FT Partners, the leading Fintech focused investment bank in the US, has posted a presentation that covers the investment crowdfunding sector while incorporating a Q&A with SeedInvest founder and CEO Ryan Feit. SeedInvest is also a FINRA regulated broker-dealer and has been approved for an Alternative Trading System (ATS). The report points to the recent “landmark regulatory changes for private capital markets” referencing the Securities and Exchange Commission’s move to improve access to capital by updating online capital formation rules.
Earlier this month, the Commission approved amended rules that increase Reg CF funding to $5 million, from current $1.07 million, and Reg A+, Tier II offerings to $75 million, from current $50 million. These changes, along with a series of other improvements, are expected to dramatically improve access to capital for smaller firms raising money in the US. FT Partners points to the following as the most significant improvements;
- The cap increases may accelerate the development of the private capital markets, encouraging more issuers to conduct raises and providing more investment opportunities for investors
- Capital raising through Reg CF or Reg A+ likely becomes more attractive and attainable for growing companies
- The changes should better serve larger companies that previously thought Reg CF or Reg A+ was too small to serve their needs
- Equity crowdfunding platforms likely poised to benefit from the additional companies and investors entering the market
Digital Transformation in Capital Markets
The JOBS Act of 2012 may have launched the next generation of online venture funding but the changes scheduled to take place in early 2021 should dramatically boost this young industry. Feit outlines his expectations for the regulatory updates:
“Three key changes, in particular, will be very significant and will make online fundraising much more prevalent among top startups raising Seed and Series A rounds. Startups can now raise up to $5 million per year through Regulation Crowdfunding [Reg CF], which is up from just $1 million. Secondly, companies can “test the waters” ahead of launching a Regulation Crowdfunding campaign. This basically means they can collect indications of interest from investors before deciding whether to spend any actual time or money on a fundraising campaign. Lastly, companies can group hundreds or thousands of investors into a special purpose vehicle. This enables companies to more easily manage their cap tables by effectively treating lots of small investors as one person.”
Feit believes the entire sector is still quite young but that over time this will be a “large, multi-decade, secular shift in the private capital markets.”
Noting that today promising young firms seek to remain private as long as possible, Feit is of the opinion that “investors shouldn’t have all of their savings in just stocks and bonds” and diversification is key. While back in the day, a retail investor could hop on board a young Amazon or Apple in an initial public offering, today most of the growth happens before retail has the option to invest in these firms. This is where investment crowdfunding platforms can provide access to investors looking for promising growth opportunities.
As the industry has evolved, investment crowdfunding is no longer just about seed rounds but Series A and later. An issuer may leverage the full stack of securities exemptions to raise growth capital all online. Feit says that 2020 has been huge for SeedInvest as over 200,000 new investors have signed up for the platform while offerings are now completing multi-million funding rounds on a regular basis. Without providing actual numbers, SeedInvest shares that it booked 3X growth in Q3 2020 versus the same quarter in the year prior.
“It’s going to be incredibly interesting to watch two key disruptive trends play out over the next decade. In order to remain competitive, brokerage and advisory firms are going to need to continue to find additional ways to add value to their clients. As traditional offerings become increasingly commoditized and as access to millennials becomes even more important, firms are going to need to find additional ways to provide access to alternatives. There are firms, such as SeedInvest, that provide access to venture capital, and there are a number which do the same for real estate.”
The presentation may be viewed here.