Financing Businesses Under the Improved Regulations

The new business financing regulations (March, 2021) go a long way towards fixing our business financing & private investment laws that were written back during the height of the Great Depression in 1933/34

These new financing regulations can serve and empower business sectors that traditionally Venture Capital ignores. 

Bonds not Stocks

There are over 27 million private companies in America.   The objectives of the vast majority of these companies are not well suited to issuing stock as a way to raise growth capital. However, issuing bonds could be very beneficial to many of these companies.  

Issuing stock to investors creates challenges that are not in line with most companies’ objectives. For one thing, how do investors get their investments and profits out?  

Unlike the public stock market, the private market does not have an effective secondary market where stocks are bought and sold in a manner that optimizes an efficient pricing model.  

Instead, generally equity investors expect some type of liquidity event that will, if all goes well, produce a very significant return on the investment. Most liquidity events are either an acquisition or in rare cases an IPO.  This type of an investment will tie up your investment for long periods of time, an expectation of 5 to 7 years is not unusual, during which you, the investor, have very limited ability to withdraw your money. For many investors, especially those with limited funds, this is not a good idea.

Nor is it a good idea for the company itself in the vast majority of businesses. The vast majority of the 27 million plus private companies are not specifically being created to be sold. Sure, the old adage is “everything is for sale” applies but that is not generally the intent. Most businesses are being built with the goal of providing the owners a good income and often times a good job as well. In this type of a situation issuing bonds, which is a form of debt similar to a bank loan but issued to investors, could be an excellent alternative.

The new investment regulations offer the business the opportunity to offer bonds directly to the public over the internet through SEC licensed “portals”.

Though similar to bank loans in that they pay interest to the investor, generally a business loan requires payments to start the next month and often times require collateral such as the owner’s home. Bonds can be structured with much more flexibility offering options such as differed payments or payments based on revenues. Bonds may require collateral, but the market will determine that not a bank regulation.

NOTE TO READER

I am not a lawyer, and this is not legal advice it is provided for educational purposes only and is very basic information that will be expanded on in our future posts. If you are interested, I encourage you to subscribe.