RetireAmerica pioneers capital protected equity crowdfunding

fiscal-cliffWhen it announced its’ launch last month, RetireAmerica billed itself as the first capital protected equity crowdfunding platform.  By letting investors choose from three levels of capital protection, RetireAmerica hopes to appeal to a greater range of investors, including ultraconservatives, novices, and those burned in the recession.

Retire America allows people to make equity investments in early stage companies.  Customers can choose to have 0 percent, 50 percent, or 100 percent capital protection.

Those that choose either 50 or 100 percent have a portion of their investment used to purchase convertible notes which are backed by government bonds, that, if allowed to sit until maturity, should provide a return equal to the percentage of capital investment protection chosen by the investor.  The investors that choose 50 percent protection would see roughly 40 percent of their investment go towards certificates, while those choosing the 100 percent option would see roughly 78 percent used to purchase certificates.

The idea that became RetireAmerica started more than 20 years ago after a company which is now called WIT Capital but which was then Spring Street Brewing attempted to sell securities over the internet for the first time.  They received an order from then Securities and Exchange Commission Director Steve Wallman to cease activity, citing the need to “adequately protect investors,” lack of investor knowledge of the risks involved, and the potential questionable handling of investor funds.

The key part of that letter was that the SEC believed that the mechanism proposed by Spring Street, a web-based mechanism called Wit-Trade, did qualify for a regulation A exemption.

“We note that the Company employed electronic delivery mechanisms in its original Regulation A offering. This approach would continue to be acceptable, although you should consider the Commission’s interpretive guidance regarding electronic delivery released last October (1995),” the SEC stated in a letter to Andrew Klein, the President and CEO of Spring Street Brewing at the time of the ruling in March, 1996.

In spite of the tentative green light, Spring Street/WIT decided to sit on the concept.

“Direct-to-retail was very tough back then,” acknowledged RetireAmerica CEO Steve Colmar.  “Only after social media came into play, and then crowdfunding, and ultimately the JOBS Act, did we decide the time was finally right to be able to directly reach the retail investors.

Four years later RetireAmerica commissioned a study to determine the level of interest in a capital protected product.  The results were encouraging.  While only 38 percent of those surveyed expressed some or more interest in a traditional venture capital product, the frequency jumped to 53 percent when the element of capital protection was added, with the all important “very interested” portion nearly tripling in size.

While the concept of capital protection was interesting on its own, RetireAmerica added to the unique appeal by including the option of being able to convert some of their protected equity into company stock, based on the performance and needs of the company at that time.  That wrinkle was proposed by Cameron Goodnough, now the Managing Director with TD Securities in Toronto.

Attracted to the initial version of the product sans conversion, Goodnough said it would be interesting if there was an opportunity to convert based on performance.

“We modeled at and loved it, so we added it at the end of 2009,”  Colmar said.

Now that the investment community has had time to digest the proposed SEC rules, does Steve Colmar have any concerns about crowdfunding for equity going forward?

“I am not worried at all,” Mr. Colmar replied.  “The biggest issue we cared about was general solicitation.  We target both accredited and (eventually) unaccredited investors.  Some form of Title 3 will also eventually come into law.”

The SEC took great pains in the report to stress their efforts to protect newer investors.

“That is our biggest strength.” Colmar stated.

While the JOBS Act and the proposed rules are the open door through which RetireAmerica has been waiting two decades to pass, Mr. Colmar gets the sense the SEC is a reluctant player in the whole process.

“They (the SEC) don’t like the congressional mandate.  Their sole purpose is to protect investors and they see the JOBS Act as very problematic.”

The world has changed in the decades since the idea for RetireAmerica was first conceived.  The tech bubble and subsequent recession have made Americans more conservative in their investment appetite.

“When we first developed the product 15 plus years ago, the whole idea was that retail investors couldn’t play and in some cases shouldn’t play in high risk investments,” Colmer recalled.  “Most Americans now have to manage their own retirement portfolios.  Capital protection allows them the opportunity for higher returns and even the opportunity to participate in high risk investments at all.”

Colmer noted that even during the tech boom heyday investors placed a priority on protection.  “Even when people were paying $10 at an IPO and saw that go to $100 in weeks they were still concerned about protecting principal.  Then the tech bubble burst, and we saw real estate burst.  And that was followed by the recession that left many with a value of their 401K cut in half.”