A survey addressing private capital markets – think investment crowdfunding, venture capital, and private equity – was completed this past month. And respondents have overwhelmingly indicated they are interested in private markets – in fact, more so than publicly traded firms, according to the results.
Private securities are mostly available to Accredited Investors in the US – under Reg D. Other jurisdictions allow greater access to retail investors. In the US, two securities exemptions allow non-accredited investor access – Reg CF (Regulation Crowdfunding) and Reg A+, sometimes described as a mini-IPO type exemption. The combination of all three exemptions is leveraged to raise capital online for private firms. While the Reg D market is enormous, both Reg CF and Reg A+ are growing. At the same time, issuers may combine Reg D with another exemption creating two channels to raise capital.
According to the survey, 92% of investors who responded would consider investing in private companies, compared with 78% in publicly traded companies.
The private securities survey initiated by the World Digital Foundation (WDF) and supported by Crowdfund Insider shows that 80% of the private companies raising capital in 2023 would consider equity crowdfunding above venture capital.
The results are interesting, as 2022 was a challenging year for everyone, and the global economy is struggling to regain its footing currently. Investors appear to be in a risk-off mode, and in fact, this past week, an article published by CI indicated that in the US, investment crowdfunding slowed in 2022.
Shari Noonan, CEO and co-founder of Rialto Markets – a broker-dealer active in the securities crowdfunding sector, commented on the survey results noting that it is clear that companies are embracing the ability to raise money beyond traditional venture capital while “building investor communities who advocate and support the innovations they aim to deliver.”
“Additionally, 78% of private company issuers and industry partners said that an engaged community brings additional commercial value to their business.”
The survey indicates a shift in thinking from traditional funding, with 75% of private company issuers stating they had used a combination of seed capital, angel investors, and/or equity crowdfunding to raise capital, while just 40% had used venture capitalists or institutional partners.
Other survey results include:
- 84% of private companies surveyed seek new ways to monetize their assets for investors and employees
- 98% of respondents thought secondary trading was vital to the future of private securities.
- 25% of private company issuers wanted to raise up to $5 million in the next 12 months, but almost as many (24%) will aim for $5-$10 million, and 22% are looking to raise $75 million-plus in the next 12 months.
- 86% of respondents believe improved regulation of the private securities markets is vital
Rebecca Kacaba, CEO and co-founder of Dealmaker Capital, said that the crypto sector fears and the FTX debacle will force changes in capital markets.
“Protection for all investors and investments is time proven to improve and expand markets, not hinder their growth. Companies taking investor money who operate with no accountability to those investors is simply unacceptable. There are rules and regulations that define the requirements. The market needs oversight and enforcement of these rules.”
Surveyed individuals believe that secondary markets for private securities were most applicable for private equity/single issuers, real estate, cryptocurrencies, NFTs, and other fractional digital assets.
“The top three challenges, according to issuers and industry partners, were, firstly, navigating the regulatory process, secondly building a community, and thirdly finding the right partners for a capital raise. We foresaw trends now upheld by this survey, including the need for secondary ATSs enabling a private company issuer’s employees and investors to potentially trade their shares much earlier.”
Dr. Joe McGinley, CEO and founder of McGinley Orthopedics – a Healthtech that is in the midst of a Reg A+ offering, said online capital formation enables them to build and engage with a community of investors – both large and small.
“… many being medical practitioners themselves, who truly believe and support how our ‘right first time’ surgical devices are transforming the treatment of fractures,” shared McGinley.
It should be apparent that affinity investing can play a key role in raising growth capital.
So while there is growing interest in private company investing and securities crowdfunding in general, activity will be impacted by the overall economy in 2023. When will the Fed halt raising rates? Will the US Congress step in and improve the ecosystem, like with the JOBS Act 4.0? Regardless, at some point, things should improve in 2023. At the same time, smaller innovative firms will continue to need access to capital – a growing number of these firms will raise capital online.