Saturday, May 5, 2012

New Private Equity Opportunities Are Coming Thanks to the JOBS Act (maybe)

Earlier this week in the EPJ Daily Alert, I wrote:
Here's something that needs to be watched very closely: crowdfunding. Pebble Watch surpassed $7M raised within a few weeks on Kickstarter, a crowdfunding web site. Kickstarter raises money for projects via the web, but does so only via volunteer donations. Those making the donations do not get any equity in the projects. That's what is so impressive about Pebble, it is offering a watch but no equity and was able to raise the $7 million.
Here's where things start to get interesting. 
The Jumpstart Our Business Startups (“JOBS”) Act that President Obama signed into law on April 5 included crowdfunding legislation . The JOBS Act allows issuers to raise up to $1 million from a large number of accredited and unaccredited investors by selling securities through a broker or SEC-approved web site funding portal.  When sold through these intermediaries, crowdfunded securities are exempt from the registration requirements of the Securities Act of 1933, as amended (the “Securities Act”), and state securities laws. This COULD be very big, emphasis on the "could". 
The crowdfunding on a non-equity basis by Pebble that raised $7 million to date shows that this method of raising money can be very powerful. It could result in small companies raising their first million dollars with nearly zero red tape. Why do I say this "could" be big, instead of calling it a slam dunk? Because the JOBS Act calls on the SEC to draw up the regulations for the launch of crowdfunding. 
This gives the SEC a lot of leeway to muck up the program. The SEC has to come up with guidelines by the end of the year, if they are not onerous, crowdfunding is going to be very big. If you need to raise money, crowdfunding is going to be a great avenue to raise your first million. If you are looking for interesting investments, especially at the start, there are likely going to be inefficiencies that could result in huge profit potential. Google "crowdfunding" and start learning what you can about the sector. It COULD be big. 

As I discussed recently in "The JOBS Act: Washington Takes One Step Back Toward Capitalism," this tiny step back toward capitalism by Washington is decidedly not a gift toward prosperity and economic free-market ideals but rather a grudging crumb tossed to new start-up companies that create one out of every ten jobs in the United States. Second, and probably more important, this is an attempt by Wall Street and politicians to score in an election year with the powerful and very politically connected hedge fund community. The act will also allow them to advertise and promote their offshore and domestic hedge fund investment services more openly to American investors. 

"Overall, new businesses account for almost every new job created in America. For start-ups and small businesses, this bill is a game changer. Because of this bill, start-ups and small businesses will have access to a bigger pool of investors." – President Obama talking about the new JOBS Act. 
This is true, but more importantly for the November election and the major financial support provided by the hedge fund industry, the act effectively curtails many years of restrictions and will allow hedge fund managers to promote their businesses more publicly with their performance and investment strategies by speaking, writing and advertising.

But the big kicker for investors and small firms will be in the ability for small firms to raise equity money via crowdfunding, with (hopefully) no onerous regulations. Here's Holland discussing this crowdfunding (note: he calls it private equity start-up investing):
Benefits of Private Equity Start-ups to Publicly Traded Companies
A Source of Long-Term Capital Investment – Individual investors in private equity can provide an important source of capital that is long-term, historically illiquid and committed to the success of the business.
Investors Have A Personal Stake In Company Success – The limited number of shareholders, formerly 500 but now up to 2,000 investors, often consider themselves real stakeholders in the company because their profit and stock appreciation or loss is dependent to a great degree on the profits and growth of the private company...
Reduced Need For Debt Financing – Private equity investors are usually superior to debt financing by a bank or outside lender as they are entitled to interest plus repayment of the principal on the loans outstanding. If you are a start-up or new business venture excessive debt means the bank owns you. On the other hand, giant conglomerates, global industries and quasi monopolies that use excessive debt often own and control the bank for obvious reasons.
Reduced Transparency, Reporting Requirements and Regulations – One systemic competitive disadvantage American public companies have over many foreign competitors is the requirement to manage quarter to quarter instead of taking the superior long term view of growth, profits and dealing with competitors. This disadvantage is enhanced when your competition knows almost as much about your financial condition as the management of a public company due to reporting requirements. There is far less transparency for private equity companies. 
Lower Regulatory Costs & Bureaucratic Delays Than Public Firms – Private equity companies can offer a cost and time savings with government bureaucracy compared to public companies. This allows management to spend more productive time and effort running the company to achieve growth and profit projections and less wasteful effort in completing quarterly reports to the SEC and other bureaucracies.
A Limited Number of Shareholders and Management Working Together – One important key to business success is where the limited number of shareholders and management are working together to meet the same objectives. Private equity-backed companies often have a synergy between management, directors and shareholders where even shareholders can communicate with management offering suggestions, center of influence and valuable advice in favor of or in creative opposition to business plans and activities. This important advantage of open communications really can benefit a private company over a public listed company type of structure.
Faster Growth Rates Than Public Companies – Many studies show that most private companies have higher growth rates than comparable public companies in the same line of business. This is because of the advantages mentioned earlier in the list.
Private Companies Better Control Timing of Sale or Going Public – The management and directors of a private equity company along with stockholders control the best method and timing of selling out or going public with an IPO in order to get the best possible share price for the company assets.
In a Private Company Most of Management are Also Investors – For this reason they are highly motivated to work toward the same goals as shareholders: profits and increased share values. Studies show this is the best environment for both shareholders and management. These shared goals historically do better with a private equity company, although investors must take into account the increased risk of start-up companies as well as buyouts and takeover candidates.
The Most Effective Form of Ownership and Management in Today's Business Environment – As we have discussed in detail above, a private equity company is a superior form of ownership when quick changes in leadership and direction are required in our fast-paced, global economic environment. Often in very competitive environments, these changes need to be made quickly and privately, away from competitors, which is an additional advantage of private equity. 
How You Can Benefit – I'm CEO of Biologix Hair Inc. and as a private equity financed start-up, we see real benefits to the changes created by the JOBS Act. Because of our present private equity structure, rather than a publicly traded company, regulatory changes created by the JOBS Act will allow us to be better able to communicate our story and vision to potential accredited investors interested in our global opportunity for hair restoration. The increase in individual shareholders from 500 to 2000 will also give us a better chance to delay and decide when and if we should go public at some time in the future.
Watch for More Private Equity Situations and Opportunities – The rise of electronic trading up to 90% of the daily exchange traded volume, the crashing of viewership for CNBC, the flash crash, short selling, hedge fund actions and rampant manipulation of major markets as well as individual stocks is causing many investors to look elsewhere in these troubling financial times. I believe interest in gold, private equity and other alternatives to standard Wall Street fare will continue to grow.
The JOBS Act will likely create a surge of new companies using private equity for financing to access the benefits previously mentioned. This is reason to search for other unique private equity start-ups like Biologix Hair Inc.
Of course, the usual cast of characters and firms on Wall Street will jump on this new business bandwagon but I suggest readers also consider more free-market and entrepreneurial candidates and opportunities incorporated in the US but marketing and competing with the tax and free-market advantages available globally in markets outside the United States.
Just remember that liquidity is far less accessible with private equity and new business start-ups by their very nature have more risk than widely traded shares on an exchange. Nonetheless, accredited investors and others who can handle more risk should certainly avail themselves of the diversification benefits and potential profits of private equity, especially now with the reduced negative regulatory impact enabled by the JOBS Act.


  1. Everyone can be a private equity underwriter (PEU):

  2. Can anybody please elaborate on:
    -Where is the incentive for the donors in this scheme, since they are not investors?
    -How likely is sort of activity to persist after the initial boost?


    1. Usually donations are rewarded. Checkout and you'll get the picture. All of the kickstarter projects are art based e.g. an independent movie. There are different levels of donations/rewards. For example, a smaller donation might get you a copy of the DVD while a large donation will get you a credit and a ticket to the premier. has tech based projects too which I have given in the past. Its really a great system.

  3. The real JOBS initiative.Elect a real President.Turn the dollar from a debt based free falling promissory note to a wealth generating precious metals backed real money.Get rid of the FED and the Fed income tax at the same time to both business and individuals.Cut the Military Industrial Complex in half.Reform tort laws.Allow totally free interstate commerce.Observe contracts.Double the size of Congress and set limits to two terms only.Limit the Senate to one term only.