Joel Steinmetz is the COO and Co-Founder of Rialto Markets, a fully-regulated broker-dealer that empowers companies to raise capital through crowdfunding and institutional investment.
Matthew Carpenter-Arévalo is the Vice-President of Global Operations of Uhuru Network, a full-service digital marketing company with a specific focus on helping companies raise capital through crowdfunding via Regulation A (Reg A) and Regulation A+ (Reg A+) financing.
In this article, you will learn
- How Rialto supports companies considering raising capital from retail investors using Reg A financing.
- The benefits for companies and investors of choosing the Reg+ financing model.
- How Reg A helps democratize finance by enabling retail investors to invest in companies before they go public.
- What GameStop has to teach us about the future of finance.
This interview has been edited for clarity and brevity.
Matthew: Thanks for taking the time to speak with us today, Joel. Would you mind telling us about Rialto, the company you co-founded alongside Shari Noonan in 2017?
Joel: Sure. Rialto’s business is actually twofold. We are a FINRA broker-dealer. And as such, we help companies raise capital in private markets.
How do we do that? First, we provide an infrastructure that allows us to perform anti-money laundering services, including Know Your Customer checks. We vet each customer to make sure that they’ve complied with the necessary rules and regulations. We then oversee the production of external communications like advertising and marketing to make sure they comply with the rules and regulations.
Once our clients have raised money, we also ensure that the money is going from the investor to the escrow agent and from the escrow agent to the issuer by showing that the transfer agent is made aware of who the proper owner is based on the information we have. We set up payment rails to ensure that investors can pay through wires or ACHs or credit cards. All of that work is within our scope as a regulated broker-dealer, so we’re able to oversee it from a regulatory perspective and provide the infrastructure necessary to actually raise that capital.
Matthew: Tell me about the other side of your business:
Joel: As part of our infrastructure, we also have partnerships. Some of those partnerships are auditing firms, escrow agents, transfer agents, etc., but some of them are also investment bankers. We also have technologies that will allow you to spread the net wider to find investors. To be clear, we’re not an investor acquisition company, nor are we investment bankers, but we have a network of service providers and institutional investors we can put at our clients’ disposal. Our goal is to provide our clients with an ecosystem of vetted partners that can help them achieve their objectives.
Matthew: Rialto also has an alternative trading system (ATS), correct?
Joel: Yes. In addition to the services above, we also have an ATS, or alternative trading system, which allows for the trading of private securities in the secondary market. The way it works is as follows: once a company has finished raising capital, it may want to give investors the opportunity to monetize their investment. At the same time, they may also want to attract new investors that did not participate in their primary capital raise. Our ATS is an SEC-recognized marketplace that enables companies and investors to find each other and create liquidity for private securities.
Matthew: What’s an ideal client for Rialto? Is it operating with a specific vertical or industry?
Joel: Rialto is very industry-agnostic. For us, the ideal client is someone who recognizes the value of attracting the retail investor, supplementing that with some institutional investments, but recognizing the need to be able to raise capital through a diverse investor group, as well as doing so within the regulated environment.
Matthew: And how can you determine if a client is going to be successful?
Joel: Customers that are successful, generally, are going to have either one of two things, and we tell this to them all the time: “Either you have a fantastic fan base that already exists such that you can confidently say, ‘I already have 500,000 people that look at me all the time, and they’re willing to invest,’ or you are willing to put in the time and money into an investor acquisition strategy, primarily through digital marketing.”
Matthew: Are you working with more early-stage, mid-stage, or late-stage companies?
Joel: The stages now have expanded. Twenty years ago, companies stayed private for an average of four years. Now, companies stay private for 13+ years. It used to be that companies would have a seed round, followed by a Round A, and Round B, and then they’d go public. Now you see companies having multiple rounds, including A, B, C, D, E. Our client base is composed mainly of clients in the seed, A and B rounds. Much depends on how much money you want to raise: for example, Reg A+ allows you to raise up to $75 million USD per year. If you’re looking to raise several hundred million dollars, you are probably beyond Reg A+ and maybe you’re considering Reg D.
Matthew: What are the advantages of going the Reg A route?
Joel: There are several advantages. Let’s start with a couple of major advantages. The number one advantage of pursuing Reg A and Reg A+ is the opportunity to acquire a diverse investor base. A diverse investor base allows more control over your company and your strategy.
When you’re dealing with a VC firm, their main concern is “How am I going to make money?” and “Will I make the money in my desired time frame?” To achieve their goals, VC firms will exercise a lot of control over the company. When a company works with retail investors, they have more control over questions such as valuations and preferential stock. While the retail investor is also looking for a return, they may have different motivations as well and may be thinking about a longer time frame. MedTech companies are a good example: many retail investors have an emotional connection to the product and want to see it succeed.
Matthew: If a founder is working with VC investors, those investors are often bringing other things to the table beyond capital. Maybe they’re making introductions to talent, helping form strategic partnerships, etc. Are there similar benefits to working with retail investors?
Joel: Retail investors bring something different to the table. They operate more like a community. From a branding perspective, you’re turning your customers into investors and your investors into customers.
Matthew: Successful businesses are built on network effects. Working with retail investors is a way to supercharge the network effects that will, hopefully, allow a thousand flowers to bloom?
Joel: Right. What we tell people is that we’ve given issuers the opportunity to expand their reach to investors who are here and who never had the opportunity to invest. At the same time, we’re giving investors an opportunity to invest in companies that they could never reach before.
Matthew: What does the demand side of your marketplace look like?
Joel: From our perspective, remember, we’re the infrastructure that’s overseeing the marketplace. On the demand side, there are two types of customer bases. The retail investor base is coming to us not as our contact; we’re downstream from them, but they come into our system to invest, and we walk them through the process.
Then there are institutional investors — like family offices, for example — that are looking at smaller-level private securities, not necessarily the unicorns but small private securities. Those types of customers are often institutional investors like family offices. I should mention that all investors are coming into our platform through others.
Matthew: Tell me about some of the success you’ve helped your clients achieve?
Joel: We had a Reg CF that we just did. In September, we raised $5 million in about five weeks from about 4,500 customers. It was a great success story in and of itself, but what made it potentially even better was we are now involved in a Reg A and a Reg D for that same company. So a good example of repeat business, not just for us but for them. They were able to go from one valuation to a significantly higher multiple valuation of multiples to get their Reg D and their Reg A. Here is someone utilizing three potential private securities regulations to raise capital; it’s a wonderful story for them and for us.
We have another company that’s a cannabis company that struggled to get the correct approvals because cannabis has a lot of legal gray areas that entrepreneurs in the US have to navigate. We were able to put all the pieces together to get them the approvals in the regions where they could operate.
Matthew: Is there an international component to the work you do?
Joel: Companies that wish to take advantage of Reg A or Reg CF, for example, must be US-registered companies, even if their operations are elsewhere. Investors, on the other hand, can be international.
Matthew: It occurs to me that the model Rialto is helping enable has major consequences for wealth distribution. So much value creation in the US is captured by VC funds representing major institutional investors including family offices, pension funds, etc. What Reg A and Reg A+ enable is that retail investors assume the risk and reward for funding companies in the early stages of their growth. It feels like we’re on the verge of something big.
Joel: I think that’s it. That is the main advantage of what we’re doing: Reg A+ allows an investor base, a huge and vocal investor base, to get involved in securities they couldn’t otherwise get involved in before.
Matthew: Exactly, and this also has benefits for the issuer.
Joel: The issuer now has an expanded reach of potential investors. What Reg A is basically saying, which is particularly interesting, is that “This is a very sophisticated type of offering. It is an institutional type of offering. It needs to go through regulation. It needs to have audits. It needs all that stuff that institutions rely upon, but it’s enabling smaller companies to raise money from the crowd.”
Matthew: It seems to me that what’s really interesting about diversifying the investor base is that retail investors may choose to get involved with a company for three different reasons: maybe it’s the financial opportunity, or maybe they’re interested in the technology, or maybe they belong to a certain community that has a sentimental attachment to the company’s mission. As a result, the company has more options in terms of how to finance its growth, and what types of pressure they want to experience as a result of that financing?
Joel: Absolutely. So Shari (Shari Noonan) is our CEO. Shari uses that word all the time: community. Reg A+ is about building community. You’ve heard the expression “people vote with their feet.” In MedTech, people are also voting with their heart. They could be interested in a specific medical technology because they have a friend or relative who suffered an ailment the technology seeks to resolve.
In other cases, people are guided by their values: maybe they want to finance a company working on reducing carbon emissions, or meat consumption. We work with a vegan food tech company, for example. When people invest based on these premises, they’re voting with their feet and with their heart.
Matthew: We’ve seen the power of crowds manifest itself in lots of ways over the years, but it seems that only now are we seeing the power of crowds in financial markets.
Joel: Correct: GameStop is a great example (Note: GameStop here refers to a period of time in 2021 when retail investors aggressively purchased GameStop shares in order to negatively impact hedge funds that had bet against the well-liked company). If GameStop has taught us anything, it’s the power of retail. When you get the crowd behind something, it can move things in directions you cannot anticipate.
Matthew: Oftentimes we’re so invested in the world as it is that we miss trends. For example, we think people read less because bookstores are closing, when people have never consumed more content than they do now. We struggle to internalize narratives that don’t fit with our vision of the world. Similarly, when things happen in the stock market, we assume that there’s a larger story that points to a trend in society, but we forget that the stock market is a limited reflection of the larger economy.
What I am getting at is that when we open markets to new investors with different interests and motivations, we actually get a better understanding of the wider narratives that are happening in society and what people care about, because like you said, GameStop showed us that there’s actually sentiments that aren’t necessarily reflected in the stock market activity of institutional investors. In the case of GameStop, the company had a committed client base that was willing to risk money in order to defend the company, despite institutional investors betting against the company.
Joel: And there’s an addition to that. A while back, if something happened in the markets, as an average retail investor your reaction might be, “yeah, but what am I going to do about it?” Now, technology has enabled groups of people to say, “actually, we can do something about it.” All that is necessary is for one person to start tweeting, and he or she can build a movement that can rival the economic power of institutional investors. That’s a newfound power we’re only beginning to come to terms with.
Matthew: Something you said just made me think that there’s an opportunity here around valuations. If you have a larger investor base, obviously, you have more leverage to negotiate your valuations. But then if people are investing for a sentimental or a personal reason, that introduces a really interesting element in price discovery.
So for example, if I want to replant coral reefs, I probably have to go find a Richard Branson or somebody who’s going to finance that. But if I’m able to crowdfund this, then we can do some really interesting price discovery to say, “Okay, there are people who care about this. How much do they care about it? There’s that desire expressed in financial terms.”
Joel: Yes. In the primary market, many people are not as interested in the valuation; they’re interested in the upside. I wouldn’t say they don’t care at all, but they’re not as interested in the valuation. They’re looking at an investment and saying, “Is this a good story? And regardless of what it is today, is the stock price going to go up?” Even if I’m interested purely in the investment opportunity, not even the emotional side, the question is always going to be: is it going to go up? The fact that you valued it at $200 million when I think it should be $100 million is irrelevant if it’s going to go to $500 million; it’s still worth it to me. VC firms and a lot of institutions don’t always think like that. They’ll say, “No, the valuation is too high. It’s not worth it to me.” And a retail investor might still say, “I’m still going to make money. It is worth it.”
Matthew: And how do valuations play out in secondary markets?
Joel: In the secondary market, we also look at valuations and we use the term you mentioned, “price discovery,” all the time. Liquidity is not a good word to use in the secondary market. I tell issuers all the time, “If IBM, Intel, Microsoft came out with a 50-million-dollar offering, it also would be illiquid.”
So liquidity is not the right word; instead, we’re working on price discovery. We bring in research, including academic research, that gives the company a sense of the methodology, and then with a diverse investor base, including retail, institutions, as well as some liquidity providers, we’re able to provide a true sense of how much a security is worth, and with that information, companies can make a lot of important decisions.
Matthew: Is there a risk that companies become overly dependent on retail investors? I ask because communities can be fleeting. People who were passionate about GameStop a year ago may have moved on and care about other things right now.
Joel: Yes, communities can be fleeting, and people’s interests change over time. The advantage of having a secondary market is that people will be more likely to invest because they know they can monetize their shares whenever they want; they’re not necessarily locked in for a period of time, nor do they have to do a lot of work to find a buyer.
Matthew: Joel, this has been enlightening. Thank you so much for your time.
If you would like to connect with Joel Steinmetz, COO of Rialto, you can find him on Linkedin here. Matthew Carpenter-Arévalo, VP of Global Operations at Uhuru Network, can be reached on LinkedIn here.
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