If you don’t normally keep up with the breaking news in SEC regulation, we don’t blame you—but this time, you may want to tune in. Big changes are coming, and they might reshape the way you invest.
Until recently, what you could invest in—and how you could do it—was largely shaped by the Securities Act of 1933. That landmark piece of legislation guided the regulations aimed at preventing a repeat of the market chaos that took place in the late 1920s. It also ensured that most investments in private equity, debt, and funds would be accessible only to accredited investors—that is, those with significant wealth and sophistication.
Fast forward 79 years, and you find another set of legislators working to alleviate another disaster—the lingering devastation caused by the financial crisis of the late 2000s. To that end, they enacted the Jumpstart Our Business Startups (JOBS) Act of 2012, to encourage investment in small businesses. The idea was to create a new source of capital for entrepreneurs at a time when bank financing for startups had largely dried up. This meant finding legal ways to invite more investors to fund the growth of small private companies.
The SEC has now approved Title III of the JOBS Act, which allows non-accredited investors to access equity raises of up to $1 million. This means a new way to close the capital chasm that exists for businesses that are too large to fund with a credit card but too small for venture capital.
For individual investors, this change is going to provide new opportunities to invest in an asset class that’s often uncorrelated to public securities—an asset class that until now has been reserved for the very rich. That means more investors will enjoy the potential for more meaningful portfolio diversification.
That’s the good news. The bad news is that traditionally, investing in private securities has been inaccessible not only because of the law, but also because of high investment minimums, limited disclosure, and a lack of centralized listings. They were also paper-based, hard to understand, illiquid, and extremely risky. Not only that, they weren’t available for retirement accounts such as IRAs—and you couldn’t get them through RIAs or most brokers. That’s why many potential investors, advisors, and issuers are shopping around for a solution to these problems. But most of the investing websites and technology platforms out there don’t solve for all of these issues.
What entrepreneurs issuing private securities need is a single consolidated brokerage platform with the flexibility to offer not only crowdfunding equity, but also debt and larger offerings that can go beyond the $1 million crowdfunding limit.
And what investors and advisors need is a way to invest in private securities that’s accessible, transparent, and efficient. They need a way to purchase and manage multiple private securities in their brokerage accounts, alongside their publicly traded holdings. In other words, they need the benefits of an online brokerage system applied to private investing.
Here’s why that’s important: Eliminating these pain points has the potential to bring many more issuers and investors to the marketplace. And that could lead to:
- Much broader availability and choices
- Lower minimum investments and costs
- Simplified electronic tracking and administration
- Ultimately, the ability to create customized, diversified portfolios of private security investments
Currently, VIA Folio: Folio’s Private Capital Network, is the only platform that automates the entire private investing process on one fully integrated system.
The Matchbox Food Group private debt offering provides a case study of what that looks like. This successful restaurant operation had already opened 12 restaurants over 12 years using “friends and family” financing when it began a new phase of growth. To fund an expansion into other regions across the country, Matchbox rounded out its other financing with a $10.5 million private bond offering on VIA Folio. Matchbox chose VIA Folio for this critical step because it was the platform that could service investors who wanted low investment minimums, an online experience, and the one-stop convenience of having an account, accreditation, subscription, customer service, billing, tax reporting, and regulatory compliance all provided by a single online brokerage.
Of course, the most important thing to understand about private investing is that it’s not for everyone. Despite changes in the regulations, the nature of the securities themselves remains the same: they can be risky and illiquid, and are not appropriate for investors who may need immediate access to their principal. It will be interesting, though, to see the changes that take place in the not-so-distant future. As crowdfunding and other types of private investing mature, we may see smaller and more diversified opportunities, and even a secondary market to buy and sell private securities more easily. This is one story that’s just beginning.