What is the private capital market?

Friday July 23, 2021

What is the private capital market?

In recent years we have seen exponential growth in the issuance of private capital to companies in the US, nearly doubling the amount of money raised by public companies through Initial Public Offerings. The private capital market has dramatically changed in the last ten years as more investors have entered the playing field. This shift was made possible by the 2012 JOBS Act (which has recently expanded) and significantly impacted the private investment market.

 

Previously, before the Jumpstart Our Business Startups Act (JOBS Act), it was more challenging to raise capital as a private company, as there were fewer overall players in the market. It was mostly limited to venture capital firms, wealthy investors, and hedge funds. However, this is no longer the case as the barrier for entry for investment into private companies has been lowered and allows lower-wealth individuals to invest a percentage of their income. 

 

Now, with the JOBS act adding in options like Regulation A+ and Regulation CF, a private company can raise close to $80 million in 12 months without having to enter the public market. With Regulation CF, anyone can invest in the offering. No longer is it an opportunity limited to wealthy participants. Investors with either a net worth or annual income less than $107,000 can invest $2,200 or 5% of the greater of their annual income or net worth into RegCF offerings. 

 

While the $5 million that a company can raise from this investment opportunity may not seem like much in the grand scheme things (Regulation A+ allows up to $75 million), this new rule has opened the floodgates to new investors and new capital for the private market. In 2020, 358,000 investors participated in Reg CF campaigns. That is 358,000 people that have added their money into the private capital market, which if each person invested only invested $2,200, that means there was $787 million added to the private market. That is significant.

 

For companies that are scaling fast, staying private longer is an advantage as they can spend more time increasing their valuation and their eventual share price if they were to go public. By raising this private capital, they are not only proving the concept is viable and that there is a market for what they are selling, but they are also able to operate without the same scrutiny as public companies. They will have to open up their books and meetings to the private investors as that is their right, but it is certainly less intrusive or time-consuming. 

 

Focusing on your business as you scale and grow is an incredible advantage for you as a business owner and your investors. The more valuable your company is by the time you go public, the better it will be for your investors. So, if you weigh the options for capital raising options, don’t forget that there is a thriving private market. 

 

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