Private and public equity for the crowd

By Kate McCaffery | November 01 2013 03:41PM

By and large, the average financial planning client doesn’t get direct access to public and private equity fundraising – the sale of newly-offered, individual company shares are usually only available to institutional investors and securities dealers.
The internet, however, is beginning to put cracks in that traditional barrier, and the United States JOBS Act (Jumpstart Our Business Start-ups Act) is a wedge, driven into the centre of it all. The Act’s apparent end goal: Allow everyday American investors (not just the wealthy and institutional), to invest in start-up companies, and small business.

In response, the Securities and Exchange Commission (SEC) announced in July, that it has lifted the ban on general solicitation or general advertising for certain private securities offerings, allowing companies to present their fundraising efforts to accredited investors.

The SEC is also now reportedly looking at rules that will allow access to non-accredited investors, as well.

Crowdfunding, in the corporate finance sense, is the new buzzword that’s emerged as a result, and at least one company is on the new map, working to give Canadian investors and companies similar access to information, investment opportunities, and financing.

Optimize Capital Markets, formerly known as P2P Financial Inc., is already presenting its financing and investment opportunities to institutional and accredited investors in Canada.

Matthew McGrath, president and CEO, says there are 500 institutional investors in Canada, 25,000 accredited investors registered to use the Optimize crowdfunding platform, and the company is now looking at options to engage the wider financial planning community, as well.

“No investment bank does that,” McGrath says. “You look at RBC or Scotia, they have 1,500 advisors, tops. We’ve connected with over 11,000 financial advisors. It represents a huge opportunity for both the advisors and the companies.”

Registered securities dealers using the platform earn one to two-thirds of the five-to-eight per cent fee Optimize charges to underwrite the deal. McGrath says he is also open to paying similar referral fees to those who are not licensed to distribute securities.

Forget the micro-investment solicited by projects on websites like Kickstarter. The concept is the same – the crowd comes together to raise funds – but the stakes are very different.

“When it comes to equity investment, or raising capital for companies, it’s our sense the sweet spot, the companies that need financing most, and benefit most, are the ones that are a little bit larger and more established. They’re still very much early stage (companies), but they need between $2-million and $20-million in financing,” compared to the significantly smaller-sized projects that have been fundraised for in this way online in the past.

Due diligence

Not every company can raise funds this way either. Optimize employs eight analysts who screen potential deals, and complete the necessary due diligence on each offering, before selecting those worth presenting to investors. Their present focus is on Canadian companies in the technology, real estate and infrastructure sectors, some with market value or capitalization already worth up to $400-million.

“We’re just getting started with crowdfunding,” McGrath says. “At this point we’re doing a couple of deals each month. Ask me in six months; I certainly am planning to do many more than that going forward.”

To illustrate what, exactly, is unique about this arrangement, he points to the more traditional fundraising efforts companies undertake to raise capital, where investment bankers take management teams on regional, or cross country road shows, incurring significant expenses along the way, to meet only a handful of potential institutional investors.

“The cost of a raise can be quickly eaten up by these secondary, noncritical expenses, such as flights, train trips and all the rest of it,” he says.

By comparison, he says Optimize presents its financing opportunities by setting up conference calls, webinars, and online web conference meetings. It will also set up direct meetings with management, as needed. “Companies need a much larger audience, and they can benefit from (this) more efficient way of going about it.”

The ambitious reach to a much larger network of potential investors aside, two additional factors which could be significant points of differentiation for the company are its website, and McGrath’s approach or philosophy, overall.

First, the website: Optimize invested between $3-million, and $5-million to develop the web portal it uses to present opportunities to investors. The result is an interface that is clear, and slick enough to make some of the best travel aggregators look outdated.

The second, possible point of differentiation might well be McGrath’s mindset, and the company’s resulting approach or philosophy: Transparency, often an overused and abused industry buzzword, is still nevertheless being embraced in the company’s philosophy and modus operandi – by its very definition, crowdfunding would appear to require that companies disseminate all of their information, as far and wide as possible.

Compared to traditional wealth management business structures too, where focus is centred on distributing high-cost commission-generating product, he says the company is highly selective about what it offers.

Self-fulfilling cycle

“It’s probably the single most important thing to get right,” he says. “Firms fail because their due diligence just isn’t good enough, or they take on deals they shouldn’t. You can see how it’s a self-fulfilling cycle: The better deals you get, the better reputation you get. The better investors you get, the quicker transactions will close. The reverse, obviously, can happen as well.”

As for the number of investors or participants needed to create an efficient market for companies attempting to raise capital, appetite for new investment opportunities undoubtedly exists, and McGrath says the company already has enough contacts, interest, and registered users needed to make things happen.

“Over 11,000 advisors have signed up. We’ve got over 25,000 accredited investors signed up. We’ve already got the institutional landscape in Canada,” he says. “It’s finite. It’s not massive, but we already have those relationships. It’s 200 times what you need to offer this efficiently.”