Long before Wall Street turned into a campground it was like a dependable machine that kept capital flowing to our greatest job creators – America’s small businesses. At the heart of the system was the Nasdaq engine that transformed sheer innovation into economic prosperity for an entire nation. Regrettably, a combination of over-regulation and greed shattered that foundation and led to the devastation of a once dynamic framework. What remained was a broken capital markets system impeding job creation and obstructing economic growth.
How magical life would be if only sleeping in tents, carrying disparaging picket signs and wearing funky t-shirts could miraculously repair a damaged Wall Street. With the exception of an occasional forest ranger, I have yet to see one job derive from pitching tents. On the other hand, framing a new capital markets infrastructure, championing innovative young companies, will indisputably produce jobs. In these remarkable times of technological achievement, there has never been a more opportune moment for early stage companies to capitalize on innovation. Today’s ingenuity in conjunction with a supportive capital markets structure can be the impetus for renewed economic prosperity.
For more than a decade, our capital markets have been in dire need of a Nasdaq replacement. But one that differentiates itself by encouraging growth not speculation, thus attracting shareholders not traders. During the past two years, we have been witnessing the rapid evolution of such a market, the Private Company Marketplace (PCM), also known as the secondary markets, where our fastest growing private companies are currently traded. By furnishing a fair and more liquid market for emerging private companies to thrive, the PCM has become an integral part of the capital formation process. It is creating a more efficient path to growth capital for young companies and enabling them to once again innovate, expand, compete and most importantly, hire.
Lawmakers are finally beginning to realize the immense potential of this nascent marketplace. Last week, in a rare but refreshing show of bipartisanship, the House Financial Services Committee approved three bills that would facilitate capital raising for small businesses, giving them new resources and ample time to flourish as a private company. All three bills were approved by a voice vote, with two (H.R. 2940 and H.R. 1965) passing through without a single amendment. And all three will undoubtedly foster the growth of the PCM. The House is likely to approve the bundled bills by unanimous consent later this week.
I had the privilege of interviewing Vincent Molinari, the Founder and CEO of Gate Technologies, one of the leading trading platforms in the PCM. As one of the expert witnesses during the congressional hearings that led to the creation of this proposed legislation, Vince has agreed to discuss these bills and provide key insight into how these regulatory changes could impact the entire capital markets landscape.
According to Vince’s summary, H.R. 2940, sponsored by Rep. Kevin McCarthy (R-Calif.), consists of a unilateral removal of the general solicitation and advertising ban for unregistered securities so long as all purchasers of the securities are accredited investors. Under the current law, companies issuing unregistered securities are limited to only marketing to investors they already know. By allowing a company to broaden its marketing efforts, it increases its likelihood of raising capital by reaching new potential investors.
What’s more, had McCarthy’s bill been implemented earlier this year, Goldman Sachs would not have been compelled to place Facebook stock internationally, resulting in U.S. investors relinquishing $20+ billion thus far in appreciation. To put it into perspective, what might have been a sizeable capital gains revenue opportunity resulting from a Facebook IPO, will instead most likely end up being a tax increase, spending cut or additional debt to China.
Rep. Patrick McHenry (R-N.C.) sponsored another bill that would allow companies to raise capital via “crowd funding,” a method that allows smaller investors to collectively pool money together, usually via the Internet. Under the bill, an investor would be able to invest the lesser of $10,000 or 10% of his annual income in a company. Companies would be able to raise up to $1 million in this manner or up to $2 million if they provide audited financial statements. Not only would this bill provide the much needed funding for start-ups, it would also give smaller investors an opportunity to invest long before a company’s growth has peaked.
“People are frustrated with Wall Street largely because they perceive it as an exclusive club where the rich get richer and where smaller investors are not afforded similar opportunities to create wealth,” said Molinari. “McHenry’s bill levels the playing field by giving smaller investors a chance to invest in a company at the same stage as a VC or Angel would.”
Another bill, sponsored by, Rep. Jim Himes (D-Conn.), would increase the limit to 2,000 shareholders from 500 for banks, helping community banks raise the capital needed to lend to local small businesses.
“Our public markets have experienced far too much volatility and uncertainty in recent times. Small companies simply cannot thrive in this environment. By increasing the opportunities for private companies to access capital, they can “buy” the time needed to properly cultivate their business and prepare for a public exit. This legislation, coupled with the new liquidity alternatives made possible by the PCM, will empower our entire capital markets. It will result once again in the flow of capital to small businesses, fueling America’s most vigorous job-creation machine,” concluded Molinari.
In a bleak environment where small IPOs are effectively non-existent and banks are refusing to lend, the passage of these bipartisan bills will render newfound hope for entrepreneurs as well as smaller investors. While this is a promising start, there is so much more we could emend such as H.R. 2167: Private Company Flexibility and Growth Act sponsored by Rep. David Schweikert [R-AZ] which unfortunately will not make it to the floor this week. This bill, increasing the shareholder threshold to 1,000 from 500 without triggering an SEC filing, is another important piece of legislation that will enable private companies to capitalize from longer gestation periods.
Furthermore, in the current ecosystem, even small Broker/Dealers and investment banks have been virtually forced out of the seed raising process. Regulatory burdens have made it nearly impossible for them assist earlier stage companies. The American entrepreneur is in desperate need of help and cannot afford to leave even one stone unturned. If appropriately incentivized, B/Ds could once again become an invaluable resource, particularly in unity with a fresh marketplace comprised of exciting growth companies and long-term investment philosophies.
In the meantime, I commend these lawmakers for putting the people before party and for supplying us with the necessary tools to begin reconstructing the system. Now, isn’t rebuilding is a lot more productive than revolting?