This is the first part in a two-part series examining the pros and cons, as well as a case study, of 'Reg A' offerings.
When I started in this business over two decades ago, the concept of alternative investments was limited to essentially one thing: hedge funds.
Sure, real estate and private placements existed, but they were more yield-wagging high-commission garbage products. Anybody was who was "anybody" had an investment in a hedge fund. Barriers to entry included a high net worth requirement, a long-time frame, and a big dollar investment. The closest comparison to its exclusivity was the American Express (AXP) Black Card.
Fast-forward to 2020, and hedge funds are only one-in-a-handful of easily obtained alternative investments. Owning a hedge fund is like the cheese on the burger of your portfolio.
Do you want Cheddar, American, or Swiss?
Pepper Jack, you say? Great choice.
Just as we've witnessed direct listings and special purpose acquisition corporations (SPACs) turn the initial public offering market on its head, crowdfunding and private offerings via "Regulation CF" or "Regulation A" allow even the smallest investor to participate.
A Regulation A offering is an exemption under which a private company can offer and sell their securities to the public under two different tiers. Tier 1 requires a company to follow Blue Sky laws, but there are no limitations on whether someone can invest or how much they can invest. Tier 2 allows a company to raise $50 million rather than $20 million of Tier 1. While there are no Blue Sky laws to follow, there can be investor restrictions if the offering won't be listed on a national exchange.
Let's get this out of the way up front, the risks in these types of investments are high risk, really, the highest of risk. A Regulation A offering not intending to immediately list on a national exchange carries all the risk of traditional hedge funds with less liquidity and more dependence on potentially less experienced management. With high risk comes high reward. Success can equate to enormous payoffs.
When I consider investing in Regulation A offerings that won't be listed, I go through a checklist. I also anticipate nine out of 10 of them won't be home run.
When I consider investing in Regulation A offerings that won't be listed, I go through a checklist. I also anticipate nine out of 10 of them won't be home run. There's a good chance more than half will lose money with a few investments that result in a total loss. But you only need one grand slam from the bunch and a couple of singles or doubles to come out ahead.
Rather than talking in hypotheticals, let's take a look at a company I recently reviewed as a consideration. Again, I want to note these are high risk, but with the current trends in portfolio structuring, it is a category investors should understand.
The first place I start is with the business concept. If the elevator pitch from management doesn't intrigue me quickly, it's certainly going to be a harder sell. It's not an automatic no by any stretch, though. Boring, unsexy businesses can be profitable and make for good investments, but let's be honest, most folks want to be able to see the big upside in the first 30 seconds.
After that, we move on to management, financials, competitors, barriers to entry, total addressable market, and the business plan.
Today's case studio is Audition Showdown, a company with an active, but underperforming Reg A offering (you can check it out here if you want to follow along); however, I struggled to understand after hearing the premise, because it is one of those that immediately grabs your attention.
Audition Showdown is a mobile talent show on a dedicated social media platform aimed at singers, songwriters, performing artists, and comedians. Think TikTok meets "American Idol" -- or really any television talent show like "The Voice," "America's Got Talent," "So You Think You Can Dance," "The Masked Singer," and so on. The list is long.
In short, it's the professionalism of TikTok, Triller, Snap (SNAP) , and YouTube (GOOGL) . Those three also qualify as competitors, so this is a David vs. Goliath situation. But who doesn't love an underdog?
Artists create a profile on the app. For a low, one-time fee of $19.95 to $24.95, they can compete in weekly competitions to win prizes and cash. This includes the ability to upload full performance videos that people can watch.
You don't have to pay to casually use the app or upload snippets (15-second short videos). The pay portion is only for artists investing in themselves to unlock the full potential of the platform.
On the surface, there's enough here to make me want to dig deeper.
One has to consider the risk of market saturation or market fatigue for this type of application, given all the talent shows currently on television and the popularity of TikTok and Triller. We see talent shows, however, expand and evolve, not contract.
Even with those considerations, Audition Showdown potentially fills a void. There's no direct competition. Unfortunately, nothing stops TikTok, YouTube, or Snap from doing something similar in the future, so the first-mover advantage could be a huge key to success. Earlier this week, we saw Snap announce a new entertainment platform called Spotlight with the most entertaining Snaps from the Snapchat community gathered in one place and tailored to a user's preferences and favorites.
To help kick off the new platform, Snap will award of $1 million every to Snapchatters, who create the top Snaps on Spotlight.
Conclusion: There's enough uniqueness and upside potential to continue digging, and with Snap sniffing in the space, expect its users to want to expand their reach. Let's pick up on this theme Friday. Have a great Thanksgiving in the meantime.