By Vanessa Malone
This week, Horizon, Finceler8, and the UK Department for International Trade (DIT) hosted a webinar to discuss the state of capital raising with a focus on regulatory and fintech challenges across the U.S. and U.K.
Panelists included Jessica Bartos, Investment Manager at Albion VC who has advised companies and investors like AT&T, Intel, KPN, Apax Partners and The Carlyle Group, amongst others; Mark Elenowitz, President of Horizon and Wall Street veteran known for leading the first Reg A+ IPO of a company to list on the NYSE; and Matt Smith, CEO of SteelEye which has secured $20 million in funding over the last three years. The panel was moderated by Hayden Boilini, Trade & Investment Associate with the UK Department for International Trade (DIT) based out of the British Consulate in New York.
The webinar is now available to watch here on demand. Below please find a summary of what our panelists touched on.
Key takeaways on the state of capital raising
Hayden Boilini | Moderator
On current DIT and government capital raising initiatives
- The Financial Innovation Partnership (FIP) between the US and UK governments was created in May 2019 to expand opportunities for companies at the intersection of financial services, technology and international commerce. The partnership created several joint working groups to collaborate, share insights on regulatory practices, and promote innovation. DIT has also partnered with the NY Department of Financial Services and other groups on these initiatives.
- While COVID-19 has changed how DIT does work it has not changed its approach to fintech. If anything it has highlighted the critical need for fintechs in order to promote financial inclusion.
- UK companies have access to both the Future Fund, which provides government loans to UK-based companies ranging from £125,000 to £5 million, and Innovate UK, which UK companies have used to upscale their business.
- This month, the FCA opened applications for regulatory and digital sandboxes aimed at detecting and preventing fraud and scams, supporting the financial resilience of vulnerable consumers, and improving access to finance for small and medium sized enterprises. Hayden encouraged interested companies to connect with him.
Mark Elenowitz | President of Horizon
On current state of private markets in US and UK & crowdfunding
- The SEC reported that the amount of new capital raised through exempt securities offerings, or crowdfunding offerings (e.g., Reg D, Reg A+, and Reg CF offerings) in 2019 outpaced capital formation raised through traditional, registered securities offerings. Reg A+ and Reg CF offerings alone brought in ~$2.4 billion (SEC 2020 Report)
- The SEC proposed new amendments to Reg A+, Reg CF, and Reg D to simplify and improve access to capital. This includes raising the capital raising maximum under Tier 2 Reg A+ offerings from $50 million to $75 million and Reg CF capital raising maximums from $1.07 million to $5 million. Mark believes that these improvements will encourage quality issuers to utilize these exemptions to raise capital and bring investors new opportunities.
- There has been a significant crowdfunding boom globally. The crowdfunding market grew by 48.3% in 2018 compared to 2017. While P2P lending makes up the majority of global crowdfunding market, equity crowdfunding market still represented a projected $4.97B (Cambridge Centre for Alternative Finance 2018).
- The SEC updated the accredited investor rule to enable investors to qualify as accredited investors based on defined measures of professional knowledge and experience or certifications, in addition to the existing tests for income or net worth.
- Crowdfunding is becoming increasingly recognized as an innovative part of a strategic growth plan. Mark emphasized that with equity crowdfunding, issuers are not just getting sales, they’re getting lifelong brand ambassadors. It also levels the playing field by giving the everyday person exposure to potential high-growth startups alongside high-net-worth individuals.
- The biggest flaw in today’s crowdfunding market is a lack of liquidity and secondary trading options for investors. Mark believes there needs to be an active liquid secondary marketplace for crowdfunding to really see steep growth, which is what Horizon is working to create in the U.S. and globally.
Matt Smith | CEO of SteelEye
On SteelEye’s $20M capital raising journey and the importance of regtech
- Early on, SteelEye took advantage of the UK Enterprise Investment Scheme (EIS). This investment vehicle offers tax reliefs to individual investors who buy new shares in your company. Under EIS, you can raise up to £5 million each year, and a maximum of £12 million in your company’s lifetime.
- SteelEye raised capital raised through multiple avenues. The company took advantage of government capital raising opportunities and secured venture capital, family office, and strategic investments which resulted in $20M raised over the last 3 years.
- SteelEye focused on creating a solid corporate foundation leading up to their Series A. Matt highlighted that over the course of the capital raising journey so far, he has met over 300 investors. While most said no, Matt implores companies in this stage to keep going and to keep engaging with these potential investors. Some of those who said no to SteelEye initially have followed their progress, helped shape their future plans, and became investors at a later stage.
- Demand has skyrocketed for modern fintech/regtech solutions. As the market is adapting, we’re seeing companies merge to fill unmet technology needs. Matt highlighted that companies that don’t fix issues at a deep level could see major problems later on.
- COVID-19 has triggered huge market volatility which increases market abuse and insider dealing. Companies should re-approach their compliance and data plans to adapt to the new market environment.
Jessica Bartos | Investment Manager at Albion VC
On the VC perspective and how the landscape changed amidst COVID-19
- A word of optimism: despite COVID-19, markets are still very open on the venture capital side and great companies are still getting funded.
- In the UK and Ireland during the first half of 2020, there have been ~900 VC deals amounting to £7B of funding. There has also been modest growth over 2019 with only a small dip in number of deals. In Q3 out of the US, there are similar signs of growth with flat to small increases over 2019 dollars going into VC stage companies.
- Jessica says they are seeing interest grow in the software sector in the UK. 25% of VC dollars went into software firms 10 years ago. This is now closer to 40%. This has led to software companies having greater leverage to shape their deal structure.
- When it comes to valuations, Albion VC is using the US as a proxy for the global state. There has been modest growth in valuations. Median series A and B valuations are $30M versus $28M in 2019. Jessica reiterates that if you’re a great company with right metrics, solving serious problems, VCs are still very much interested in working with you.
- With COVID-19, companies are closing bigger rounds to create a cash runway in case the economy takes longer to recover. This gives more time for companies to execute plans in the current climate.
- VCs like to meet in person, especially Series A VCs like Albion who maintain a long relationship with the companies they invest in. Jessica says they have been creative in their approach for the pandemic. They’ve been doing due diligence and other necessities digitally, but then try to create a socially distanced meeting to meet the company face to face safely.
The state of capital formation is evolving. Access to funding in the private markets is allowing companies to stay private longer. This coupled with the world’s expedited shift to digitalization is bringing about unique regulatory and technological opportunities. We hope you enjoyed these insights into the state of the market and received takeaways that you can utilize to approach your own capital raising strategy.
To hear more insights from the group discussion, we invite you to watch the webinar on demand. If you have any questions regarding the webinar or the initiatives above, please email Vanessa at email@example.com.
Horizon offers a suite of integrated securities software applications for compliant issuance through secondary trading of electronic securities. Truly a compliance-first business, our solutions combine Wall Street and Silicon Valley to power the next generation of exchanges and securities offerings in the U.S. and globally. Visit us at https://www.horizonfintex.com/.