, 2014, there were 1,310 offerings raising $14.1 billion under Rule 506(c).

However, some private placement issuers are hesitant to change their method of operation. They are used to complying with the old rules and don’t want to be among the first to change. I believe they are missing out on significant benefits from general solicitation. The new Rule 506(c) has enabled a new type of broker-dealer to emerge that can help issuers remain compliant and make investing in private placements easier for both the investor and the issuer.

If you are an investor of a certain age, you may remember when buying a mutual fund was hard. You needed to fill out a form and mail it to the mutual fund company along with your check. Switching to another fund at another fund family involved writing letters, waiting for checks, and sending in forms – it sometimes took weeks.

Today, you can invest in mutual funds on your computer. Changing to another fund takes a few clicks and it’s done in a day. Prospectuses are online, along with a wealth of data to let you search and filter to find the right fund. All of this has made mutual funds more accessible to everyone, and resulted in an explosion in the volume of money under management by the fund industry. Firms such as Schwab and Fidelity lead the way to make these mutual fund marketplaces possible.

Rule changes under the JOBs Act have made the same kind of change possible for private placements in alternative investments. New brokerage firms, like Venovate Marketplace, are creating online services that make investing in private placements as easy as buying a mutual fund. They enable issuers to more easily comply with the new rules, whether they choose 506(b) or 506(c) for their offer. Here’s how that works.

Issuers may freely engage in general solicitation, publicly promoting that they’re raising capital under Rule 506(c), but they are responsible for the new, stricter requirements to ensure the accredited status of investors. Wherever an issuer advertises their opportunity, if they refer potential investors to a marketplace for more information, the broker verifies each investor’s accreditation, 3C1, 3C7, or 144A qualification, and provides proof of verification to the issuer.

Alternatively, issuers may elect to make an old-school 506(b) offer. This requires them to manage their activities, and the activities of those acting on their behalf, to ensure that no general solicitation occurs. The broker-dealer acts on the issuer’s behalf and follows well-established guidelines for knowing their customer and ensuring that 506(b) deals are only presented to accredited investors, qualified purchasers, or institutions. Issuers must still monitor their activities off the platform, but 506(b) transactions on the platform are worry-free.

Whichever rule the issuer chooses, the broker provides:

  • Transparency – a secure, permission-based deal room to make documents available for due-diligence. Information can be searched and filtered so investors can find the deals that are right form them.
  • Compliance – investor accreditation is verified and all regulations for presenting opportunities are satisfied.
  • Efficiency – paperless, electronic documentation and signature gathering speed the process.
  • Security – electronic fund transfers and online escrow services close the deal securely.

See the table for a quick summary.

Regulatory Restrictions Rule 506(b)
(old)
Rule 506(c)
(new)
Compliance Solution
General solicitation to the general public allowed? No Yes Password protection eliminates general public from the platform.
Solicitation to accredited investors allowed? Yes Yes Broker-dealer verifies investor accreditation.
Prior relationship with investor required? Yes No Broker-dealer has a significant relationship with investors who see 506(b) offers.At Venovate, we follow the “know your customer” rule and enforce a 30-day waiting period to invest.

The post-JOBs Act era will make it possible for issuers to market to a broader audience of investors and advisors. A new kind of brokerage firm will support this by streamlining compliance with both rules 506(b) and 506(c). This helps issuers raise more money, faster, and at lower cost. Soon, this will make investing in private placements as easy as buying a mutual fund.

Venovate Marketplace has worked closely with a top securities law firm to design systems and procedures that support compliance with both new SEC rules. Our proprietary technology takes into account the law changes, the new rules established by the SEC and FINRA, SEC no action letters, and case law. On our platform, the issuer decides which rule to rely on for an exemption from registration, and we enforce the appropriate set of restrictions and entitlements to ensure compliance with all laws, regulations and guidelines. This gives investors access to a full range of offers and lets issuers conduct business as they wish.

Join Venovate Marketplace and see for yourself how our platform is the smarter alternative to raise capital, or invest in private investment opportunities.

Need Investment Advice? Now Venovate Can Help!

I like making my own investment decisions. I’ve been investing for over 20 years, I know what I’m looking for, and I have the education and experience to evaluate opportunities and find what I want.

However, I am not a tax expert. I guess I could become one if I had the time and interest to learn more on the topic, but it is more cost effective for me to pay someone who is already an expert to do my taxes. If I’m going to spend money and time to improve my skills, I’d want to focus on something more fun – like skiing or painting.

No one can be an expert on everything. I prefer to focus my energy on the things I am passionate about and pay experts to help me with things like taxes, plumbing, and car repairs for instance.

Many people don’t like making their own investment decisions. They view investing like I view tax preparation. Ideally, these people find an expert to help them choose the right investments, but in many cases they do nothing. They don’t want to manage their own investments, but they also don’t get around to delegating the task. It’s human nature to avoid what we don’t like doing. Were it not for a firm deadline and a stiff penalty, I’d still be procrastinating on my 2004 income tax return.

Now Venovate can help.

Our company’s mission is providing investors with smarter alternatives. This mission includes helping people who don’t want to manage their money themselves. To that end, Venovate now offers two new investment advice services for people who want help with their investments.

1. Venovate Marketplace now supports investment advisors

First, we are now giving independent investment advisors access to Venovate Marketplace. These advisors offer fee-based advice on alternative investments and can help you choose the right opportunity for your unique needs. They can sort through the wide variety of investments listed on the platform, perform the due diligence by analyzing the detailed information we provide, recommend opportunities that are right for you, and explain your choices clearly.

Registered investment advisers and reps, attorneys, and accountants will be able to create an investment advisor profile on Venovate Marketplace and choose deals for their clients. Investors will be able to look for an advisor whose background and expertise matches their needs, connect with them, and grant them the authority to act on their behalf or simply make recommendations.

2. Venovate Advisors – for the rest of your portfolio

Second, we are announcing our own independent subsidiary for investment advice: Venovate Advisors, led by John Foley. I had the pleasure of working with John both at Schwab and Zecco. He has over thirty years of experience in the investment advice and financial planning business.

Venovate Advisors does not compete with independent advisors who have profiles on Venovate Marketplace. Instead, it is designed to help accredited investors with alternative investments diversify the rest of their portfolio and invest for a secure retirement.

Our recent survey of investors who custody assets with our trust partners indicated that most investors keep between 5% and 30% of their investments in alternatives. Venovate Advisors can help you with the 70% to 95% of your portfolio that is not invested in alternatives.

Venovate Advisors creates a diversified portfolio designed to help you reach your goals and balance the risk and illiquidity of alternative investments. This service is particularly valuable to successful investors in alternative investments who find themselves with large concentrated positions in a few relatively illiquid securities. As these positions become liquid, it can be a wise strategy to take some money off the table and diversify it in more traditional investments.

Venovate Advisors, LLC is a 100% subsidiary of Venovate Holdings, Inc. It acts as a fiduciary, charging a percentage of the assets under management. Get more information on the Venovate Advisors website or contact John and his team for a free portfolio evaluation.

I think these two new investment advice services add a valuable new dimension to our offering by allowing Venovate to serve a broader group of investors and provide even more people with smarter alternatives.

Microsoft 1978 vs Venovate 2014: You Can Now Invest in Us!

I’m sure you have all seen this picture before. In case you’re not familiar, no… this is not the Venovate team. This was the Microsoft team back in 1978, with founders Bill Gates (bottom left) and Paul Allen (bottom right).

Microsoft 1978

What made this picture funny and viral was the question attached to it. The question read: “Would you have invested?” Fast forward to 2014, the more appropriate question for this iconic picture is: “Could you have invested?” COULD instead of WOULD, and the answer was no, you could not.

Until 2012, it simply wasn’t legal, unless you knew this team and were somehow connected to them. This was due to an SEC ban on general solicitation for private investment opportunities.

Inspired by the Microsoft 1978 story, we thought it would be fun to recreate that picture for the Venovate 2014 team. Here we are.

Venovate 2014

Now, let’s take a closer look at at these two pictures and zoom in on some key differences about the circumstances of both companies. For starters, and in all modesty, the Microsoft 1978 team overshadows most startup teams that came before or after them.

Having said that, there are three key reasons why investors and fundraisers historically have been unable to effectively connect:

  • The first is access to opportunities
  • The second is transparent information
  • The third is an efficient transaction process

 

With the introduction of Venovate Marketplace, we are addressing all three of them. Venovate took advantage of the 2012 JOBS Act and we have built the first truly transparent and efficient marketplace that brings together accredited investors with alternative investment opportunities.

Let’s talk about our first benefit: access.

We offer investors a wide variety of opportunities. On our platform you can find a range of private companies, raising a Series A or B round for example. In addition, we just started the due diligence on JBH Consulting, a fund management firm raising several millions for their natural resources funds in Kansas. And we already completed that same review process for Stallion Capital Management, a fund management firm raising $25 million for their real estate fund in Austin, Texas. Their fund is now live on our platform.

With that variety of opportunities, we are a one-stop-shop for alternatives. Meaning that there is no need for investors to join multiple platforms.

And on the other side of the market, for fundraisers, Venovate Marketplace offers access to a large pool of investors. They partly came from our strategic partners who bring to the table over 330,000 investor accounts with over $17B in assets. These investors have invested in private securities before. They are accredited investors, and they are experienced investors.

Now let’s dive into our second benefit: transparency.

Traditionally, information has been sparse and inconsistent from opportunity to opportunity. Our platform offers a largely standardized format for defining and presenting opportunities. Making them easier to review and compare. Also, as a FINRA broker dealer we do due diligence on every opportunity we list – and present the findings in a report for all potential investors to review.

Transparency is also key when it comes to investor accreditation. We verify that investors meet the accreditation criteria, so fundraisers know they’re dealing with people who can follow through on their commitment to invest. We check directly with the IRS for instance, to make sure the investors meet the minimum income requirement. Or, we verify the investors’ net worth with their financial institutions. If an investor is not approved, we restrict their access to opportunity details. More transparency for fundraisers = less noise.

And then the third benefit we mentioned: an efficient transaction process.

The transaction process usually takes a long time for fundraisers, and can be very messy. We believe our platform can cut that down from 10 months to 10 weeks. How? We facilitate the transaction process to take place online, from start to finish – and even beyond. Following the initial commitment, we are organizing as much as possible online, through e-docs and e-signatures. And even a fully integrated banking backend with escrow accounts that collect and disburse the monies committed by investors.

And think of this from the perspective of the investor: electronic issuance of shares, and an investor relations area, for ongoing updates on progress. Online, all in one place.

In summary, Venovate Marketplace delivers three clear benefits: access, transparency, and efficiency. So, if you are an accredited investor, financial advisor, fund manager, or private company –Venovate Marketplace is for you.

And perhaps one day, you too can share the story with your friends and family that you did invest in the next billion dollar idea, right here on Venovate Marketplace. Specifically, I am pleased to announce that you can now invest in us, Venovate, right here on our own platform.

How’s that for a general solicitation?

Ten Reasons to List Your Investment Opportunity on Venovate

The US market of high net worth investors is substantial and largely untapped still. Around nine million households qualify as high net worth, based on the SEC definition of having an individual or joint net worth exceeding $1,000,000 (excluding equity in a primary residence). Yet, only 3% of those households currently invest in alternatives.

High Net Worth Households

In a previous post, Michael Raneri addressed the chicken and egg challenge associated with building a marketplace. To address this at Venovate Marketplace, we have signed partnerships with some of the top trust companies and 3rd party custodians, including Provident, Millennium, Kingdom, New Direction, Next Generation, and Entrust. These partnerships permit us to market Venovate Marketplace to their clients, many of which are accredited investors.

That is why we believe that, if you are a quality alternative investment fund or private company looking to raise funding, you should consider listing your investment opportunity on the Venovate Marketplace platform. We offer solutions for fundraising, investor relationship management, and liquidity, all in one place.

Don’t just take my word for it, of course.

We recently conducted a survey of investors and issuers who have already signed up for the Beta of Venovate Marketplace. Many of these early adopters are clients of the partners discussed above. Based on their feedback, we created a top ten of reasons why funds and private companies should list their investment opportunities on Venovate.

1) Venovate provides access to a large pool of verified accredited investors  

It is not surprising that “access to a large pool of verified investors” was mentioned by 100% of fund managers and 94% of companies as a key reason they plan to use Venovate Marketplace. Venovate provides fundraisers access to accredited investors who will be verified by Venovate in line with the newly published SEC rules.

Together, our partnerships give Venovate access to a client base totaling over 330,000 investor accounts with over $17B in assets under administration. That is a vey promising start, especially because we believe that these clients have 5-10x more capital outside of those investor accounts with our partners.

2) Investors form the overwhelming majority among Venovate Beta sign ups

Of the first group of Venovate Marketplace Beta sign ups, over 80% indicated to primarily invest, or to both fundraise and invest.

3) Investors on Venovate are no rookies

83% of investors who signed up for Venovate Marketplace have experience with investing in alternatives during the past ten years. 42% of them have participated in four or more alternative investments during that time. Clearly, the Venovate audience is made up of experienced investors who know what they are doing.

4) Investors on Venovate will continue to invest in alternatives

85% of investors at Venovate Marketplace are targeting an alternative investment exposure greater than 5%, and a 70% majority of investors are targeting an allocation to alternatives between 5% and 30%. Conclusions: Investors on Venovate want to hear about your opportunities.

5) Investors on Venovate expect high quality, vetted opportunities

When asked how they expect Venovate to make the investment process for alternatives better, 87% of investors felt strongly about “verifying credibility of the issuers” and “providing comprehensive due diligence.”

These investors are not looking at Venovate Marketplace as a platform for casual crowdfunding. They don’t want us to show them opportunities from issuers who are not yet ready. They expect us to conduct due diligence, and provide transparency and standardization of our listing standards. We plan to do just that. If an investment opportunity doesn’t meet our standards, we won’t list it.

6) Investors on Venovate want a true marketplace

78% of investors valued “access to many different kinds of listings in one place” and “offering a fast and efficient investment process”. These are both important features of a true marketplace – a wide variety of offerings and an efficient transaction process. These key elements are sorely lacking in the current investing process for alternatives, and Venovate Marketplace is designed to fill that gap.

7) Investors on Venovate consider the full range of investment objectives

When asked what their main objective was for investing in alternatives, 75% of our investor sign ups cited growth, 57% added income, and 30% picked capital preservation. Obviously, many had more than one objective. These investors are not just speculators – they want to consider the full range of investment opportunities to meet their investment objectives as they change over time.

8) Investors on Venovate are interested in all alternatives, but some stood out

Investors noted significant interest in participating across all alternative asset classes, but the most attractive were real estate (59%), private equity funds (40%), early stage private companies (40%), energy (38%), natural resources (27%), and late stage private companies (27%). Again, most investors indicated interest in multiple asset classes.

9) Issuers want to simplify shareholder management

Over 40% of issuers felt strongly about the value of cost-effectively managing the transaction process and providing investor relations tools to their investors. We heard from fund managers that they would like to have a system to expose to their current investors and that provides access to their records and updated investment information. These features are an integral part of our platform architecture.

10) Liquidity is more important to funds than companies

We were a bit surprised to hear that alternative funds and private companies had different views of liquidity – with 44% of funds looking to utilize it and only 12% of private companies interested in providing it to shareholders. Either way, Venovate Marketplace plans on helping all issuers, both funds and private companies, with liquidity needs in the future.

If these findings spark your interest in joining Venovate Marketplace, please sign up for our exclusive Beta. If you have an investment opportunity in an alternative fund or private company you’d like to list, please email us at info@venovate.com.

We are looking forward to hear from you.

 

Invest Like Harvard (with the Help of Venovate)

Barron’s recently interviewed Jane Mendillo, CEO of Harvard Management, which oversees the $32.7 billion Harvard endowment, the largest endowment in the country.

Harvard endowmentAlternative investing stood out as a prominent theme of the discussion. Harvard currently has 11% in U.S. stocks and 55% of the portfolio allocated to alternative investments, including private equity, hedge funds, real estate, and natural resources. It also has 11% in both foreign and emerging market equities and only 11% in fixed income securities. This represents a significant departure from 1995, when it was 70% stock, 22% bonds and only 13% alternatives.

Mendillo explained the advantages of the endowment’s strategy and need for a more sophisticated approach to portfolio construction. According to Morningstar, for the ten years ending 2012, the annualized performance of the U.S. stock market ranked 36 among the world’s top 45 markets, so international and emerging markets must be a larger part of the mix. Alternative investments can even out the higher volatility of these equities with a better return than bonds. This approach is replacing the more traditional portfolio of fixed percentages of stocks and bonds in many institutional portfolios. Over the past 10-year period, through the use of alternative investments, Harvard has beaten the S&P 500 by 2.2% and a 60/40 blend portfolio of stocks and bonds by 3.3% per year on an annualized basis.

Investing in alternatives is not without risk, however. Mendillo discusses how Harvard’s overexposure to illiquid investments hurt the portfolio during the downturn and since has restructured the portfolio to better fit their liquidity needs. They also eliminated  5% of leverage from their portfolio.

Let’s look at some lessons to learn from this, and how Venovate Marketplace can be of help to invest like Harvard.

1. Use alternative investments

Challenge: Most accredited investors have not had access to the alternative investment universe, but can now include these asset classes in their portfolio.

Solution: Venovate Marketplace is building a platform that offers access to private real estate, natural resources, private equity, hedge funds, infrastructure, and direct private company investments.

 2. Apply real diversification

Challenge: Diversification today means more than a simple stock/bond mix. Adding international and emerging market equities can capture higher returns, but increases volatility. Carefully chosen alternative investments can help manage this volatility and offer the opportunity for higher non-correlated returns than bonds.

Solution: The minimum investment size for alternative investments on Venovate Marketplace can be as low as $25,000. This allows accredited investors the opportunity to build a diversified alternative portfolio without overexposure to any one private company, deal, asset class, or even fund.

3. Understand your time horizon

Challenge: Individual investors do not have the indefinite time horizon of an endowment, of course. They must structure their investment strategy and portfolio construction around realistic liquidity needs. Mendillo suggests an “illiquidity premium – of at least 300 basis points annually on average over publicly traded stocks” is needed for tying up your money in any particular investment for multiple years. Particular care must be taken in IRAs and other qualified plans if you are in or near retirement and distributions must begin by age 70½.

Solution: Venovate Marketplace offers investments that fit a variety of liquidity needs – from illiquid venture capital or natural resource funds with multiple year lockups to alternative products with daily liquidity.

4. Do your research

Challenge: Investing in anything can be risky, but alternative assets generally include a larger minimum dollar commitment and a period of illiquidity. It is important that you fully understand what you are investing in, the risks, the opportunity, and the lockup period. These differ widely from one deal to another, so it is important to do your own research or engage a qualified advisor to do it for you.

Solution: Every Venovate Marketplace listed investment opportunity has standardized, transparent information including a private placement memorandum, financials, term sheet, and subscription agreement.

In conclusion, alternative investments are not just for large institutions and endowments anymore. Through Venovate Marketplace, individual accredited investors now have access to a new world of investment opportunities. Sign up for our Beta, and be among the first to experience Venovate Marketplace.

The Time Is Right for Smarter Alternatives

In a recent Wall Street Journal article about Venovate, venture capitalist Tim Draper was quoted as saying about us: “I think the timing is about right now. This is a very exciting time for private companies and investors.”

Time for ChangeI couldn’t agree more. We are at the convergence of a number of important trends. Crowdfunding sites like Indiegogo and Kickstarter have made people comfortable with the concept of using the web to fund something they believe in. The JOBS Act has opened up the possibility of using some of these same techniques to finance companies and deals. At the same time, state regulators are expressing valid concerns about how investors will be protected in this brave new world of “crowdfinancing.”

In many ways it reminds me of the early days of online stock and options trading. We faced many of the same challenges, but we met them. Many members of the Venovate team come from the online brokerage world, and some have been at it as long as me. I am confident we can meet these challenges and believe that there are three keys to our success with smarter alternatives. We need to make investing in private placements meet these three criteria:

Easy – Make investing in alternatives as easy as trading stocks online. Believe me, when you make a stock trade lots of things go on behind the scenes that are invisible to you. But to you, it’s simple and easy. We are committed to make private placement investing just as easy. We want to make it easy to find and evaluate information on an opportunity, easy to indicate interest, easy to sign the documents, and easy to close the transaction. We’ll do the heavy lifting behind the scenes.

Safe – Provide a safe place to shop for opportunities. The JOBS Act gives everyone more freedom. With freedom comes risk and responsibility. Regulators are concerned about fraudulent and unscrupulous actors having easier access to investors. We share that concern. We have listing standards and will curate deals which will help ensure that investors have full disclosure and complete transparency so they can make educated decisions. We feel transparency is the best protection against the unscrupulous. There are no guarantees of success in investing, but we intend to do everything we can to help investors make informed decisions.

Liquid – Create an aftermarket for private placement securities. One reason many investors shy away from private investments is their inherent illiquidity. This is a concern to be taken seriously. Read the information provided by the sponsor about how long your money will be tied up, and don’t commit money that you might need sooner. That said, we plan to create an aftermarket for shares of alternative investments. It will be an auction-based market that still affords sponsors a measure of control about when liquidity windows are open. We believe that a liquid aftermarket will make alternative investments more accessible and less risky.

Crowdfinancing is a new approach to an investment process that has been around for a while and is ripe for innovation. Some people are early adopters and are eager to jump in. Others want to wait until the concept is more proven. The early adopters will help us shape the way this new industry evolves. If you want to be one of them, sign up for our Beta.