This instalment in our series of blogposts on syndicated investment will focus on the US – the regulatory environment, investor participation and what it all means. Take a look at our first post outlining the evolution of syndicated investment and our recent post on its significance.
The phasing-in of crowdfunding regulation in the US was completed last year. The final rules, often referred to as Regulation A+ (reg. A+), are an update and expansion of the previous Regulation A (reg. A) of the Securities Act 1933 that allowed for small capital raises of $5 million. This last development allows for raises of up to $50 million, and is part of a package of new laws encouraging small business-funding, collectively known as the Jumpstart Our Business Startups (JOBS) Act.
For syndicated investment, the key development facilitated by reg. A+ is the inclusion of ‘unaccredited’ investors. Previously, only 'accredited' investors - people earning over $200,000 annually, or those with $1 million in assets (excluding their primary residence) – were able to invest in startups in the US. Now - subject to certain investor caps - investment in early-stage businesses is open to everyone.
This has allowed fledgling syndicated investment platforms to flourish, expanding their investor network with the new wave of participants.
How does it work?
Investors in a syndicate invest as one unit by establishing a special purpose entity to execute the transaction. In the US, the maximum number of shareholders for a limited liability company, the business structure of choice, is 99. Therefore, syndicates of 99 or fewer individuals are formed from an angel network for each investment.
What does it mean?
Previously in the US, such investments were served only for rich, 'accredited' investors. It meant that the 97% were excluded from early-stage investment. Why? The rules were designed to protect the vulnerable (poor) from making damaging losses. 'Accredited' investors were allowed to take higher risks as they were seen to have a larger ‘buffer zone’ to absorb losses.
With the alternative finance revolution, investment in all asset classes is opening up, democratising finance. But does that translate to higher investment participation? Recently the US’s Federal Reserve Board released a study concluding that 47% of Americans would struggle to come up with $400 if an emergency were to occur requiring it. This may mean participation in early-stage investment remains with the richer segment of society. What else should be considered?
Since the deregulation, tax cuts and spending increases of the Reagan administration in the 80s, the US has been a heavy borrower and consumed above its national income. Individuals and families felt richer, and many argue that this was the beginning of a cultural shift in the way Americans saved and consumed.
The flow-on effects have created a spending culture, financed by shrewd savers abroad. US household savings rate is now at about 5% compared to 12% in France. For that reason, broadening of investment opportunities may go unnoticed in a culture that prioritises short-term consumption over savings and investment.
On the other hand, US participation in equity capital markets is at around 26% of the population. This means that although savings are low, those savings would be allocated to higher risk asset classes - shares in this case. It suggests a happy relationship between Americans and equity investment in early-stage companies.
What about on Equitise’s home turf?
New Zealanders and Australians save at a slightly higher rate than Americans but are still heavy consumers. However, in positive news for equity crowdfunding and syndicated investment, our participation rate in domestic stock markets is amongst the highest in the world - 40.4% of Australians and 31% of New Zealanders.
It’s early days for syndicated investment, however there are positive signs that it is revolutionising early-stage investment in the US. Time will tell whether the new regulations expanding access to investment opportunities will increase the participation of retail investors. Stay tuned for our next post on how Equitise is pioneering a trans-Tasman syndicated investment platform.