Rialto Markets has added over $1.2 billion in signed contracts from private company issuers.
As the cost of going public has risen, fewer companies have pursued the option of raising capital in an IPO and trading on an exchange. This cost of compliance is predicted to move even higher in the near future – especially with a new round of rules currently being considered by the Securities and Exchange Commission. Meanwhile, there is an ocean of capital pursuing private firms – aiming to gain access to the next big thing before it is acquired or listed on an exchange. Some people view an IPO as more of an exit opportunity for big money instead of an investment in a fast-growing firm.
With the JOBS Act of 2021, three new securities exemptions were created that allowed online capital formation, or investment crowdfunding, to take place. Reg CF (up to $5 million) and Reg A+ (up to $75 million) allow firms to raise capital online, selling securities to both accredited and non-accredited investors. Reg D 506c, an exemption without a funding limit, is only available for accredited investors but frequently issuers will pair a Reg CF and Reg D 506c securities offering to combine both non-accredited and accredited individual investors.
A new generation of platforms has emerged in recent years to capitalize on the transformation of capital markets that leverage the internet and technology to match investors with firms in need of growth capital. Rialto Markets is one of these platforms and it is managed by entrepreneurs with deep expertise in traditional securities markets.
Rialto Markets is a FINRA-regulated Broker-Dealer that also operates an Alternative Trading System (Rialto Secondary) for private securities trading. This includes “digital asset securities.” The firm supports companies issuing equity and debt securities through Reg A+, Reg CF, and Reg D exemptions.
In the past week, CI has connected with Shari Noonan, CEO and co-founder of Rialto Markets to ask her about her platform, the current economic environment, and her expectations for the future of online capital formation. Noonan, has more than 20 years of experience in the financial services sector including executive roles at Deutsche Bank, Goldman Sachs and Instinet. Noonan was previously COO of Global Equity Trading and COO of Global Electronic Trading at Deutsche Bank.
Our discussion is shared below.
Inveniam Capital Partners recently invested in Rialto Markets. Can you provide any details on the investment? Inveniam CEO Pat O’Meara said at the time it was a step toward building a “fully functional ecosystem” for smaller firms in search of capital. Can you elaborate on this?
Shari Noonan: There is some confidentiality around the institutional investments we are receiving, including the significant investment from Inveniam Capital Partners. As you know we also wanted to give retail investors a brief window to invest in Rialto Markets via a RegCF, which we have just closed early as we are onboarding the remainder of the institutional round. The board is being formed, but we can’t comment right now.
Currently, smaller private companies have access to a limited universe of investors and they in turn have limited access to investment opportunities.
Regulations like Reg CF and Reg A+ provide opportunities to expand that access from both sides. However, the current operational and workflow mechanisms do not enable this at scale.
Inveniam and Rialto Markets have created the tools to change this and deliver a fully democratized ecosystem for the marketplace. This enables private companies looking to raise capital to expand their net and reach a much wider and more diverse investor base, providing investors with access to investments at an earlier stage than previously.
Due to the shaky economy, venture investments are slowing. Is this an opportunity for platforms like Rialto Markets? And what about valuations?
Shari Noonan: Rialto Markets enables not only venture and institutional investing but also retail investing. This diversity can help private companies seeking capital find a wider range of investors, which might mitigate some of the shakiness in the economy.
Obviously, public market valuations have come down, however, the jury is still out on private market valuations.
Have you seen any impact on your platform activity due to rising inflation/rising interest rates/slowing economy? How is deal flow right now? And what are your expectations for the rest of 2022?
Shari Noonan: The impact of current economic conditions has not yet been felt. Deal flow continues to be strong in high-growth private companies with valuable solution-led products and services.
We saw a 1,021% increase in equity crowdfunding in 2021 to $113.52 billion, so that level of growth may be difficult to sustain, but it will still be a strong 2022 for the Reg CF and RegA+ investment markets. And Rialto Markets has itself added over $1.2 billion in signed contracts from private company issuers, so we are buoyed by the market we’re in – which is private securities.
Can you provide any insight as to issuer interest between the different exemptions?
Shari Noonan: The key components are firstly, the amount of capital sought, secondly the timeframe and, finally, cost. Reg A+ allows for much more capital to be raised but takes longer and costs more than Reg CF, for instance.
The increase in the thresholds for a RegCF do mean that issuers can potentially raise enough to do something meaningful and RegA+ allows private companies to do a lot of what they would in a pre-IPO scenario, as $75 million a year per company is substantial.
What are your thoughts on institutional money entering the early stage/venture stage sector via platforms like yours?
Shari Noonan: The trend is towards private companies feeling empowered by enabling technologies like Rialto Markets to take control of their destiny and maintain control of their company and data.
As secondary trading becomes more established within private securities, larger investors – such as institutions – are seeing where the future opportunities lie and potentially acting earlier in the lifecycle of investment of exciting private companies.
As fewer firms seek public listings, due to costs, compliance, and an ocean of private capital, are private markets the new investment path of preference?
Shari Noonan: The continued rise of private markets has been strong for quite some time now and is increasing due to a friendlier regulatory landscape and the propagation of technology like ours at Rialto Markets, which enable a smooth customer experience for both issuers and investors. We see nothing to challenge Forbes’ forecast that the private securities market will grow from $7 trillion in 2021 to $30 trillion in 2030.
Rialto Markets has an ATS for secondary transactions for private securities. Where does this marketplace stand in its development?
Shari Noonan: Our ATS – Rialto MarketBoard – is live and available to issuers and we work directly with them to determine the most appropriate time and method for listing their security.
More broadly we are encouraged by the support we see for the development of the secondary market as stated by House Financial Services Committee Ranking Member Patrick McHenry (R-NC), “The liquidity provided by a secondary market is an investor protection in and of itself, because it would allow individuals whose financial situation has changed to exit these investments in times of need.”
Earlier this year, Senate Banking Republicans announced the JOBS Act 4.0. Do you have any thoughts on this legislation? What are the most important regulatory/legislative issues that must be addressed to improve online capital formation and access to opportunity for individual investors?
Shari Noonan: The proposals in JOBS Act 4.0 are a step in the right direction to build upon the successes of the original JOBS Act. The JOBS Act 4.0 is quite far-reaching and includes many proposals. This combined with the current regulatory regimes’ attention to these issues will be essential as to what results. We look forward to participating in the process.
Drilling into the specifics, the proposals cover some areas that need to be addressed like:
Firstly, pre-empting Blue Sky registrations for private company issuers. As we know this can be a significant expense to the issuer before they have raised a dime. Blue Sky can also adversely affect investors if the issuer decides to not pay the fees in a particular state – hence the issuer can’t legally take investors’ money in that state and the interested investor from that state is blocked from participating in that raise. This would be one of the best JOBS 4.0 proposals to push through.
Since Blue Sky is not addressed when it comes to secondary trading, there is a difference of opinion on whether it needs to be covered, but issuers ignore Blue Sky at their peril. By explicitly exempting secondary Blue Sky transactions it would make it infinitely easier for private market investors.
Secondly, modernizing the accredited investor definitions. The current definition is outdated and restrictive. Only 13% of people in the country would be considered accredited under the existing framework. Let’s get more people under the umbrella to participate in a safe and pragmatic way.
This proposal tries to do just that by:
- Codifying an expanded statutory definition of “accredited investor” to include certain licenses or possessing qualifying education or experience as determined by the SEC.
- Directing the SEC to create an examination that individuals can take to be certified as an accredited investor.
- Requiring the SEC to incorporate additional “certifications, designations or credentials that further the purpose of the accredited investor definition” within 18 months, and continuously reassessing every five years. This bill also codifies the final rule so that the SEC cannot dial it back.
- Requiring the SEC to create a form that would allow for individuals to certify that they are sophisticated and understand the risks of investment in private offerings.
Looking at the second part of your question: “most important regulatory/legislative issues that must be addressed to improve online capital formation and access to opportunity for individual investors…”
Pre-emption of Blue Sky registrations is a huge step forward. This would ‘clear the runway’ for issuers to launch faster and more cost-effectively, while enabling residents in all 50 states and territories to participate.
One part of this proposal commonly overlooked is to allow ‘gig workers/zero hours contracts’ to receive equity compensation for their efforts, just like full-time or traditional employees. Gig working is here to stay and should be seen by Congress as an important worker category. Many gig workers also work for private start-up companies, so they are helping the company achieve its goals and increase the network affect – think GrubHub or pre-IPO Uber and Lyft drivers receiving private stock. I think it’s time for them to get a piece of the potential other than an hourly rate.
How do you foresee Rialto Markets evolving over time? Does it become a digital investment bank serving both individual and professional investors? Do you evolve into a global primary/secondary capital formation and trading platform?
Shari Noonan: Rialto Markets already offers services in primary and secondary trading, plus solutions for both traditional and digital securities. We will continue to expand those services to bring greater efficiency and scale to the ecosystem ancillary to the primary investment platform and secondary trading capabilities.
Aside from expanding our existing breadth of services, we are also already capable of handling additional types of securities as and when they are deemed securities by the regulators.
And what about digital securities. What is your vision for this sector of Fintech?
Shari Noonan: Digital securities are the next logical step in the evolution of financial services.
As the regulators haven’t reached peak confidence in permissionless blockchains or the potential for digital securities to be bearer instruments, there has still been progress. We see the evolution starting in NFTs.
This area will be the user acceptance test environment for the industry to see how this all works. For example, many NFTs are securities that also live natively on a blockchain. Wrapping NFTs into the regulatory framework by registering them as Reg CFs or Reg As, then approving and tracking ownership on a next-gen SEC-registered Transfer Agent is the right way forward.
This will allow the industry in TradFi and DeFi to cross-pollinate in a way that fits securities laws, but also tests the boundaries of the new technology. Put a different way, let’s bring the best of the existing/legacy model and merge it with the best of the new blockchain-based world to satisfy the regulatory requirements and move into a fit-for-purpose tech.