Q&A: SEC Trying to Improve Private Market Access; Bitcoin Mining

 

Q: Hi, Andy. Is it true that the SEC wants to give retail investors more access to private markets? I mean, it sounds good. Could you tell me what that could mean for me?

A: Great question. This is a pet peeve of mine. The SEC has opened up private pre-IPO investing only a crack in recent years, and there it still stands!

Okay, first, a little dollop of history…

The SEC created equity crowdfunding rules to give retail investors access to private markets because it had no choice. The JOBS Act of 2012 mandated it. Of course, it took the SEC a mind-numbing four-plus years to issue the enabling rules.

The Regulation A+ rules were issued a year earlier, making the SEC’s procrastination on crowdfunding slightly more forgivable.

But the equity crowdfunding rules the SEC issued have three big problems…

First, they have a low maximum for how much money a company can raise. It’s only $1 million (Reg. A+ has a $50 million limit).

One million dollars doesn’t go very far these days. Crowdfunding is most effective when done in combination with raising capital from venture capital firms. But many companies take the attitude of “If I’m going to spend a lot of time drumming up support from VC sources, why bother with crowdfunding?”

The second problem: Attorney fees, accountant fees, portal fees and others. They add up.

And the third problem? Access. Companies trying to raise money are hard to discover. Their pitches to investors are dispersed across more than a half-dozen portals that specialize in listing crowdfunding companies. Keeping up with new listings isn’t easy.

I do it. But that’s my job!

So here’s the thing…

The SEC has been down this road before. It’s done studies… and studies of studies (I’m not kidding). So guess what?

Here comes another one!

SEC Chief Jay Clayton was touring Nashville last week and said he wants to open up new options for everyday investors.

The SEC says it will be issuing a “lengthy paper” within the next few months. And then it will seek public comments. And then?

Clayton says they expect to move pretty quickly to get something done.

I’ve heard that before. But I’m hopeful. I’m thinking the entire process could take about a year.

The good news is that one big fear the SEC harbored has proved unfounded. Scams and fraud have NOT been a problem. Very little of that has occurred – at least not any more than what happens in the public investing space.

So what are some of the rule changes that would open things up for you? Here are a few to keep in mind as the “process” meanders forward…

  • Fewer restrictions on how much you can invest: Right now, limits range between 5% and 10% of your income or net worth per year.
  • More ways to qualify as an accredited investor: Right now, you have to make $200,000 or have a net worth of $1 million (not including your primary home). Other possible pathways to qualify might include passing an exam, having a finance-related job or investment license, or showing “sophistication” in past investment activity. As an accredited investor, you’d be eligible to invest in many more companies that raise money from angel and accredited investors.
  • Higher limits for raising companies: Increasing the crowdfunding maximum from $1 million to $5 million would entice more companies to engage in crowdfunding.
  • Ease of use: Fewer questions and disclosures are asked of accredited and non-accredited investors alike. It’s cumbersome and unnecessarily time-consuming.

The SEC will be addressing only the first of the three problems I’ve identified. For this reason, whatever comes out of this initiative would be welcome but not game-changing.

As for the access problem?

We’re not waiting for the government to fix this. We’re developing an elegant solution to help investors access all the crowdfunding deals available to them at any given time.

I can’t tell you much more than that at this point. But stay tuned. We’ll have some exciting news to share with you in the near future.

  • Early Investing Co-Founder Andy Gordon

Q: What is “bitcoin mining”? How does it work? And how does this process make miners “influential”?

A: Bitcoin miners use powerful, specialized computers to secure the bitcoin network and process/validate transactions. The bitcoin blockchain is a distributed ledger (a record of all transactions, as well as the amount of bitcoin in wallets). Every 10 minutes, a new “block” is added to the chain and encrypted. Miners make sure transactions are legitimate, then update the ledger and cryptographically secure it.

Miners compete with each other for the “block reward,” which is currently 12.5 bitcoins. This reward serves as an incentive for miners to process transactions quickly and securely. The block reward gets cut in half every four years, and the next “halving” will occur in 2020. It’s expected that the last bitcoins will be mined around 2140. So the supply of new bitcoin is constantly decreasing and will run out completely in about 120 years. Miners will still be necessary to process transactions and will make money off transaction fees.

There are hundreds of different mining groups, and how much influence they have depends on who you ask. Various mining groups have tried to assert their power on multiple occasions, with little success. For example, Bitmain, the largest producer of bitcoin mining equipment in the world, tried to change the rules of bitcoin last year. It wanted bigger block sizes (higher throughput).

But many influential people in the bitcoin community didn’t support this change, and Bitmain ended up losing the fight. So Bitmain backed a “forked” version (copy) of bitcoin called “bitcoin cash” (also called bcash, or BCH). Bitcoin cash supporters claimed that their coin was the “real bitcoin” and would overtake the original bitcoin. So far that hasn’t happened, and bcash trades at around $538, compared to bitcoin’s $6,948 as I write this. So far, bitcoin cash has not gained a lot of traction.

Mining is a crucial part of the bitcoin ecosystem, but overall I think we’ve seen that miners don’t have all that much influence. It is ultimately users and developers who decide the direction of bitcoin.

For more on Bitmain and bitcoin cash, read my article from a few weeks back, “Steer Clear of the Bitmain IPO.”

  • Early Investing Co-Founder Adam Sharp