This decade has been a watershed epoch for financial services – one that will undoubtedly be memorialized as the period of when securities regulations finally began catching up to technological achievement.
Hundreds of years from now, when economic historians look back on the contributions of FinTech, I believe that they will pinpoint innovations in micro-investing technology as the distinct catalyst which democratized global financial systems and transformed economic landscapes.
As such, I have decided to start chronicling the monumental significance of micro-investing technologies.
I recently published an article focused on how micro-investing technology can help reduce America’s wealth gap by ensuring that even the smallest investors have access to the same effectual diversification strategies which are freely employed by deep-pocketed investors.
Unbeknownst to most, investors aren’t the only ones who are well served by diversification methodologies. The benefits of not putting all your eggs in one basket apply as much to securities issuers as they do to investors. While there is a plethora of articles evidencing the effectiveness of portfolio diversification, there is practically no commentary whatsoever highlighting the merits of “investor-base diversification” – despite the fact that any non-self-funded business is far better served by possessing a well-diversified investor base.
This lack of informative reporting, coupled with the increasing regulatory burdens over the last century, almost makes one wonder whether the powers that be aren’t deliberately trying to deter “investor-base diversification”.
But, I’ll save conspiracy theories for another time.
The fact is, diversification is as essential to issuers as it is to investors. There is much less uncertainty for an issuer in having 100,000 different $10 investors than there is in possessing one $1,000,000 shareholder. It is the very same rationale that renders 100 different $20 investments less risky than one $2,000 investment.
Essentially, the smaller the shareholder base, the more thinly traded the security. One sell order for a thinly-traded small cap from a sizeable institutional holder could collapse a company’s market capitalization in seconds. Yet, the impact from Jane Doe dumping her 300 shares to pay for a root canal is inconsequential.
Institutional holders today possess way too much influence over stock prices. Years ago, when I worked on a trading desk, I saw far too many small cap stocks plunge – despite sound fundamentals – simply because one if its larger institutional investors decided it was time to liquidate its position. Substantial wealth was dissipated, small retail investors got burned and employees were fired – all so that one shareholder could move on to the next shiny object.
Fortunately, this dynamic is changing.
Micro-investing technology, coupled with new crowdfinancing structures made possible by the JOBS Act, enables a small business to cost-effectively and compliantly build a large, impassioned and well-diversified investor base. As crowdfinanced offerings ultimately make their way to the public markets or begin “trading” on venture exchanges, their crowd-investor foundation will prove vital to ensuring that businesses remain more appropriately valued based on their fundamentals – not on the “mood swings” of a handful of mega-investors.
Instead of stressing over one seller, our innovators and job creators could be focusing on, well, innovating and hiring. This will result in better products, stronger businesses, more jobs and greater confidence in the capital markets.
Because the broader economic implications of “investor-base diversification” are seldom discussed, not enough companies see the advantages in possessing a widely diverse cap table.
Despite the SEC’s implementation of all key components of the JOBS Act, there are many issuers still reluctant to employ these “crowdfinance” exemptions. Some express concern that an expansive cap table is too difficult to manage. Others fear that too many small retail investors on the cap table will be an obstacle to obtaining future venture capital financing. Other issuers mistakenly believe that it is easier and less cumbersome to raise capital from a small band of large investors than it is to pool tiny increments from a massive crowd.
Due to advancements in micro-investing technology, many of these apprehensions are unfounded.
More and more custodians, clearing firms and transfer agents are employing micro-technologies so that issuers can effortlessly support a proliferating number of micro and fractional investors. Companies like Folio Investments and ClearTrust, in particular, are using technology to automate much of the administrative and shareholder management functionality for issuers of private placements.
As more and more companies get comfortable possessing expansive investor-bases, they’ll have less anxiety about redemptions and more control over their business. Much like portfolio diversification, investor-base diversification – made possible by micro-technology – will have widespread economic implications including: less market volatility and manipulation; more stable job growth and ultimately a diminishing wealth gap. Remind me again why no one else is writing about this?