For some regulators, there is an urge to lower the bar for “accredited investors”, a legal term that specifies investors able to invest into private market investment opportunities. In August 2020, the definition was adjusted to permit more investors to invest into these opportunities comprised of venture capital, hedge funds, private equity, and specialty debt investments.
Lowering this threshold – previously demarcated only by income and wealth thresholds – ostensibly democratizes investment. Contrarily, critics argue that this could permit those for whom private investments are unsuitable to invest into complicated fund structures that are often illiquid and complex, hence the prior regulatory gates of income and non-real estate wealth.
Coinciding with the lowering of the regulatory gates, 2020 has also seen a surge in the SPAC market – so-called blank check companies that merge with private companies to take them public. The composite of companies selected by blank check firms to go public runs the gamut from a conglomeration of convenience stores to innovative home-sales platforms.
While the type, scope, and structure of private companies that elect to go public via reverse merger with a SPAC cannot be uniformly described, there have been a surprising number of pre-revenue companies that will be (or are) publicly traded. The now-downtrodden Nikola Motors earned a mere $36,000 as of June 30, 2020 in gross revenue – before operating expenses totaling $86 million. On this paltry 1H 2020 revenue, Nikola still manages a $7.75Bn market cap.
Nikola’s meager revenue from seemingly non-core “solar revenues” seem like a gold mine in comparison to Bill Gates-backed QuantumScape which is going public via Kensington Capital Acquisition Corp doesn’t expect to see any revenue until 2024 when it expects to gross $14MM in revenues.
This begs the question of the degree to which previously non-accredited investors were denied suitable investment opportunities. If pre-revenue companies can to come to market with valuations in the hundreds of millions with any revenue years off, then are retail investors really missing out on VC-like opportunities?
It is a bit of a counterfactual to ask since we cannot know to what opportunities retail investors would have substantially availed themselves and the notion misses larger chunks of private markets like LBO and private debt opportunities.
However, retail investors have availed themselves quite readily by innovating on already complex, contrived investment vehicles: just see this WSJ piece on a guy who, after reading about the VelocityShares 3x Inverse Natural Gas ETN, decided against simply finding the long 3x Natural Gas ETN – an animal that actually exists – and instead sought to short the 3x Inverse Natural Gas ETN to his own $100K+ detriment.
This is just an extra-levered exposure to the 3x long natural gas ETN, an absurd and unnecessary bet for a non-professional to make on the direction of natural gas prices. ETNs – exchange traded notes –are themselves complex with unique structure to their underlying assets that are unlike equities. Yet, their seeming liquidity and accompanying ability to short inexplicably lured this foolhardy investor like moth to flame.
So should the bar be lowered indefinitely such that the average investor should see the same private debt, hedge fund, or private equity investment presentations shown to institutional investors? It could be reasoned that some institutional investors see the opportunity for retail investors (as shown by unfortunate revealed preference) as they already exist in public markets. SPACs are showing this to be even more true. Private investments typically come with capital call obligations and one wonders if General Partners are going to want to work with a thousand or more retail Limited Partners but the savvy capital gatherers will make it work – hopefully to the benefit of all stakeholders.
San Francisco Securities Outlook 