Private Capital vs IPOs

Fascinating hearing Thursday at the SEC, a discussion of whether easing private capital formation as a matter of regulatory law had the consequence of unfairly excluding the “retail customer” from access to great investment deals.

Trends: drop in IPOs, 2018 private capital raises were twice IPO proceeds; Jobs Act changed registration requirements under the ’34 Act allowing large widely held companies to remain private just about forever, with no public information available; retail customers cannot participate in private capital raises unless they are both “accredited” (a modest definition of wealth) and connected enough to get private deal access.

At the hearing, the sub-text was: is it wise, or unfair, to exclude the retail investor from the deals where most of the US growth capital is being invested?

The hearing reveals the pendulum of thinking on this issue. For some time, it was thought that retail investors were too poor or too dumb to invest in innovative companies, so the regulations excluded them and liberalized the rules allowing rich sophisticated investors or robust funds or strategics to make those investments with minimum regulation and disclosure (even barring State regulators from over-riding the Federal policy). Guess what: it worked. Retail investors were boxed out and “smart money” flowed to private deals.

This offended one’s sense of democracy–why do only the rich get in on the great deals (ignoring the statistics that indicate that very many private deals are really bad investments for those without great financial resiliance)? Not surprisingly, AOC was asking questions at this hearing.

Many speakers thus urged opening the rules to permit retail investors access into private deals. But this is of course contrary to a fundamental historical SEC mission, which was to not allow retail investors to invest in high risk without there being protections and robust disclosure. If new regulations open private capital deals to retail investors, will that in turn drive the SEC to insist on protections, full disclosure, the panoply of inhibitors to capital formation that gave birth to private capital to begin with?

Stay tuned and look for deja vu all over again….

States Sue SEC Over Broker Regulations

Just one week ago I posted a link to my current article on SEC amendments to the regulations defining the duties of investment advisers and brokers to the investing public, and noted controversy about the alleged deficiencies in the treatment of brokers asserted by critics.

Today’s press references a suit in New York Federal Court filed yesterday by eight state attorneys general seeking to void entirely the SEC standards for brokers. The grounds are technical: noncompliance with the statute that requires certain steps be taken by US agencies to amend their regulations. It is asserted that the 2010 Dodd Frank Act does not permit brokers to enjoy lesser fiduciary duties than investment advisers. Aside from New York, the other plaintiff states include California and Delaware (although not Massachusetts).

To this point, the SEC has not answered the complaint; far too soon. This suit will be a long one, and is the tip of the iceberg relative to this volatile issue.

Non-Opportunity Zones?

I am back in action, and posting, following an August “on the road.”  (Please hold your applause.) 

Summer reading and recent press indicates that the 2017 Jobs Act, which created tax advantages for investments in low income communities (“opportunities zones”) would spur job creation, new businesses and employment.  It was thought among other things that investments in these zones would foster much needed housing for the indigenous low income population.

Recent magazine press has pointed out that almost all the money that has flowed into opportunity zones, instead of fulfilling this promise, has gone into building housing, with high-end amenities, for wealthier owners or tenants.  A recent magazine article noted that the people most benefitted by opportunities zone investment were the Trumps, Kushners and LeFraks of the world. 

An interesting side note from the OPAL Wealth Management Conference held in Newport late this July:  there was a great deal of interest in opportunity zones, with promoters seeking funding from high-asset family and group family offices.

What is happening may well be an unintended consequence.  Even negative press coverage has not suggested that the 2017 Act was cleverly designed just to boost the top 1%.  However, the law of unintended consequences may be striking yet again. 

Broker/Adviser Duties Altered

The SEC this summer altered the legal obligations of brokers and investment advisers. If you invest, you should care about the groundrules that these professionals owe you. There is controversy as to whether you are now better or worse protected after the SEC actions. See for my August article attempting to decipher what the SEC thought it was doing.


There are reported to be 134 funds seeking to operate in the opportunity zone space, and about 80% of these are headed by people who have never run a fund before.

There was critical analysis of these investments.  Your money is locked up for ten years.  The advantage is that after ten years there is no capital gains on your profits but meanwhile you have no liquidity.  You still have a risk of achieving successful development, and the target yield was variously described as 9%, 9% to 12%, 14%, plus “300 basis points” for the value of the ultimate tax shelter.

There was no discussion of investing in companies (which is possible), only in real estate.  The expert panel thought that vertically integrated realty developers (who could put together the package of land, build the property and manage it) would be the safest bet.

The bottom line is that this is viewed as a long-term and safe cash flow play with no liquidity; it should not be entered into just by reason of the tax deferral but rather as a way to get a recurring and safer yield.

[This is the final post in the series based on discussion at the OPAL family office conference in Newport, Rhode Island held in late July.]


Most cannabis investing began in Canada where companies are publicly listed.  Everyone thinks that the United States will be a huge market in the near term with particular emphasis on places like Michigan, Massachusetts and California (with California hurt by a large black market, allegedly).

Some experts thought that investments in Canada were “played.”  The Canadian contingent sharply disagreed, claiming particularly that Canada was very well situated by way of geography and regulatory controls to be a source for growing and henceforth also a location for processing. 

Europe is perceived to be “a few years behind, although medical use is growing” and it is thought that the rollout in Europe will be country by country.  Expectation that Germany and Italy will be substantial markets. 

Some valuations for investments in cannabis related companies too pricey.  Counterargument is that as a multiple of future revenues, with future revenues growing quickly, these investments are not particularly overpriced.  There was noted a recent fallback in the price of Canadian public shares.

There has been difficulty in obtaining banking for cannabis, by way of both loans and deposits.  Recent newspaper articles indicate that some credit sources are opening up.  Everyone seems to expect that banks will “fall in line” within the next year or so, although there was no express definition of what “in line” might mean.

What about the prospects of a federal statute leaving the issue of legality to each State.  The consensus is that this will not happen, if at all, until after the next election but that thereafter, it is likely that “any new President” would be willing to undertake this unbundling.  Counterpoint: “Trump won’t sign anything from Liz Warren’s desk.”

People involved in playing the market in cannabis noted that the current confusion in terms of legality is not a problem for them; they believe in the long-term prospects, and the confusion reduces market prices today and creates a better opportunity for arbitrage.

In the long run, companies in the “sin” business (beer, alcohol, tobacco) are likely to be large acquirers, particularly since it is possible that their other businesses will fall off.  Pharma is reported as generally opposed to legalization.

General warning that there are “sketchy operators” in the marketplace and that one should invest in “professional best in class operations.”  This suggests the necessity for sophisticated investment advice.

What about the State by State legalization issue?  This is expected to be slow, sort of like States permitting gambling casinos.  Mention that the process overall could take years.

Finally, mention of an investment opportunity in “third party labs” necessary to do testing inherent in government-authorized marketing of cannabis products.  One has to look closely at the regulatory context of local labs.  Speculation that these labs would ultimately be the subject of rollups.


Set forth below are comments concerning the China gleaned from several different presentations.  Some may seem to be, indeed some may be, either or both of counter-intuitive and somewhat contradictory.  A few of these comments may be woven into other posts on the OPAL conference, but I thought it interesting to just do a mind dump about “all things China.”

There is initial skepticism concerning investments in China’s brand-new Star Market, described as the equivalent of the NASDAQ market in the U.S.  It consists mostly of tech companies and was designed to provide access to outside investors, but the market was described as lacking in “depth.” 

In so-called “A Shares” (voting and generally for company management) issued by Chinese companies, there is a 10% withholding to extract the money.

Clearly U.S.-China relationships have deteriorated.  The trade dispute should be ignored.  The U.S. will not sustain very high tariffs, and this is in any event unimportant.  The point is that the United States no longer looks to build China’s economy, which was a post-WW II goal.  It now views China as a competitor and will push U.S. supply chains to be disassociated from China.

There are general qualms, if there is a further deterioration in relationships with China, that a future dictatorship might negatively impact the flow of invested funds out of the country.

China is running out of workers.  They still have a 6% growth rate but it is over a much broader base.  Demographically China is suffering from increased divorces and decreased marriages.

In terms of long-term macro analysis, as between the United States, China, Europe, and “the rest” of the world, the United States is “least ugly.”  China will end up with a 5% growth rate and may create more aggregate economic value, but the United States is a better investment bet.

The United States can successfully compete with China, it is not an existential threat. 

China sends so many people to the United States to get trained in Western technology because its population is getting older and there are fewer workers to support the balance (is this a non-sequitur?).  China hopes to build giant companies to threaten the U.S. economy.  The United States defends against this in part through recently-improved CFIUS controls which require substantive review of inbound M&A transactions with particular focus on Chinese buyers; recently Chinese acquisitions have fallen substantially.

United States stock markets will continue to go up, or not, based on reasons extrinsic to the China relationship and tech war between the United States and China.

The current U.S. Administration is using national security issues broadly, particularly when it comes to China.  This has to do with enforcement of CFIUS as well as trade sanctions, Department of Justice indictments, export controls and tariffs.  Recent litigation has indicated that the U.S. will reach out to punish Chinese companies even when theft of IP is not involved.


At the Opal Family Office conference, a variety of alternate investments were discussed and sometimes pitched.  It was interesting to see that no “hedge funds” presented, nor were any recommended.  Herewith a checklist of alternatives discussed (without commentary as to the wisdom of any of them):


Medical office buildings (described as stable tenanted real estate investments with tenants in a growth industry).

Development of fully-integrated residential housing communities with a focus on creating a “quality of life” environment.

Biotech: recommended at a fairly early stage, particularly in the oncology, neuroscience and rare disease spaces; big pharma is losing money as major drugs go off patent protection, big pharma has reduced internal research and therefore is relying on acquiring promising biotechs at early stage.

Facebook’s new “Currency” called Libra: this was described not as a digital currency but as a digital ETF; Facebook was described as “becoming a digital state” where all your information and data will be concentrated there.  (Discussion also of Bitcoin, also to no consensus.)

PE and VC Funds: with volatility of public markets and high expense of going public, growing tech companies are seeking direct investments from the private capital markets.  Additional benefit for family offices is potential pass-through under Section 1202 of the Internal Revenue Code (investments in small businesses held for five years escape Federal tax upon exit; beware AMT and State treatment, however).

Opportunity-zone investments (can be not only real estate but also operating businesses within a zone.

Gold, with an asserted preference for mining and processing companies which were said to have the benefit of being value-added to the underlying commodity; it was claimed that in the “last four quarters” gold has outperformed the S&P).

Investments in companies which emphasize ESG, the current euphemism for “environmental, socially impactful and governance” quality practices.  Today, need not be a code word for poor IRR.  But also perhaps this is not useful advice as, reportedly, 80% of the S&P 500 already purport to be following ESG practices.


Several presenters at the OPAL conference discussed matters of alleged importance to the operation of family offices and multiple family offices.

As with any enterprise, it is important to avoid cyber risk.  In 2017, reportedly 28% of family offices were attacked, particularly by phishing.  The greatest risk is penetration through third party vendors or employee failures.  A two-factor password protection is recommended.  You are not necessarily entirely safe in the cloud.

How to think about the U.S. political climate?  One investment advisor (not clearly of the majority view) pointed out that generally the public markets appreciate over time regardless of the person or party in power.  Although historically in U.S. politics the party in power is supremely advantaged by a strong economy, it is not quite clear that this is the current case as increased political partisanships may have promoted issues of governance and immigration even above the economy in the voter awareness.

There was a discussion concerning “drift” by advisors managing funds with a change in focus or in emphasized sectors.  To some degree, it was thought that you want a manager who is awake to trends.  In this regard, a couple of presenters noted that they always try to discuss, with potential fund managers where an investment is contemplated, the views of the younger people in the fund team to see what is going to happen in the future.  However, a drift in manager “style” may not be a recognition of requisite flexibility but rather a harder-to-analyze change in world view.

How else do you diligence a proposed investment in a fund?  You need to talk to all levels of management in the fund.  You need to talk to other investors to see if they pool their knowledge and diligence in order to provide broader insight.  Diligence is best done at the point in time that a fund is being formed as opposed to once it is up and operating.  Seemingly implicit consensus that a fund of funds is not how family offices should invest.  Indeed, there is some suggestion that family offices, at least if bonding together in “clubs,” can themselves handle their own investment decisions and avoid give-up of cash flow and equity to fund managers.

Check a fund manager’s ADV filings.  If a manager is involved in multiple funds, how are opportunities allocated, will the manager have enough time to spend on your fund, will you be afforded an opportunity to invest in parallel, in a side pocket (often reserved for people early to putting money into a given fund or for larger limited partner investments).

There was also discussion about assuring the independence of the LPAC (Limited Partner Advisory Committee which would resolve conflicts between the LPs and the manager), and how to handle the now-nondeductibility of the fees assessed by a promoter in setting up a new fund (a couple of ways work for this; giving the manager a profit interest instead, or paying the fee outside of the fund structure).

Key issues in due diligence on operating companies in which you are considering an investment:  Is there a clear plan of profitability?  Does the term sheet provide sufficient deal control to maximize preservation of principal?  Do the founders have “true grit?”  In evaluating companies, family offices were advised to have and completely follow their own due diligence protocols and due diligence questionnaire items, particularly in areas not covered by the PPM. 

Finally, consider the role and percentage of “impact investments” which have substantial social fallout; often a way to deeply involve children into the family office and business.  Consider flipping the standard family office emphasis on public market investments, which can be volatile and pricey; one presenter suggested at least 60% of investments should be in private deals.  Rely on public markets only for investments in volatile new technologies such as AI, genomics and cyber.  Consider using AI and machine learning to judge risk; in the market, most changes are usually for the negative and “velocity foretells losses.”  Keep two to five years cash available so you need not be forced to liquidate during dips, and so that you have dry powder for buying opportunities.

The Global Economy/OPAL

Introduction: This post is the first of a series (presently of indeterminate length) based upon information obtained from the recently concluded Opal Conference of family offices held in Newport, Rhode Island.  These posts will be denoted at the end of the title of each post with the word “/Opal.”  At this conference, presentations were made by experts in economics and government, advisers outside and within family offices, and persons suggesting (or directly offering) a variety of investment platforms.  All “Opal” posts are based upon my notes of the relevant panels and my personal reactions.  The data presented has not been verified by me.  Nothing in these posts constitutes investment or legal advice on the part of myself or my law firm.  My firm was one of many presenting sponsors of the Opal conference.  To the extent I may make reference to cannabis investment, be advised that one of my law partners chaired the panel on cannabis investment on behalf of our firm’s substantial cannabis practice group.  This introduction applies to all Opal posts but will not be repeated.


Numerous panelists discussing numerous investment topics strongly concluded that investment in United States securities or opportunities was most prudent.

This in face of expressed fears that no one can tell where the economy in the US, or in the whole world is headed.  These fears came in two flavors: that the bull markets have gone on so very long and everyone knows that they are cyclical and at some point will fall either as a 10% correction or likely worse; or, there are identified fundamental signs that suggest that the markets must fall based on substantive business reasons. 

Specific citation to factoids indicating we are in for an adjustment or a recession some time soon (with no specific time horizon): trade wars; reduction in world trade; strengthening dollar harming exports; Chinese economic problems (aging demographics; debt; new American policy to consider China in the long term as a competitor and not an economy to be nurtured on humanitarian and US-profit grounds); European disunity (not limited to Brexit); rise of populist governments; European debt selling at a discount (“Europe is telling us something”); the gold markets (“Gold is telling us something”); return of quantitative easing on the part of central banks; central bank purchases of gold reserves; weaknesses in “other” markets; inability of other countries to generate unicorn giant companies with giant exits.

Not a lot of discussion of geo-political risk in specifics.  Not much emphasis on Brexit except as a symptom of national politicians needing to respond to local political and economic crises but being denied flexibility to do so by reason of “Brussels.”  Not much discussion of US national debt as a percentage of GDP.  No one mentioned robotics killing jobs or need for labor at all.

Specific citation to factoids indicating we are in excellent economic shape at least in the United States (you may note reasons directly contrary to some of the negative factoids): US technology and innovation; the American dream which will attract the best and the restless to the US over time to found innovation based on available investment capital and robust exit opportunities; the favorable US demographic future compared to other countries (a surprise item to me); lack of likelihood that tariffs will really be sustained at unacceptable levels and ability of the US to establish supply chains outside China (“Viet Nam is the next China;” less important supply chains for a service economy).

Most sobering thought, coming out of the ESG panel: an impassioned plea for companies and countries to address the nuclear weapons access situation: “If we don’t get this one right, nothing else matters.”

Who will lead the world?  The US and China (not a surprise) and very negative views of India (“70% of all cigarettes sold in India are by the single stick;” “the South may be fine but the North has majority of the population and no business”). 

Does seem to me that the dissing of India is a bit short-sighted.  India has vast populations and land mass and an edge into the English language and an entrepreneurial educated class.  It is a long life (assuming we survive the nuclear weapons issue) and it is hard to believe that India will not figure it out by planning or by accident or by dictatorship.