By Aaron Levitt on October 11, 2013
With popular social media website Twitter announcing that it will go public via an IPO later this year, the market has been abuzz with private equity and start-up companies. And there’s good reason. For early investors, a successful start-up can be worth some big coin once it hits the big time. Meanwhile, an improving economy has created a surge in buy-out and M&A activity. All leading to massive profits for those institutional private equity players that dabble in these markets.
If you’re a pension fund or other huge accredited investor, getting into this world of private equity is actually pretty easy. But what about us retail investors? Is it possible to gain from all of this activity?
The answer is a resounding yes. Luckily, for retail investors accessing this world of private equity and venture capital has never been easier for portfolios.
Big Gains For Investors
The pending Twitter IPO has renewed the general public’s obsession with start-up companies. That’s because these start-ups can turn early investors into millionaires overnight. According to investment consultant Cambridge Associates‘ two main indexes of PE returns, both private equity investors in the U.S. and those abroad have averaged nearly 13.6% in annual returns over the last 20 years. Venture capitalists- or those who just provide seed money to start-up companies- have done even better by realizing nearly 30% returns in that time.
Straight stock investors haven’t been so luckily. During the same time period, the broadSPDR S&P 500 (NYSE:SPY) only managed to produce 8.53% in annual returns.
There’s plenty of reasons to think that the party will continue going for some time. Innovation in the technology and healthcare space continues to grow rapidly, while private equity buy-outs continue to reach a fervor pace. A prime example, has been computer maker Dell’s (NASDAQ:DELL) recent $24.4 billion buy-out. All in all, CEO of buyout firmApollo Global Management (NYSE:APO) Leon Black estimates that PE investors should see low- to mid-teen returns going forward.
Given the potential for higher returns, regular retail investors do have some options for playing these markets.
Take A Look At Business Development Companies
The first place investors should look is towards business development companies (BDCs). These firms invest in or lend to small- to midsized companies and provide managerial assistance in hopes of profiting as these businesses grow. They are basically, the closest thing to a publicly traded private equity or venture capital as regular retail investors can get. Several BDCs- like Hercules Technology Growth Capital (NASDAQ:HTGC) and Ares Capital Corporation (NASDAQ:ARCC) –have been quite successful at spotting the “next big thing” in the tech world.
Secondly, due to their tax structure, BDCs are similar to real estate investment trusts(REITS) in that they are required to payout 90% of earnings as dividends back to shareholders. That results in some hefty yields- often in the 7 to 12% range.
The Market Vectors BDC Income ETF (NASDAQ:BIZD) could be one of the best ways to add the sector to a portfolio as it offers investors a broad play. The new ETF tracks 27 different BDCs and offers a hefty 7.72% dividend yield. Since inception back in February, BIZD has returned about 5%. Expenses are high at 8.33%. But much of that stems from acquired fund fees and expenses from the underlying BDCs themselves and not the fund.
Public PE Firms
The other choice for investors could be betting on the firms that are doing the buy-outs and venture capital themselves. While it won’t provide the same level of direct participation, the fees and earnings from buy-out funds and PE deals do trickle back into these firm’s pockets. Several major players like Blackstone (NYSE:BX) and Kohlberg Kravis Roberts & Co (NYSE:KKR) are now publicly traded and offer juicy yields and capital appreciation for their shares. The PowerShares Global Listed Private Equity (NYSE:PSP) can be used as a broad global play on these firms as well as provide some exposure to BDCs. The ETF yields 10.46%.
The Bottom Line
Recent hot IPOs like Potbelly (NASDAQ:PBPB) and Twitter has many regular investors salivating at the chance to participate in start-ups and private equity. With returns in the 13% to 30% range, who wouldn’t be? Luckily, the world of private equity can be achieved in a regular portfolio. For investors, funds like the ProShares Global Listed Private Equity ETF (NYSE: PEX) make it all too easy.
Disclosure – At the time of writing, the author did not own shares of any company mentioned in this article.
For stock investors, dividends can be an important part of the investment return. Missing a dividend because of how the dividend dates work can be frustrating, and — more important — it can reduce the amount you make on that stock. The date of record is the day on which you must own the stock to receive the dividend. But the way the markets work let you both own and not own those shares on the date of record.
When a company declares a dividend, the announcement includes the record date, the payment date and the amount of dividend per share. The record date determines who are the “shareholders of record” who own shares on that date and are entitled to receive the dividend. The payment date might be a few days after the record date, or even a couple of weeks later. To receive the dividend you must be a listed shareholder on the record date. You do not need to still own the shares on the payment date.
Stock Settlement Rules
Stock market rules dictate that a stock trade takes three
business days to become official or “settle.” This means that if you place an order to buy shares today, you purchase at today’s share price, and the shares will show in your brokerage account — but you aren’t the official owner of the shares until three business days from today. So to be a share owner on the dividend record date, you must buy the shares at least three days before the record date.
Because an investor must purchase shares three days before the record date to receive a dividend, a stock goes “ex-dividend” two days before the record date. Buy shares on the ex-dividend date, and the trade won’t settle in time to make you a shareholder of record on the record date. This also means that if you own shares before the ex-dividend date, you can sell on the ex date, two days before the record date, and you’ll still be a shareholder of record and receive the dividend.
Even though you can sell on the ex-dividend date or later and receive the dividend, this move costs you the value of the dividend. When the stock market opens on the ex-dividend date, the share price will be lower than the previous day’s value by the amount of the dividend. So selling on the ex date, you earn the dividend, but you receive a share price that’s reduced by the amount of the dividend. The share price will eventually recover to the pre-ex-dividend value, so it usually pays to hang on to your shares rather than sell the moment you’re qualified to receive the dividend.
by Mark Kennan, Demand Media
Investors make money from stocks they own in two ways: selling the stocks when the price goes up and receiving dividends from the shares they own. However, buying right before a dividend and selling right after isn’t usually a way to make money because the market responds to dividend payments by adjusting the stock price for the value of the payment.
When a company declares a dividend, it’s promising to pay investors from its own cash pool based on the number of shares that each person owns. For example, if a company declares a $1 million dividend, that company has to come up with $1 million in cash to make the payments. When the company announces a dividend, it also sets a record date, which is the date you need to be recorded as a shareholder to receive the dividend. Whoever owns the stock on that date gets the dividend payments.
Effects on Stock Price
Because paying a dividend lowers the amount of money a
company is worth, the stock market responds by lowering the price of the company’s shares. For example, say a company is worth $50 million and has 2.5 million shares outstanding. Based on that valuation, an investor would be willing to pay $20 per share. If the company pays a $1 million dividend, or 40 cents per share, the company would still have 2.5 million shares outstanding, but only be worth $49 million. So, after the dividend the market would only value the stock at $19.60 per share.
No Loss for Current Shareholders
Even though the price of the stock goes down after a dividend, current shareholders don’t lose out. Instead, their wealth just takes a slightly different form — it’s split between the reduced share value and the dividend payment. For example, say you owned shares worth $20 each before a 40-cent per share dividend. After the dividend, your stock is only worth $19.60. However, you now have 40 cents in your pocket from the dividend payment. Adding that 40 cent dividend to your share value of $19.60 puts your total worth at $20 — right where you were before the dividend.
Another disadvantage to buying and selling shares in a short period of time is higher tax rates on any profits you might make. Any time you earn a profit from selling stock you’ve owned for a year or less, those profits are taxed at your ordinary income tax rates, rather than the lower long-term capital gains rates. In addition, if you don’t own the stock for more than 60 days during the 60 days before and 60 days after the stock’s ex-dividend date, your dividends can’t be qualified dividends, which means the payment is also taxed at your higher ordinary tax rates.
Profiting from a stock investment relies on selling your shares when prices are high, after buying them at a comparatively lower price. Many factors play roles in determining when stock prices increase. In some cases, dividends affect stock prices. However, there is not always a direct link between declaring dividends and price increases.
Stock prices increase when demand for a stock is high. This usually occurs when investors get new information to suggest that the company is doing well. It can also happen if investors believe the company will soon declare a dividend. Dividends are payments to investors for owning stock. Companies can issue them quarterly, or on special occasions, such as after a successful expansion or period of growth. When a company declares a dividend each shareholder receives a payment, whether she has held the stock for years or just bought it recently. When investors suspect that a dividend declaration is forthcoming, demand will rise, pushing up the stock price.
Stock prices can increase at any time, including before or after
a company declares a dividend. Acquiring stock before a dividend is declared is key to receiving the payment for each share you own. If you’re hoping to see the price of your shares rise while also collecting a dividend payment for immediate income, waiting until the dividend has been declared is too late. Some companies issue dividends every three months, which means you can see a pattern to their dividend history and buy just before a dividend is declared. However, other investors will be able to see the same trend, meaning that stock prices could rise well in advance of the dividend as investors position themselves to receive it.
News of Dividends
Even before companies declare dividends, stock market analysts may have specific expectations for dividends. Rumors of a company’s decision to start offering a dividend for the first time may raise stock prices. However, if that company doesn’t declare a dividend in the expected time frame, the price may return to its original level. Companies use dividends to attract investors and encourage them to keep their stock, which raises cash for the company. They do not use dividends, or information about their plans for dividends, to manipulate stock prices directly.
Investing Based on Dividends
A company’s board of directors is responsible for declaring dividends, as well as selecting the amount of the dividend and deciding whether to cancel dividend payments. This means that no dividend is certain until it’s declared, even if a company has a long history of offering dividends as incentives to invest. Just as declaring a dividend can cause a stock’s price to increase, canceling one can cause the price to fall. Make sure that your investment decisions are based on more than just information about dividends. Factor in the company’s overall health, its potential for growth and the status of the overall economy.
After over 15 months of delays, today the U.S. Securities & Exchange Commission (SEC) finally moved on Rulings for Title III of the JOBS Act by issuing their proposal.
Title III is the long awaited “non-accredited crowdfunding” component to the JOBS Act, which allows non-accredited individuals to participate and invest online into private companies, in small increments (say $1,000 to $5,000).
As a participant in JOBS Act efforts, and CEO of Crowdfunder.com, I’m thrilled at how swiftly the SEC picked up crowdfunding Rulings under the now Chairman Mary Jo White.
In this article I’ll share the implications I see for the crowdfunding market with Title III, the highlights of the SEC’s proposed Rulings, and the expected timing on when non-accredited investment/fundraising gets finalized by the SEC and kicks off.
Implications of Title III Crowdfunding
For some perspective as this historic legislation finally comes “unstuck” after 15 months of regulatory delays, I believe four things are happening:
1. Opportunity and capital for entrepreneurship is being democratized.
Early stage investing is rapidly moving into the digital age. Title II of the JOBS Act, implemented on September 23rd, is already driving this move online by creating new ways for companies raising capitalto market/advertise publicly online. But this is still limited to the existing capital from accredited investors only.
Title III will begin to disrupt the entrepreneurial capital market in a more fundamental way, bringing change to the previously elite world of investment fundraising and investing in early stage businesses, which used to be the exclusive domain of the wealthy.
As the market matures, we’ll see a more level playing field for everyday citizens to fundraise or invest, regardless of their personal wealth or their immediate personal connections to wealthy individuals.
2. A new class of investor is being created
Right now the annual VC investment market is roughly $30 Billion. The non-accredited investor market has the long term potential to actually dwarf the existing VC market, just by the massive number of new investors who will be allowed to participate in early stage investing for the first time in over 80 years. A new wave of capital is set to be unleashed by Title III and come into the U.S. investing market, which some estimate will grow to a $300 billion market.
Many of these non-accredited individuals will be first-time investors, though it’s important to note that non-accredited investors are not entirely new to funding businesses. Most businesses and ideas are initially funded with some “friends & family” money. Title III will both help formalize the process of going out to your personal network for capital,
and allow an even broader pool of accredited and non-accredited investors to participate alongside.
3. It’s a Capital Market, Dummy
The buzz phrase on the street is that there are “hundreds” of these crowdfunding platforms out there. While there are many would-be upstarts and entrants, the winners in this market will attract quality deal flow, build a visible brand name, and what is likely the most challenging and critical – execute well on the “demand” side of the equation (engaging investors).
That said, investment crowdfunding is a capital market, not another internet niche. Thus the market does not have a “winner take all” dynamic, though there are network effect advantages for platforms that have already been around and growing their online networks and closing deals.
We don’t see that one single investment bank serves all of Wall St. and the public capital markets, even after decades of competition and consolidation. Similarly, there are many ways to serve Main St. and the multi-billion dollar market of investment crowdfunding.
4. The investment establishment (angels, angel groups, VCs) will evolve, or get passed by
A significant opportunity for Angels & VCs to leverage investment crowdfunding exists. That said, over the last 2 years I’ve had an interesting experience as the CEO of Crowdfunder and participant in JOBS Act related legislation and regulations.
In the past I watched long time angels and VCs publicly go to bat against crowdfunding, stating that they would never invest in a crowdfunded company.
Now, in the last 4-6 months as investment crowdfunding is growing rapidly with accredited investors on sites like Crowdfunder, the tone of most investors has changed. Some of these same investors who were previously skeptical, or even upset about crowdfunding, have made a 180 degree turn. And some are now bringing deals they invest in to sites like Crowdfunder for follow-on investment crowdfunding from other accredited investors & funds.
Given this change in sentiment from investors, I’m reminded again of what Schopenhauer said:
“All truth passes through three stages. First, it is ridiculed. Second, it is violently opposed. Third, it is accepted as being self-evident.”
Given the potential efficiency gains of using the Internet as a complement or replacement for how you source opportunities and market investments you make for follow investment from the crowd, it makes sense that more established investors are changing their mind.
One could argue that we’re on a path towards crowdfunding becoming the new normal for early startup finance, where founders use sites like Kickstarter to validate projects via rewards-based crowdfunding, or use sites like Crowdfunder to validate and fund businesses via investment-based crowdfunding.
For a bit of humor on how VCs and investors have gone from anti to pro crowdfunding, see this amazing video on “If Nicolas Tesla Pitched VCs.” (This highlights Kickstarter which does rewards/donation crowdfunding where people pre-purchase goods or experiences, not investment)
Timing and Implementation of Title III Crowdfunding Rulings
The SEC just gave their detailed proposal for Title III Rulings. What follows is now a 90-day commenting period where experts, regulators, advocates and opponents effectively “crowdsource” input and hash things out through the SEC site. The SEC does a deep review process on these comments.
Following this 90 days, it is likely that the SEC will spend another 30 days to finalize the revised rulings based on commenting, and then schedule a vote on the final rulings several weeks later.
This timeline has Title III likely coming in April or May of 2014, when the rulings are voted into effect and the first non-accredited crowdfunding can take place.
The Shape of Title III Crowdfunding Rulings
The SEC put our their proposed rules for Title III this morning. Here are the highlights of the 585 page proposal:
For Non-Accredited Investors:
One critical piece of investor protection for investors (and Grandma) are clear caps (limits) on how much non-accredited investors are allowed to invest in a given year. Under Title III, this yearly amount breaks down to:
- For income below $100,000, invest a max of $2,000 or 5% of income or net worth
- For income over $100,000, invest a max of 10% of income or net worth
- Investments made in a Title III crowdfunding transaction can’t be resold for a period of one year
Is Grandma going lose all her money, as some fear?
Grandma is going to be ok, and it is important that all new investors are educated and know that early stage investing is highly risky and a majority of companies don’t survive. With that, crowdfunding isn’t something new- it is at its essence investing, which has been risky for decades and has an existing set of challenges that crowdfunding brings new dimensions to.
For fundraising from Non-Accredited Investors, the company has the following restrictions and would be required to disclose:
- Limited to raising no more than $1,000,000/year under the Title III exemption.
- Disclose financial statements of the company that, depending on the amount offered and sold during a 12-month period, would have to be accompanied by a copy of the company’s tax returns or reviewed or audited by an independent public accountant or auditor.
- Disclose information about officers and directors as well as owners of 20 percent or more of the company.
- Disclose use of proceeds.
- Disclose the price to the public of the securities being offered, the target offering amount, the deadline to reach the target offering amount, and whether the company will accept investments in excess of the target offering amount.
- Companies relying on the Title III exemption to offer and sell securities would be required to file an annual report with the SEC and provide it to investors.
While some in the market might be waiting for these new rulings under Title III, there is rapid growth under Title II and in accredited investing online. Investors and entrepreneurs alike aren’t waiting for Title III, they’re fundraising online today under the existing laws.
As I talk to company founders each day, they have some idea that non-accredited crowdfunding is on the way and might be a future option, though any company looking for fundraise today is surely focused on the immediate investment crowdfunding opportunity with accredited investors.
With that, while there is a growing base of accredited investors investing online today, only a tiny percentage of the 8,000,000 accredited investors in the U.S. have ever invested in a tech startup or social enterprise. And right now these investors have the opportunity to do this for as little as a a few thousand dollars via crowdfunding.
It’s an interesting time to go on a platform today, see how it works, and be a part of this historic time. So get engaged in the movement and find some local entrepreneurs to support, whether that you do it with your dollars or your time and attention.
There are six major types of active participants in the direct secondary market:
Existing investors or the company Existing investors in a company or the company itself can repurchase shares from employees or other investors. For companies with substantial excess cash (ideally due to cash generation from operations), it may make sense for the company itself to acquire shares from employees or investors, similarly to the way public companies conduct share
buybacks. However, if the company is burning cash or saving cash for acquisitions, this option may not be appropriate. Sometimes, existing investors may wish to increase their stake in a company. If the company is unlikely to need further capital (therefore reserves at the fund level are not needed) and the inside investor is prepared to pay a reasonable price, they can often be a good buyer of shares.
However, since the mandate of the primary investor fund is to provide capital for growth and other corporate purposes, the potential for significant secondary stake liquidation is often limited. Further, an additional investment
in secondary shares may limit the investor’s appetite in the future for growth capital or acquisition funding.
A primary investor Many primary venture capital firms have struggled to provide attractive returns and meaningful liquidity to their investors and as a result have considered or began to explore secondary transactions. In addition, some investors may have tried to participate in a primary round with a company but lost out to another firm, and as an alternative route, they may consider investing through a secondary opportunity. However, since many primary
firms do not want to buy common or junior preferred stock, the number of primary firms actively pursuing secondary deals is limited.
Fund-less sponsors are participants in the secondary market who aim to identify
shareholders seeking liquidity and negotiate a transaction with them. However, instead of financing the deals from an existing fund, the financial backing is arranged on a deal-by-deal basis. These agents or firms usually get compensated with a fee for their intermediary services and/or receive profit sharing after the eventual sale of the stake that was acquired
with their help. Sometimes funds will be formed by boutique banks that raise money from a small group of wealthy investors with a mandate to buy shares in one company. It is frequently the case that fund-less sponsors will provide an offer or letter-of-intent and use that agreement to raise money from a third party to consummate a transaction; however, the transactions often fail to close if these groups cannot raise the promised capital.
Secondary exchanges Thanks in part to some highly publicized transactions in 2010 (e.g., Facebook, Zynga, LinkedIn, and Twitter), secondary exchanges have become well known as an avenue where private stocks can change hands. Examples of these exchanges are SecondMarket, NYPEXX, and Sharespost. However, these exchanges are limited in their ability to provide
information about the underlying companies and frequently charge additional fees associated with the transaction. In addition, secondary exchanges tend to focus only on a few highly publicized, “popular” companies. Transactions in these companies are executed
Coming soon to a boardroom near you is one of the more significant developments the private market has seen in some time. Thanks to the merger of SharesPost, an online platform that connects investors to venture-backed companies, and NASDAQ, the world’s second largest stock market, investors will be able to buy and sell shares in privately held companies.
This is big news for investors that want to own a piece of today’s surging private companies, especially fast-growing technology-enabled firms. Think Twitter, Pinterest, Square, Dropbox and others.
This is also major news for all privately held companies, especially those in Chicago seeking to increase access to capital to fuel their growth.
Due to the recent emergence of crowd-funding websites, companies have gained the ability to reach a wide base of potential investors. But some still consider online crowd-funding to be the Wild West.
This NASDAQ merger with SharesPost is significant because NASDAQ brings over 40 years of control and expertise in building markets -– not to mention a global reach and a credible brand.
NASDAQ has also become an increasingly friendly partner for Chicago’s innovation community. On February 25, I rang the Closing NASDAQ Bell with 18 of Chicago’s most rapidly growing companies. All were winners of the 2012 Chicago Innovation Awards. It was great to have Chicago recognized on this stage that represents the global epicenter of business and technology. And it was clear that the NASDAQ folks were impressed to meet with some of our recent winners — like Coyote Logistics, SMS Assist, Belly and other growing firms that could conceivably be listed on NASDAQ someday.
As with anything new, education will need to occur for the investor community and private market to fully grasp the potential. On August 19 at the Museum of Broadcast Communications, the Chicago Innovation Awards will host a NASDAQ executive who will speak to approximately 350 of Chicago’s growing firms about how they can engage with the NASDAQ Private Market. Local businesses looking to increase their access to capital might find value in joining that day.
In a conversation I had with a rep from NASDAQ shortly after the merger announcement, I learned that NASDAQ won’t just accept any company to the Private Market. A vetting process will occur, and only the most promising firms will be accepted. Scalability, competitive advantage, a strong management team, impact in the marketplace — all of these will matter, as they should. But given the growth of Chicago’s innovation community, and the soundness of the business models we have seen emerge from our region, NASDAQ should be pleased with what they find in the Windy City.
Luke Tanen is executive director of the Chicago Innovation Awards, the region’s foremost celebration of new products and services, and co-author of Innovating…Chicago-Style, which tells the stories of 80 Chicago-area innovators who have launched groundbreaking new products and services over the past decade.
7 the next 10 years creating a big chance you can not miss the rich
The last decade you may have missed countless opportunities to get rich, you want to miss the next decade it? Let’s look at the next ten years making the rich opportunity that may exist.
1. the agricultural land market
Some experts said that 12.77 million hectares of arable land contract rights, collective construction land 2.5 million acres, 15 million acres of agricultural land. The 15 million acres of land to stimulate China’s economy one hundred trillion yuan market.
2. culture media
With the shortage of materials of the past, the cultural industry will usher in major development in the future. Third Plenum also mentioned the need to build “cultural power”, young people want to join the film industry and other cultural industries blessed.
3. 4 G network
With 4G pictures of issuance, Chinese telecom industry officially entered the 4G era. 3G has been tremendous subversion, such as led to the development of smart phones, has spawned the development of the mobile Internet industry, 4G inevitably will bring countless opportunities to create wealth.
4. online education
As the video can be “readily achieved,” the future of online education will become more likely. In fact, Baidu, Alibaba, Tencent (referred to as BAT) started early layout of the Big Three online education.
5. incubation platform
The next most competitive integrated enterprise resource companies. Integration of capital, the integration of entrepreneurs, venture incubator. Today, the media have been doing this thing. It is said that members of the community Zhenyu logic of thinking to do about it is the future!
6. the mobile Internet
Big screen mobile Internet has been opened, but there are many possibilities for the future. Who ahead of the layout in this wave of the tide, who will be able to win.
7. Capital Markets
Online education, mobile Internet, 4G networks are emerging industry. Banks are risk averse, only the capital market will be more popular and emerging industries, therefore, the future of the capital markets would have a longer one made rich tide.