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The crypto industry is never too far away from the most recent discussion of the Howey Test - which determines what qualifies as an “investment contract” and is therefore subject to US Securities laws. Crypto-payments company Ripple’s ongoing battle with the SEC makes near daily news, New Jersey regulators kicked-off a multi-state pile-on against crypto-custodian and lender BlockFi, and the SEC has been sending not-so-subtle messages to stablecoin issuers like Circle. If you ask the folks at these companies, the general idea, which has been backed-up by the SEC, is that tokens like Bitcoin and Ethereum are not securities, but decentralized currencies, and not subject to US Securities laws.
But I’m not here to talk about the Howey test. Or the various projects and tokens attempting to avoid classification as a security. For some platforms, securitizing your assets is not something to be avoided, but a strategic path that forms the backbone of your business.
Alternative Asset Investing
Alternative asset investing is generally referring to anything that isn’t cash, stocks, or bonds (“Alternatives”). Traditionally, institutions and high-net-worth individuals have used Alternatives to diversify their portfolios, seek higher yields, and generate returns uncorrelated with the equity markets. That’s the idea anyway. Sports memorabilia, real estate, or Fabergé eggs don’t exactly track with the S&P 500. But regulatory restrictions and simple affordability have kept the general public from accessing these types of investments. You might be able to buy a house, but you probably aren’t investing in commercial real estate with your rainy day fund.
Thankfully, some regulatory progress and a handful of enterprising startups have opened the doors to the everyday investor. In 2012, President Obama signed into law the bipartisan and cheesily named Jumpstart Our Business Startups (“JOBS”) Act, which eased federal regulations around certain types of fundraising and crowdfunding. A few years and a few tweaks later, businesses have a few options for “offering exemptions” that allow them to raise capital by offering and selling securities without having to register with the SEC. Reg D, Reg A+, and Reg CF (amongst others) largely differ with regards to whom they’re available, amounts that can be raised, and rules around investor solicitation.
Alternative investment platforms leverage these exemptions and “securitize” the underlying assets to allow investors to buy “shares” in high-value assets rather than needing to buy a million dollar art piece. The most common way to do this is to create a Special Purpose Vehicle (“SPV”) — an entity whose sole purpose is to own the asset — and selling shares in that entity to the public.
Below, we’ll take a look at a select few of the more prominent Alternatives platforms from a few angles to:
Discern their offering exemption, if any, from the public information on the site;
Think about how that choice reflects on their product offerings and business model and target consumers;
Take a look at some of the assets!
Reg A+: The Mini-IPO
Platform: Rally Road
Rally is a platform for buying and selling equity shares in collectible assets. The site has a healthy inventory of old-timey baseball cards, video games, comic books, classic cars, and some very random one-of-a-kind items. The site has a very “guys being dudes” vibe to it, what can I say.
How it Works: Rally finds and purchases these collectible assets and then “securitizes” them, selling the shares to investors while storing the assets in their secure facility that definitely evokes the Freeport from Billions or Tenet.
Offering: Reg A+, Tier 2. The Reg A+ exemption allows Rally to register its subsidiaries with the SEC in a “mini-IPO” and amend the filing each time they list a new asset. Putting in that up-front work allows them to more freely advertise the assets and to sell shares to non-accredited investors.
Investors: Non-accredited investors can participate, with some restrictions, but these are generally open to anyone. Rally also offers a secondary market, so investors can buy/sell shares in the app after a 90-day holding period, though I can’t imagine there’s a ton of liquidity. If Rally sells the actual asset, that represents a liquidity event for the investors who receive their portion of the proceeds in a distribution.
Featured Items: A 1776-era broadside copy of the Declaration of Independence, a 1955 Porshe 356 speedster, and a triceratops skull. You’ll never convince me this site didn’t fill its inventory from a Nic Cage garage sale.
Platform: Masterworks
Description: An invitation-only community for investors to buy shares in blue-chip art, including works from Basquiat, Andy Warhol, Banksy, and many artists other than the three that I have heard of. Masterworks also heavily promotes its proprietary pricing data as well as a data platform for users to manage their investments.
Offering: Reg A+, Tier 2. Very similar to Rally in that they securitize the items in a “mini-IPO,” open the offerings to non-accredited investors, and offer a secondary market for investors to buy/sell shares.
Featured Items:
Reg D: The VC Tool
There are a few different types of Reg D offerings, many of which are just your standard capital raise for a startup or a VC fund, but Alternative platforms can and do use Reg D for securitizing assets as well.
Platform: Farmtogether
Not a competitor to farmersonly.com, but an online marketplace for US institutional farmland investing. You can finally own your own farm without waking up at 4AM to till the fields.
How it works: Farmtogether buys an operating farm with an SPV and operates it through an internal management entity. Through FarmTogether, investors can hold on to the asset for a 7-10 years aiming for healthy appreciation, as well as receive cash yields paid out quarterly from the farming operations.
Offering: Farmtogether is registered with the SEC as an Exempt Reporting Advisor, but otherwise this seems to be a standard Reg D exemption, available only to accredited investors.
Investor: Each share of farmland has a target holding period, but the platform will assist any investors who are looking to sell their interest for liquidity. Farmtogether plans launch a secondary market later this year, and will likely need to partner with a registered broker-dealer to do so.
Reg CF: The Rise of Crowdfunding
Through Reg CF, businesses can raise up to $5m in a 12 month period. Reg CF offers a unique model in that they must be made through a registered “funding portal” (I.e. Indiegogo, Seedinvest) and the issuer needs to file a Form C with the SEC. Going this route allows investors to actually receive equity shares in a crowdfunding launch instead of swag, special access or some other marginally useful benefit.
Platform: Republic
Republic is a funding portal and thus can support crowdfunding offerings for startups and product launches for accredited and non-accredited investors.
How it Works: If you’re looking for it, Republic probably has it. They’ve built up an impressive combination of crowdfunding platform, Alternatives marketplace, and investment aggregator (I.e. partnership with Fig). This is the platonic ideal version of making the regulations work for you and diving in headfirst.
Offering: Reg CF, amongst others. Republic is the most varied platform in this discussion in that it also supports Reg A+ and Reg D offerings as well, putting it in competition with not only Rally and Masterworks, but accredited-focused platforms like Angellist as well.
Featured Items: A residential condo in Austin (Reg CF), A huge slate of video games, a remote heart monitor (Reg A+), and many startups (Reg D 506(c)).
Options Abound
Discussed above are only a small slice of the Alternatives platforms available.
Here.co uses Reg D to allow accredited investors access to vacation rentals for those targeting asset appreciation AND yield.
Yieldstreet (pictured above) offers individual Reg D offerings, short term notes, and recently launched a multi-asset fund giving access to non-accredited investors.
Some platforms have also found a niche without needing to securitize their offerings, but relying on a classic buyer-seller marketplace infrastructure.
Alt — rare sports cards with a proprietary pricing database and storage services — allows you to “invest in sports cards just like stocks,” but are actually just a facilitating agreements between two participants.
Royalty Exchange enables artists to sell their future royalties to investors without giving up rights to the underlying IP.
It’s clear there is a large market for alternative assets, and bringing everyday retail investors into the fold is a massive opportunity. If at least three of these platforms don’t have “Robinhood for X” in their pitch decks, I’ll eat Pharrell’s Hat. There are a lot of reasons why securities classification can be devastating for crypto projects and protocols, but in certain scenarios diving headfirst into the regulation can be a transformative boost. In those situations, IF:Then will be there to help.
Until next week, friends - David Ikenna Adams