The 2012 JOBS Act lets smaller companies raise money through a mini initial public offering (IPO). In theory, that allows regular investors earlier access to companies that had previously only been available to wealthy, accredited investors.
On this episode of Industry Focus: Technology, host Dylan Lewis is joined by Motley Fool contributing writer Daniel Kline to talk about the dangers of this type of investing. They break down all the risks associated with purchasing shares in a company that does not have to report as much financial data as a traditional publicly traded company.
A full transcript follows the video.
This video was recorded on Sept. 29, 2017.
Dylan Lewis: Talking a little bit less about the filing, and again some things that are just a little bit more broad stroke characteristics of this space and this type of investment, we talked about how there's some disclosure differences, the financials might look a little bit different, these are early stage businesses. But also, there can be some liquidity differences with these types of investments. When you are working in the equity crowdfunding space, particularly as a company that is private, you certainly don't have the liquidity that you would for a publicly traded stock that's on the exchange. Even in the case of this royalty flow business that has a mini IPO, they're looking to be on a public exchange. But if they are a smaller business, one of the things you need to keep in mind with a small caps and particularly micro-cap businesses is, liquidity just doesn't exist in the same way. You don't have nice, smooth stock charts. There are big hiccups when a major investor actually tries to get rid of some of their volume.
Dan Kline: In many ways, this is fantasy sports. If you want to take 1% or 2% of your investment portfolio, and you see something that you really think has potential, and throw some money at it, that's great. Or if you really love a burger chain, or a musician, or somebody that's going through this process, I think it's great to have that fun extra interest in this person or thing or business that you care about. But, once again, and I cannot stress this enough, these feel like get-rich-quick schemes because they might be. And get-rich-quick schemes don't usually work out.
Lewis: Yeah, and I will say, this is one that I'm like, "Oh, there's a legitimate asset here that could perform fairly well over the next couple of decades," whereas a lot of the other things that we've seen come through this space have been restaurants or movies, where there isn't a track record of success. I think, like I said, the floor for something like this is a lot higher than a lot of the businesses that you see come through this space.
Kline: I love the strategy of buying interest in other music catalogs. I would look more toward people that are deceased, that they're really maximizing their catalog. There's absolutely huge potential there. It's become the new music publishing, which was always where the money was in the music industry. So, I like that model. What I don't see here is, they say they're going to do it, but there's not actually anything holding them to that. And they're five years away from having to fully report, because they're never going to hit $1 billion in revenue with this kind of money. So, you really have to believe in management, and here you don't really know much about management or what it's thinking. You also don't know what's for sale out in the market.
Lewis: Yeah. It's kind of a new frontier in a lot of ways, both for the average investor and the investment industry. Something that we're still exploring and figuring out. Listeners, like I mentioned, we have done episodes in the past talking about the JOBS Act, so we have some things that would be better primers and good background for folks who want to catch up a little bit. At South by Southwest this year, I actually sat down with Bill Clark and Slava Rubin of MicroVentures. Slava Rubin is actually one of the co-founders of Indiegogo. A really interesting guy. So, they helped talk about this space and walk me through how they think about it on the equity crowdfunding side. If you want more info on that, just shoot us a note and we'll be sure to send you along the episode. We kind of have a special guest here in the studio, Dan. I don't know if you know.
Kline: I do. I'm not there, but I know.
Lewis: Yeah, you can't see her because you're on Skype, but today is "bring your adult family to work day". Did I get that right, Austin?
Austin Morgan: That's correct. But as my mom calls it, it's "take your mom to work day."
Lewis: And she's been looking forward to this for quite some time, right?
Morgan: Since the day I got hired.
Lewis: Which is two years?
Morgan: Two and a half.
Kline: Why didn't you bring her last year?
Morgan: I was still a temp. I didn't have the option. [laughs]
Lewis: Well, you're here now, and she's here now.
Morgan: She is.
Lewis: I mentioned that I wanted to do something to bring her on the show, because I like to bring you on, and I thought it would be fun to bring her on. So, I asked her before we started taping to think about this. If you were to have a stake in some performing artist's music catalog, who would it be and why? It doesn't need to be an investment based decision. It can be, you just love this artist.
Mrs. Morgan : That's a really tough question, because I love a lot of artists. I think, if I'm thinking historically, I think I would love to invest in Elvis. If it wasn't just historical, I love TobyMac, also.
Lewis: That's outside my wheelhouse, I don't know who TobyMac is.
Mrs. Morgan : He's a local artist, he's a local Christian rap artist.
Lewis: Very cool. Austin, what about you?
Austin Morgan: I have two different directions I would go. Metallica, because Metallica. I mean, every good closer in baseball comes out with Metallica.
Lewis: [sings] We might get sued for me humming that.
Austin Morgan: Or, I would go with someone like Drake, because everything Drake puts out starts, not a movement, but you have kids yelling yolo after he puts out a yolo song. Yolo wasn't a thing until Drake.
Lewis: He's a pop culture machine.
Austin Morgan: Yeah. So, he puts out a song and it's just a thing.
Lewis: It just becomes the internet, the internet explodes. Dan, what about you?
Kline: Again, two answers. If I'm going passion, it's The Replacements. Timeless band, never got their due, really deep catalog. If I'm going money, it's Carly Rae Jepsen, because I have never gone a single day since Call Me Maybe came out where I have not heard that song. And I don't listen to pop music. It has to be the most played background music, when you're walking around the mall. So, she just has to be raking it in and I would love a piece of that.
Austin Morgan: I think you're listening to the wrong radio stations.
Kline: I'm not listening to radio at all. It's just in the ether.
Lewis: Yeah, there's a whole class of music that just gets played at malls. It's feel good music, it gets people going, it's energizing. For me, the economic side of this, Jimmy Buffett all day. Give me Jimmy Buffett, long-term. People love Jimmy Buffett. I don't. I think his music isn't that great. But a lot of people really like Jimmy Buffett.
Austin Morgan: I think that's the winning answer right there.
Kline: I think "isn't that great " is putting it very politely. [laughs]
Lewis: But, for just my own musical tastes, I got to go Chance the Rapper, I am a big fan of Chance the Rapper. Love what he's doing on the indie side. Perhaps not the greatest for making money, because he's not signed to a recording label. But, he seems to be doing OK. Dan, we kind of got off track a little bit here. Anything else before we wrap the show and I let you go?
Kline: Yeah, let's bring it all back home. These alternative investments are playing. It's going to the track, it's gambling. And you have to be very, very careful with them.
Lewis: Which is to say, this is an emerging space. So, it's not surprising that those are the characteristics. We might hit a point, years down the road, where it's a little bit more established and we have a better baseline. But the reality is, not too many companies have taken these routes to raise money. And we don't have a good three or five-year track record for how some of these companies have performed. I think that's kind of a good note to close on. Be cautious, investors, as you see these types of opportunities come up.