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Episodes of the DEAL FLOW show

November 30, 2020

Episode – 25

Regulation A+ | Jobs Act and more with Rod Turner

Description

Rod Turner is CEO of Manhattan Street Capital, a world-class Reg A+ and Reg D fundraising platform. He has years of experience in the tech world and played a key role in building Ashton Tate (dBASE), Symantec Norton, and more. Rod is an experienced M&A expert and led the successful acquisition of PCAnywhere by Symantec. At Manhattan Street Capital he helps investors of any wealth level anywhere in the world to invest in private companies, through Regulation A+.

In this interview, Rod shares great information on Regulation A+, the Jobs act, and other topics. He explains how 2019 was a banner year for REG A+ and how it's only going to get bigger. He talks about what kind of companies are NOT Good for Reg A+. He speaks about how Reg A+ is being accepted in the Broker-Dealer Community. He talks about how offering decent dividends can increase interest in an offering. This is a great, albeit short, interview that you won’t want to miss!


What You Will Learn
- The early history of the Jobs Act and Regulation A+
- What kind of companies are NOT GOOD for Reg A+
- How REG A+ is being accepted in the broker-dealer world
- The best time to approach broker-dealers about you Reg A+ Offering
- What you can do to increase interest in a Reg A+ offering
- and much more


Connect with Rod:
LinkedIn

Full Transcript

COMING SOON

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November 25, 2020

Episode – 24

Pipe Deals | Capital Raising | Reg A | Digital Payment Kiosks etc.

Description

Bill Corbett is Chief Executive Officer at Innovative Payment Solutions, Inc. (IPSI) He cut his teeth at Bear Stearns, where he learned from the legendary Ace Greenberg. Early on Bill got involved in private investment in public equity, often called PIPE deals. He Co-founded PIPE pioneer and San Francisco boutique investment bank, The Shemano Group. He has raised over $2 billion in his career. At IPSI, Bill is focused on building a digital payment technology service business using self-service kiosks.

In this interview, Bill digs deep into Private Investment in Public Equity, also known as “Pipe Deals”. He explains what he looks for when evaluating deals. He talks a little about reverse mergers. He speaks about the effects of Covid-19 on the business environment. He talks about what he looks for when building a support team. He explains why “knowing your customer” is so important when raising capital. He talks about how Reg A is similar to a Pipe Deal. He goes into detail on his newest project, digital payment kiosks. This is a very interesting interview that you won’t want to miss!


What You Will Learn
- Private investment in public equity (PIPE Deals)
- Why you should return all phone calls
- Bill’s new project: Digital Payment Kiosks
- How to build a support team
- Do’s and Don'ts of Capital Raising
- How Bill evaluates deals
- and much more


Connect with Bill:
LinkedIn

Full Transcript

JP Maroney:

Greetings and welcome to another episode of the deal flow show. I'm JP Maroney, your host, along with my co-host mr. Paul, Nick Leni, from here at our team at Harbor city capital and the deal flow show team. And we've got bill Corbett from innovative payment solutions with us, and there's some history here. So this is going to be a fun interview. We're going to talk about what a scratch golfer. Uh, you are now I'm laying me on a golf course is like the whole Lori Bird. Uh, have you heard about the whole Lori Bird? Do you know what they are? The whole Lori Bird is a three foot tall bird that walks around in four foot tall grass saying where the hell are we? That's what kind of golfer I am. But looking forward to this, because I want to talk a little bit about your background and let's start there. How you got started in the capital markets. I know you had a career in investment banking, and then I want to talk about the project you're working on. Now, the company you're running, which sounds very exciting. We're looking forward to both on the show and offline learning a little bit more about that. So maybe if you could just back up a little bit and talk about where you got started and maybe some of the early bills that you cut your teeth on.

Bill Corbett:

Yeah, I would love to. And first of all, thanks, JP and Paul is so great to get reconnected with you. Uh, it's a pleasure to be here today. Um, but you know, if I could digress, I, uh, spent 32 years on wall street. Um, my, I cut my teeth at bear. Stearns spent about 10 years at bear Stearns and Lehman brothers, uh, learned the business from a legend named ACE Greenberg who, uh, was at bear Stearns for about 60 years. Uh, one of the great companies in the entire universe bear Stearns before the collapse, but ACE was, was an amazing guy. He taught you to have the utmost of integrity. He had a mandate at the firm that you call people back in 24 hours. And if you didn't you're fire. And so always in the back of my head, I, I have this complex where I have to compulsive.

I have to return phone calls. And it's amazing if you live by that motto that you pick up business, you never know what's going to happen when you are, you know, standing up and returning calls. And I, so I learned the business at bear and, uh, bear Stearns partner of mine. We started a, a broker dealer in San Francisco. I was a CEO for about 12 years called the Shimano group. And, uh, we were, uh, pioneers in the pipe space. I, uh, I know it's hard to believe, but there was a time where there was no internet and email and emails, uh, just maybe some of your viewers and your network. But the reality was, is we had to network, we had to use DNB cards. We had to use institutional rosters, S and P. And, uh, we were, um, kind of early, if you will, in mid nineties to the pipe space, I saw the internet coming, uh, and told my partners that if, if we don't pivot to something that has larger fees, we're, we're dead man.

And, uh, Schwab San Francisco company was growing enormously and we just felt that we had to change. So I think it's important as a businessman to keep your mind open. And, uh, you know, I, I heard one the other day. It was, you know, mine's like a parachute, you know, unless it's open it's it's trouble. So we basically pivoted to raising capital, uh, as investment bankers for larger public companies, large meaning sub 50 to sub $60 million market caps. Uh, Informix was trying to keep up with Oracle by cooking the books, unfortunately, and as they threw out management, the stock had dropped to about a $50 million market cap. We raised, uh, $50 million for them. It took about 10 days. And that kind of, you know, gave us a launch into the pipe space, both, uh, on our ability to execute the relationships that we garnered through that we brought credit Swiss in and a couple other SESCO Honda and a couple of other really interesting in smart institutions.

And we saved the company, uh, and ended up being sold for a billion dollars three years later. Uh, we leveraged that to do other pipes and we were, you know, historically I would say, you know, in the top two to three or four firms for S you know, almost five, six years and in the amount of deals that we did in the pipe space. So that was a, it was a great learning experience. We all had a lot of fun. We did a lot of good stuff for, uh, for public companies. And we use that as a, as a lever to, to do bigger and better business.

JP Maroney:

I have a couple of questions related to that, but I want to go back a little bit. You were talking about your early start at bear and ACE. You said ACE Greenberg. When you look at people like that, that you followed, what were the characteristics that you think made them a great deal maker, a great in their space.

Bill Corbett:

Very interesting, because he had the highest integrity I've ever seen on wall street. You know, his, his word was his bond. Uh, he was a magician, uh, and an expert bridge player. So he had a keen mind. Uh, he was one of those guys that, you know, was not, in fact, you waited with Ivy leaguers, you know, cause he was competing with Goldman Sachs for 60 years. Bear Stearns for 60 years, never lost money in 60 years, which is extraordinary if you go back to the depression. So they were very interested in hiring, you know, young, smart, um, aggressive guys that they really weren't going to fall back on, you know, some pedigree and, and not, and worry about making the call. So, uh, smart guys, but the main ingredient JP was integrity. He, uh, he just the truth and he was very simple in the way he approached everything.

He had some, uh, some great lines. For example, if you don't want to be misquoted bill don't give interviews. And, you know, he was just a, you know, a straightforward Midwestern guy that ended up in New York city and spent about 75 years there. And, and he was amazing too, in the sense that when he was young at 27, he had leukemia and he beat it. And so he was very solid as far as a positive outlook on life. Uh, very grateful, uh, had a lot of humility for being as successful as he was. And he was kind of the broker to the stars, you know, the big players, the Larry Tisha's, uh, some guy named Trump, uh, used to do a lot of business. You could hear the blocks going by, you know, 500,000 chairs, a Hilton, you know, in the eighties, that was a big deal. Uh, but he was a man of great integrity. And I think that's, that's the key to that, uh, to that business for him.

JP Maroney:

That's interesting what a Testament for those inner audience. And I know it's going to be some percentage that don't know what the pipe space is, as you say, it let's define that for them, because it's funny because we just got through having a conversation about this on Monday related to, uh, another public potential public offering, but walk us through

Bill Corbett:

Bill. It's certainly not in the plumbing industry, uh, but a pipe would be a, uh, public, uh, private investment in a public equity. And what that means is, uh, you're basically marrying up as an investment bank or a transaction where you're introducing, uh, a institution or a group of individuals to make an investment in a public company. And there's generally that, you know, in, in the days that we were doing it, there would be some restrictions as far as the rig D and having to register those shares. Uh, I know consequently we've seen, you know, one 44 shrink to six months, but back in those days, we would, we would put together a private placement. We would charge somewhere in the neighborhood of eight to 10% plus warrants, the investor, you know, you ask yourself, why would an investor do that? Uh, you know, the investors usually getting a discount to the current stock price, he's getting warrants.

Uh, sometimes he's getting a convertible debenture, so he'll get a coupon, maybe an original issue discount attached to that. So w the reason one would do that would really be to get the warrants, um, or maybe, you know, the stock's not quite liquid enough to buy a million or $2 million worth of the stock. So the pipe allows him or her to participate in a private placement. And the pipe space was pretty early in the mid nineties. Uh, it's become commonplace. And ironically, during the, uh, the baka we saw, no, Oh, what was it? I, it would have been, Oh one Oh two when, um, Oh, no, excuse me. It was 2008 when GE and buffet, uh, made those $5 billion investments. Those were actually done as pipes, you know, so it, it's a great way for, if you believe in a company to own a large amount of the stock, uh, usually you can get warrants with these transactions, which it's like buying two shares for the price of one. It gives you, um, you know, some, uh, steroids, if you will, on the investment, if it works

JP Maroney:

And that money pardon me, and that money is getting injected into the operating company, as opposed to placed in the public markets where the traditional purchase. Right.

Bill Corbett:

Absolutely. And, you know, the main thing from my perspective was being able to quantify the dilution JP, so that, you know, you could approach the board because, I mean, if you think about it, who's your real customer. And I've always asked that, I mean, is, is it the individuals or the institutions investing in the, in the, in the enterprise, or is it the enterprise and the company itself. And I always felt that, you know, you're going to do right by the Institute by the company, but you really are fighting for the investors because that's the people that you're going to represent time and time again, hopefully with other transactions. But yeah, the money gets, you know, basically injected into the business, hopefully for, for a good purpose and growth. Um, and it's, it is basically the, the hope would be that the company and, you know, due to contractual obligations would file a registration or an [inaudible] for those shares, as well as the warrants. So that if you're lucky enough that the stock moves off the discount that you bought it from, you know, over the next, you know, pick, pick a number 30 to 90 days, maybe a year, uh, you generally can make a lot of money if you're right. Right.

JP Maroney:

I was going to ask though, just from curiosity and maybe another perspective, what was the holding period on those restricted shares? Again, back then?

Bill Corbett: 

Well, back then, you know, Paula was 12 months, but you can circumvent that legally with the sec by filing an [inaudible]. So, you know, so many, you don't get a full review, which, you know, the sec could, could want to take it out a little bit further to get more information from the company. Generally, the holding period would be sometime between 30 to 60 days for one to get through the S want to get it, what's called effective

JP Maroney:

Reggae that you see some public companies doing now since they made it available to public enterprises. Is, does that technically qualify?

Bill Corbett:

So pipe, you know, I guess you could say that JP, I mean, I really liked the, what they've done with the jobs act. I think that it's opened up companies. It's been very difficult as you guys know for the sub 50 sub $60 million market caps to raise capital. I think that general solicitation, which would have thrown in jail and the nineties and the early two thousands, if the ability for the smaller companies to use reggae I think is, is, is excellent. You know, I think the new legislation that they're passing through for reg D to go from maybe a million dollars to raise as much as 5 million, uh, is, is really good news. You know, I, I, it seems to me, and I can't speak for the sec, but it seems like they've turned the corner and decided to allow smaller companies, more access to capital, including, you know, changing some of the rules that are in place.

Now they're trying to change, uh, finders finders, being able to raise capital for small companies, you know, w without being, uh, actually registered with FINRA or having a series seven or whatnot. So I think that's really compelling to me, it's an about face. Uh, and they're starting to look at this environment, which has been brutal as we all know, uh, other ways and, and backing off from the restrictions are small companies and providing them access to capital that we haven't seen before. And I think reggae is a good deal. Uh, I think crowdfunding any of these things, I think that enable companies to grab, uh, larger amounts of capital to grow their businesses. A good thing.

JP Maroney:

Shouldn't how y'all were going. You said institutional list, and I assume you mean, basically in those days you were banging out the phones, right?

Bill Corbett:

All, all the business was done on the phone, JP absoultely.

JP Maroney:

So have you, and I know you're, which we're going to talk about. You're running a public company now, but, um, have you personally, or with your colleagues seen this shift that we're hearing and seeing where road shows for example, or, you know, zoom shows now? I mean, it's and people being able to create an, almost an accelerated roadshow path and raise as much or more money through that, are you seeing the same thing people's willingness to shift and do business in a different way?

Bill Corbett:

I am. I mean, look, we all know that meeting if, you know, meeting people in person, especially if, you know, you're a somewhat professional is, is better than not at least in my opinion. However, uh, being in San Francisco in my whole life, I think you're seeing a sea change out here, which I think will be replicated if it isn't already, um, big companies. My, my, my daughter works for Facebook. You know, my son's at, at, at a company called indeed. And these companies are basically saying, you don't have to come back, maybe not ever now. And, you know, sure. Engineers, we're probably going to have to show up, but the whole dynamic is changing out here on the, I don't know about New York, but, you know, for example, LinkedIn in San Francisco is saying, there's no reason to have an office anymore, which is pretty extraordinary, you know?

And, and I think what you're seeing is that people are able, you know, to work on their own, to motivate themselves, to do they're seeing that in the last couple quarters, despite the COVID. And I think that they're more productive, ironically, you're not sitting in a car and then the Bay area traffic has gotten to be ruthless. So if you're in a car for three hours, you've got another three hours in the day to be more productive for your company. So I think you're seeing a sea change. I wouldn't want to be long, a lot of commercial real estate, some of these places, but I think you're seeing a lot of, uh, dynamics that have shifted to your point that it's okay, you know, to, to be on a, uh, um, a zoom call. And I think that, uh, things are getting done, which is great. And I think that maybe, you know, a year from now, after this thing passes and, and hopefully God willing, the vaccine starts working, we get back to going to conferences and, and meeting people. But right now, I mean, I don't see why one would want to get on an airplane and go sit with a couple of hundred people in a room to go to a conference.

JP Maroney:

Yeah. That is true. You know, we've talked to a couple of CEOs on the show and they found it to be very effective during the virtual roadshows. And yeah. And I think that, I think people are getting into that mindset that even when it starts to come back, it's like, where are their social skills again? Right. About the handshaking and about the, about the, the being at the bar and having to deal down at the bar and you know, all that stuff, maybe just history. I want to talk a little bit about the challenges with, as you said, sub 50 million market value, raising capital in the markets today. If I understood what you said in just a moment, but before we do, if you're watching or listening to this episode of the deal flow show, you can get access to our previous archives, our previous episodes, as well as subscribe, follow us, get access to us by going to the deal flow, show.com the deal flow show.com. And by the way, we're also now thanks to our team on nearly every audio and video platform in existence. So big kudos to the Duplo show team. And everybody that's been working behind the scenes on this, but, um, so bill, explain what you mean by that. And is this something maybe we could pivot towards what you're doing now? Is this something you've experienced personally as a CEO now of a public company, or is this just an observation in terms of the challenges of raising capital in the markets? If you're under that tier,

Bill Corbett:

I look, I think relationships are key. And when you've been around, as long as I have, you know, you have some pretty good relationships through the years where I look, I keep going back to integrity. I think my grandfather, who was a wonderful guy told me, you know, when you lie, you have to remember. So at a very early age, I decided that I wasn't smart enough to remember anything. So I'm just going to tell the truth, and I'm not the smartest guy, but when I'm dealing with there's an integrity factor and a transparency that I'm, I'm not trying to pull the wool over your eyes. I'm trying to give you as much information as I can about a particular company so that you can make an intelligent observation and, and decision to whether or not you want to invest in it. And that way, as long as you're, you're, you're working on the lines of integrity and transparency, you're building enough, trust that through the years, uh, you can keep, continue to go back to that, that institution or individual that you have this, this, this long history with.

So, you know, I've, I've been fortunate enough to raise, uh, over a million dollars in the last several months with some great institutions that I've known for some time. Um, I take a mindset that, you know, as, as a CEO, it's a war on capital, and it's a fine line that, you know, you have to balance the aspect of dilution with being a steward for the shareholders, because let's face it. I, you know, I worked for the shareholders and I'm trying to increase shareholder value. And w at what point do you take in some money and how do you deploy it? What's the best use of that money? Uh, and how do you, you know, raise money at higher levels? Because ultimately my responsibility, as I see it is to raise money at higher levels as we build a growth company. And so I think in this environment, you know, you have to consider all options for raising capital.

Um, and I have found that, you know, we've been fortunate with some, some pretty good institutions that want to help us, you know, with the company and let it grow and, and invest in it. Um, but that being said, you know, I, I think that you have to have good auditors, you have to have good lawyers. Um, I filed an S one recently and we got it through in about nine or 10 days. Uh, I think that's representative of the fact that, you know, we have good auditors. We have really good lawyers that, uh, you know, really know what they're doing. And I think that helps as a reflection of the company. And so I think in this environment, you know, you just have to continue to network. You have to, uh, continue to work on, on existing and new relationships. And I think it's, you know, it's, it's a knife fight in an elevator.

You just can't stop. You just have to keep, you know, almost evangelically talking about your mission, what you're doing. And, and I really don't judge JP fall. I, I try to tell the story the best way I can and, and see if there's an interest on the other side to help us, you know, grow the business. So I think this environment is, is a tricky one, but I think it's getting better. Actually. I know that sounds strange, but I think the buyer and the environment is getting better, low interest rates, public companies, you know, offer as an alternative investment, a little bit of a turbocharge to your portfolio. And especially in the form of private placements,

Paul Nicolini:

You've raised a lot of money bill in your career, and you've, you've answered really a lot of this next question that I'm going to ask you, but what else can you tell our audience about the do's and don'ts in capital raising.

Bill Corbett:

I know it's not an exact science and, you know, it's, it's hard to make generalizations, but, you know, I think there are certain things that, that you can do. I mean, if, if for example, I, I, I don't know, I've probably raised over a billion dollars in, in 30 years and, you know, I never was one to charge upfront fees, you know, I just always wanted to base, you know, everything on my performance. Yeah. I just, I just, I was always, uh, a sports guy and everything to me is a microcosm of sports and it's about performance and you're only as good as you know, that the last game you pitched and I just felt coming into a new relationship, it'd be unfair for me when you don't know my firm or made to say, give me $50,000 and I'll go do the best I can for you.

And then, you know, 30 to 60 days later, for whatever reason you've failed. And the guy says, what did you do for the 50 grand? And, and so I felt that would be very hard to, uh, to justify. So when it comes to raising capital, you know, I felt that, you know, you really want to be performance-based and, and running a broker dealer or having the distribution of the BD, uh, you know, your reputation is, is really, you don't think about that at 25, but, you know, luckily if you did, when you're 35 or 45, your reputation is key. You know, it get in your word gets around the way you treat people, um, is, is prevalent in a lot of different ways. So I think it's important to treat people fairly and honestly, and it gets back to of course that, that thesis of integrity.

Um, but you know, I, I just think that you got to know your customer to guys. I think, you know what we did really well, Paul, when we worked for you and, and running the BD as a CEO, I knew what my customers wanted. And really as a salesman, kind of as an investment banker, you, why sell your customer something that they don't generally do? It's like swimming upstream. So if I know my customer likes liquidity, then I'm going to find companies that are liquid and these aren't real estate plays. So if I can bring them opportunities that are liquid, you know, that gives them an opportunity at some point down the road when they want to get out of the position that they can get out. And, uh, I think knowing your customers is really important. Um, and I think that the ability is, uh, as a banker to be able to quantify dilution is key because are a lot of characters out there.

And if you can't quantify dilution to the board, uh, I think it's, uh, something you might want to pass on, because I think it's important that you have fixed price conversions, fixed prices with board's ability to say, should we do this transaction or not? Because I think that the contingent liability going forward is sure if the stock goes up, it's great. But if the stock goes down, it becomes, you know, uh, not so pretty when someone's converting stock it, you know, tens of millions of shares into your company, because you really should be able to quantify dilution. I think that's important.

JP Maroney:

Like your mindset of performance based years ago, one of my mentors said to me, he said, JP sales is the only profession where you get paid exactly what you're worth. And I think anytime you can connect what you do to performance, it puts you in the, in the yoke with whoever it is that you're working with. You're both pulling for the same success. And I know at, at one of the statements we make to people here at Harbor city, when we're looking to partner up with a company, as we say, you know, we bring together and give people access to resources, capital as well as new customers, which are the things that companies need to grow. It's what they feed on. But we also say we don't meet our lunch money. We know where our lunch money's coming from. We want to win when you win and we wanna win when you succeed, we all succeed in a big way.

And I liked that, but, but that also puts the, the pressure on you to evaluate and choose deals appropriately. So we only have so much bandwidth. So how do you, how do you evaluate, and I'm going back again to your previous work, but how did you evaluate deals? What is your process for defining? Is this still right for us? Is that the right time? Is it the right market? I get the, are these good people? And I get the whole bet the jockey thing, but, but how do you evaluate the deal to make sure it's worth you putting your energy?

Bill Corbett: 

That's a great point, right? And, and as agreed animal, because most of us on wall street are, you know, where's the path of least resistance to get paid, you know, and selfishly for me, because I started at zero every year, like a lot of us did, uh, where can I get paid? Where can my customers actually be put in a position where one I can get paid and might not be the priority maybe second to where can they make the most money possible? And Jack's would always say, you know, I, I'm a visionary and I, you know, I, I'm looking for the big, the big move up on growth or whatnot. Jacks. We're always look for fixed assets on a balance sheet and what the heck do I need you for? We need you for, for that. And anybody would lend money against a good, solid, fixed asset.

Let's go find the hard deals. And when they were, you know, they're extraordinary, they're 20, 30, X and 12 months with warrants. And I was fortunate enough to be in several of those. And it's a great feeling, JP, when, when you make people money, you know, when they make that kind of money and as a banker, you know, there's a lot of Goodwill in that, you know, when you make somebody 10, 20 times on their money in 12 months, six months, they tend to want to do your next deal, you know? And so it makes your job a little easier when you got a little wind at your back and you've had a few, uh, you had a winning streak.

JP Maroney: 

Fair enough. So how did you evaluate the bills? That was my question.

Bill Corbett:

First and foremost, I would, I would look at management, uh, and we would do due Dili on management, you know, and make sure there's no skeletons. Um, we would look at the dynamics of the stock, go through the filing. So you would alert. Shareholders are see when the last time they had filed a Ridge statement. So we would do an extensive amount of due diligence. And I would look at it from the eyes of the investor, you know, I mean, is there a significant upside, uh, is there some inflection point coming in which case, you know, maybe there's an FDA approval coming and the stock might rocket. Um, and so when you start looking at those things and you put them all together, then it gets down to, should I put my time and energy into this, into this company because you're right, JP, I mean, time is money.

Your most valuable commodity is your time. And what's the opportunity costs. And going down that path with someone that doesn't work out and you missed, you know, the next 10 X. And so that's always in your mind, I, I think the priority would be the individuals. I really think that the, the people that have had a track record of executing are the guys that you want to bank, you know, and I've heard this before and, you know, I'd rather have, you know, a, you know, a quasi questionable kiddo opportunity or technology with a world-class operator than phenomenal technology with a average operator. I think you can set yourself apart by piggybacking on guys that have had a track record. And, you know, I mean, look at anything from Steve jobs, Apple was almost bankrupt. He comes back. I don't think it's an accident, you know, that it does so well. I think that if you look at Elan mosque, not that I got the opportunity to invest in anything you had. Cause they're all billion dollar companies. But if I was a Goldman Sachs, I'd be riding, I'd be riding Elon Musk, you know, coattail the whole way he was a guy just doesn't seem to make mistakes. You know, he's, uh, he's almost like Marvin Davis, you know, in the, the new century,

JP Maroney:

You know, you talk about your sports analogy before too. You can say it right. How does a coach go from one team to another? And all of a sudden that team is at the NBA finals in the world series and so forth.

Bill Corbett:

Yeah. It's very true. I mean, I know talent has something to do with the team, but there's a reason why they're always in the playoffs. There's no question about it.

JP Maroney:

Then I'm going to ask, I normally don't like asking questions. I don't know the answer to, but there's a book I read. There's a book I read. I actually went back and read re-read this book several times. Over the years, there was a book called honor roll by Howard Jonas. He was the guy that started the callback industry many, many years ago. Um, he owned, um, I think it was prodigy for some period of time, but way, way back. But he had a chapter in the book called golden the gutter. And I've always been fascinated by this and we've had personal experience with this, but he said some of the best people he ever added to his team were people who were exceptional performers were great operators or whatever their core skillset was within an organization. But for some reason they'd gotten kicked to the curb could have been Oh eight Oh nine financial crisis.

It could have been getting in bed with the wrong people, whatever it might've been, but they'd gotten kicked to the curb. And then he had found some of his best talent in the gutter, basically that golden, the gutter. How have you been able to over the years assemble the teams for the particular projects? What do you watch for, and not just the leader or the operator, but the kind of people that you bring together for deals. How have you built the network? I mean, can you give us some sense of how you've put together that roster?

Bill Corbett:

Yeah. I, I think that, um, you're certainly looking for, you know, hungry guys, um, or gals, you know, I think that, uh, you want people that have, you know, had some success somewhere along the way. Um, they, they work together. They, they share a common theme, which is they're street-smart and book-smart, um, humble. And, uh, they generally tell the truth. You know, I think it's really important to be surrounded by people that, uh, are constantly trying to do the right thing. It's a wall, Street's a tough place. You know, you've got regulatory constantly with FINRA and the sec, and you want to always be compliant. I was very fortunate. I was never sued and didn't have any customer complaints. And not that I was better at making people money. Cause I certainly wasn't. But you just try to always surround yourself with, you know, a team of guys that are smart, uh, and that know what they're doing and bring value add.

And I think people's skill sets vary from person to person. Um, and so if you can find talent that fits into a group of people that share a common goal, which is to increase market cap, uh, you know, then everyone wins and it, it truly is rewarding. It's a great feeling. When you fund a company, the investors work, maybe they have a product that, you know, helps leukemia patients or, you know, they have a product that helps the consumer in some way. So, you know, I always felt that, you know, when I early in my life, I wasn't sure if I was going to get into wall street or if I was going to go sell insurance. And I just felt like, you know, the opportunity on wall street was amazing to me because, you know, I, I started gambling as a golfer when I was young.

And to me, you know, wall street was a little bit like that, but each day was different and you would meet companies and CEOs that love what they're doing. They're passionate about it. Uh, they give their life to it and they're committed. And, and I like people like that, you know? And, and so I would constantly look for people that are like that. And then I would continue to, to make sure I was available to them. I would continue to perform any way I could for them with my brokerage firm, like you guys, having all kinds of ancillary relationships and that can augment and help build the business. And they get all of that under one umbrella, if you think about it. So in theory, you're, you're setting yourself apart from a lot of your competitors because of the way you handle yourself. And because of the things you bring to the table to that particular company, and I would try to do the same so that we would have multiple bites at the Apple to help them fund round two, three, four, sometimes we'd have four or five, we'd take them public.

We do reverse mergers back then and we'd take them public. And then we would have multiple transactions. And if they execute it, they made you look smart. And now all of a sudden you're doing trades that, you know, that were two or three or four or 5 million, you're doing 10 and 20 million transactions at multiples where you did the first one years ago. And you're basically doing that. Not only because it's, you know, it's, self-serving, however, you don't want to lose that customer to a Goldman Sachs or a DLJ, or, you know, Morgan Stanley that are starting to come down to where you live, which is the micro-cap world and when they are not doing so well, the last thing you want to do is see, you know, your competition with an, a bold bracket, uh, that might have more resources than you. So I think that, that you're protected through the relationships that you establish.

JP Maroney:

Interesting. Um, I want to get into innovative payment solutions before we run out of time. Before we get into that, uh, once again, if you're watching or listening to this episode of the deal flow show, you can get access to our archives, our previous episodes, as well as subscribe and follow us and get access to our future episodes by going to the deal flow show.com. That's the deal flow show.com and okay, so bill Corbett, innovative payment solutions, let's talk about today, what is the business that you're running? And it's a disrupt in my opinion, a disruptive technology and, uh, serves a great place in the market. I want to talk a little bit about that and maybe where you're taking the business.

Bill Corbett:

Sure. I appreciate it. Thank you very much. So, um, when I was an investment banker, I took a company public called [inaudible], uh, which was deploying, uh, let's call it kiosk in Mexico. Uh, and we spent about five years. Uh, I helped the company brought in public raise capital for them, brought in some advisers and tried to help any way I could, um, and built a business that was using about 2 million Mexicans, uh, in the network to send digital payments in Mexico. Um, and it was very, very, uh, compelling in Mexico because there's long lines to, you know, make utility payments or to make micro, micro loan payments. And this kiosk, which was a very sophisticated machine, had the ability to do that. Um, we sold the business last year, did about 11 million. We saw an opportunity to grow a FinTech out of Southern California that would focus really, uh, JP and Paul on the, um, what we call the underbanked and the unbanked.

And what we mean by that is these kiosks are extremely sophisticated. So one could pay a utility bill while they're standing in Los Angeles for their dad's utility bill in Mexico city, uh, top office cell phone. Uh, so we're in the early stages of building a FinTech. Uh, we find it, um, very exciting because these kiosks can operate as a, as a bank, if you will, uh, for the unbanked or the underbanked, uh, there's uh, more than 12 million in Southern California, all the way up to where I live. Uh, I live in pebble beach and run the business out of Southern California. But if you think of the bread basket of Salinas, uh, all the way down the San Joaquin Valley, you know, 80% of the fruit and vegetables are grown, uh, in this state. And with that there's $40 billion a year being wired to Mexico, $40 billion, and of which, um, a large part of that comes from California.

So our objective really is to deploy kiosk, uh, in the next several months, that operate as, um, what we would call a digital wallet. Uh, it has the ability, the machine will have the ability to kiosk to wire money to Mexico. Uh, we were, we want to create our own stable coin. It's a dollar back stable coin that we can send money to Mexico with, uh, that we feel would use blockchain in a closed loop. We think that's very, and you know, when you look at the macro side, guys, this is a population, the under-banked and unbanked that hasn't been treated too fairly by, uh, the, the Ola gobbly of, of the big conglomerates that have, um, charged a lot of money, uh, to send money to Mexico and around the world for 20, 30 years. Um, so we see this as, uh, convenient having a kiosk where they can do these things, uh, price competitive, where we think it could be cheaper than anything in the market.

Um, and we think that it'll settle quickly and within a wallet, we have the ability for them to put money in the machine. We have these, uh, aggregators in Mexico that were, we have this long legacy with, for five years. Um, but it with any wallet and they download an app, they'll be able to send money while they're sitting on the couch and not have not have to run out to the money transmitting businesses. And, and, um, we think that's, that's a really good point. So we're, uh, we're building a FinTech. We think as a pub co guys, uh, we have many opportunities to, uh, add ancillary businesses and roll up some businesses into it. Um, my goal, you know, which is what I, my dream would be to build a two to $300 million company in the next couple years and, you know, be successful at helping a group of people that could use a break and, and get a piece of this 40 billion a year. That's going to Mexico.

JP Maroney:

It's only us down. Or do you see this spreading out in other markets? We've had some recent conversations with our banking contacts and the whole buzz in Honduras and Guatemala and everywhere is contactless banking, contact lists, um, subsidies contact with bill pay everybody because of COVID, it's driving, obviously driving this. Do you see expanding? Where, where do you see it headed to get to that two to 300 million?

Bill Corbett:

I see, you know, the world is wide open. I think you could send money to Mexico. You could send money to India. Uh, like you're saying Guatemala, I think there's, there's many different avenues for us to explore. I think there's plenty of business here to build a remarkable business just in Southern Cal, up to the central Valley and, and Salinas. Uh, however, you know, if, if you look at the macro side, uh, you could become really a distribution hub. So one comes up to the kiosk and they want to buy a lotto ticket in Mexico. They want to pay their dad's cell phone bill in Mexico, and they hit a button. Uh, maybe they want a microloan, which I know is, is kind of a dirty word, but, you know, the reality is, is if you do it right, you're providing a good service. So let's say you want to get into, you know, betting on NFL games in one day.

So if you have a thousand kiosks throughout California, you know, you wake up one day and you say, Hey, I think the shareholders would benefit from having this in the kiosk. And so the kiosk really is, is in the path of their lifestyle, wherever that is, and a grocery store or a liquor store. And so I think if you get in with the right influencers, guys, you can spread like wildfire, if you're competitive, uh, and it settles quickly. I think there's all kinds of different businesses. We can grow out of this, but it starts, I think with, you know, developing a brand, getting them comfortable with sending the money to Mexico and, and on the other end, maybe, maybe it's cheaper. I went on the receiver, receiving it, and it's easier for them with their, the way that they, um, they conduct their business.

JP Maroney:

You currently have the kiosks, or where are you in the process?

Bill Corbett:

Uh, we have 60 kiosks in a warehouse in our warehouse, in Southern California with COVID. It kind of slowed us down a little bit. Um, however, when I look at the what's going on, the, the remarkably, the wire remittance business to Mexico has gone up about nine or 10% year over year during, despite the, the virus and, and the COVID. So I think what we're seeing guys is, you know, people that do essential jobs, you know, that they pick our, our lettuce and it, you know, do jobs that are essential, uh, on the front lines and they have money and they're making money, and they're really committed to sending that money back to Mexico for their families. And so if we can help them with that and make it more convenient and cheaper, uh, we think we could, we could grab market share. And ultimately we think we can build a, a really compelling business around it.

When, when do you see yourself deploying these kiosks? I would say to you that in the next 60 days, the next 35 to 60 days, we'll be deploying, uh, we've got some great advisors that are helping us. Uh, we've got a great law firm that's into blockchain technology, uh, advising us on, on, uh, what we should be doing, because it's imperative that you're compliant. Uh, obviously in everything that one does, you should be compliant. I think life, uh, is a lot easier that way. Uh, and so, uh, we're making sure we have good counsel, uh, on making sure that, you know, we're doing everything the right way, because if we build it properly the right way, uh, we think will thrive. And there's no reason to do it any way, but the right way. So it's taken a little longer because of COVID, but, uh, very people are very receptive to wanting to put the kiosks in their businesses. Paul, what are you

JP Maroney:

You considered, you're not a bank. Um, what, what technically, how are you classified as a business? Well, think we were

Bill Corbett:

Really fitting into the mold of the FinTech, JP. Um, you know, when I look at some of these companies, uh, it's a hot space, uh, square in San Francisco. Uh, I've watched grow from an, from an early day. Um, I, PayPal is killing it and I'm not in any shape comparing us to PayPal, but, you know, they've gotten into the, the money remittance business, uh, they've really hurt MoneyGram and Western union. Uh, they're very good at it. And I would say we're a, or a startup, that's a FinTech, um, that, um, is into digital payments and finding the quickest, cheapest way to make payments, uh, abroad.

JP Maroney:

Well, the reason I asked the question and I don't know how deep you want to get into this or open this can of worms on, on the air, but, you know, the cannabis industry is historically one of those unbanked or underbanked industries because of the federal guidelines or the, the, the, I guess, uh, conflict between state and federal laws. Right. Um, but in, in a reality, you're sort of an on-ramp to digitize cash, right. And, and if you are an on-ramp to digitize cash, do you see a future for y'all in that cannabis industry? Is it sorta like you're okay if it happens, you just don't want to know about it, or is that a, is that a serviceable? Um, because, you know, obviously with patriotic and all those are the things you're, you're dealing with certain limitations and caps and all of that, but I could, I could, I mean, I know these guys, some of these guys that got, you know, pallets of cash, they're paying their taxes in cash. They're paying their employees in cash because they're unbanked. Yep.

Bill Corbett:

I it's a good point. I mean, I, being in California, I would welcome it. Um, I've had discussions with banks. I think ultimately if we could find a partner in a bank that was wide open, I know that's a slippery slope with the way the feds look at it, but if we could find a bank, we could really help the cannabis industry. I want to focus on proven the platform, uh, in the short term with money remittance, uh, and payments and a distribution system. But I would think as an adjunct, that's a, that's a phenomenal business. Absolutely.

JP Maroney:

Yeah. And you're speaking my language when you talk about having a platform and then looking at that platform from a perspective of monetizing with multiple opportunities and offers so many businesses, they get the blinders on and they see their particular product that they're selling that product. They're going to go look for more people, as opposed to saying, here are the people I'm solving problems for, what are the other problems that I could solve for them from, for those same people, with a singular acquisition costs and kudos to you and innovative payment solutions for what you're doing. I wanted to ask though, bill, are you guys the middle of any kind of funding round right now? Are you looking for capital, right?

Bill Corbett:

Not right now, but you know, Paula, as, as we talked about today, I mean, I think one has to keep an open mind and to raising capital. I think I, you know, in 30 years, I can't remember saying a CEO looking at me saying, bill, I don't really need any money today. I mean, I'm just amazed at all of these different businesses that I've funded or I've gotten to know they all need money all the time. Um, so I would say to you that I'm, I'm, I'm always looking for partners to help us grow. Uh, um, I'm trying to expand eyeballs. I, to me, I think liquidity is key. I think it's the lifeblood of a pub coasts. And I think that one has to keep an eye on making sure their stock is, got eyeballs on it and you're relevant. And, you know, you're putting out, you know, press releases that are, um, completely compliant, but that are in an orderly way informing the shareholders or, or people watching yet. So I would say to you, I'm always, I'm always open to looking at ideas, uh, especially, you know, if we can, if we can execute, then we get the stock higher through that execution. We raising money at less diluted values. Cause down here we're, we're a small company, but I'm a little selective on, you know, opening the flood Gates down here. But that being said, I'm always open to, uh, discussions about capital

JP Maroney:

The deal flow show team sits at the center of deal flow. And like I said, we have resources, capital sources, um, people with opportunities. What kind of people would you like to hear from, from our audience or be introduced to Daniel Panorama, our producer, Paulie and our set myself. Um, and then what's the best way to reach out to you?

Bill Corbett:

You know, I, I would say my website would probably be the best way to reach out. Um, I'm, I'm very interested in expanding my network. This is the first time I've been a CEO after, you know, 30 years on wall street. So, you know, I I'm, I'm open to people that you think they can create value for my shareholders. Uh, I, I've got an advisory team that I'm putting together that it's, it's exceptional. They're wonderful guys. Um, they have great track record, uh, anything that I can do to, uh, uh, raise, I guess, you know, raise awareness to the company, uh, would be good for my shareholders. So, uh, I'm, I haven't really done much at all on IRPR I'm going to start to look to kind of do some of that stuff as we get ramped in here. Um, but I would say to you guys that, um, anyone that you know has a track record and it looks like value add I'm, I'm always looking to try and increase shareholder value.

And I feel like a coach in a way where I'm, I'm gathering advisors and people to the team that I think make us a great ball club, you know, and hopefully with aspirations to, to play in the playoffs and, you know, eventually win a championship. My, my goal is, is to make the shareholders a bunch of money and see evaluations that make us proud over the next several years. That's kind what, what I'm doing. It's my full-time position that I live and breathe in. And hopefully we bring the right players to help us do that.

JP Maroney:

Are you going to make your acquaintance looking forward to offline conversations as well? And seeing what value we can add to innovative if you're watching or listening to this episode of the deal flow show and you're thinking, Hmm, maybe I'd make a good guest for this show, or maybe I know somebody who would be a great guest for the show, be sure to reach out to us@thedealflowshow.com. Of course, when you get there, you can also subscript subscribe, follow us. You can get access to all of our previous episodes as well. On behalf of our team here at Harbor city capital and the deal flow show team, mr. Paul Nicoline of JP Maroney, bill Corbett, innovative payment solutions. So good to have you on. We'll see everyone in the next episode. Thank you

Comments

November 23, 2020

Episode – 23

Real Estate - Opportunity Zones, Covid-19 Effects, Tax Benefits

Description

Jay Soave is a Managing Principal at Cadence Capital Partners, LLC. He is responsible for raising debt and equity for real estate projects nationally. He is well versed in all asset classes, including those in opportunity zones. Jay has structured, negotiated, and closed sophisticated transactions for 16 years, representing over $15 billion in gross value. He specializes in JV structuring, Opportunity Zones, and REIT taxation.

In this interview, Jay goes deep into many aspects of the real estate market. He talks about the tax benefits of investing in real estate. He shares his due diligence process when looking at multi-family properties. He talks about opportunity zones. He discusses how he deals with failures and setbacks. He talks about Covid-19 and it’s effects on the Real Estate market. He shares his secret sauce for building a database of high net worth investors. If you have an interest in Real Estate this interview is a must see!


What You Will Learn
- The Future of Opportunity Zones
- Building a Database of High Net Worth Investors
- How Covid -19 has affected Real Estate
- Multi-Family Real Estate Metrics and Due Diligence
- and much more


Connect with Jay:
LinkedIn

Full Transcript

JP Maroney:

Well, greetings and welcome to another edition of the deal flow show. I'm JP Maroney, your host, along with my cohost, mr. Paul Nicoline from here at Harbor city capital. And we've got Jay Solvay on the show with cadence capital, and I'm want to jump into real quick. And I've done a little bit of research talked to you, uh, in advance through our team and want to learn a little bit about how you got started in the capital markets. And then we're going to kind of dive into big inside your knowledge of how you put deals together, your process for vetting things and what the deal breakers are, what the deal makers are for you. So, Jay, let's go back a little bit and talk about how you first got started in the capital markets. Yeah, so, uh,

Jay Soave:

A bit of a unique route. So again, thanks for having me to, uh, enjoy being here. So, uh, I was an attorney for 17 years, um, and, uh, had always had an eye on doing something different. And, um, my, my goal was to get into something and the private equity and the VC side of things always been a deal junkie my whole career. And, uh, in 2009, I got a job in New York city at a Tishman Spire, a pretty large real estate, private equity fund, and working on all sorts of transactions. Uh, they had done a lot of fun work, but uh, really started to moving in the one off joint venture type, um, developments and acquisition platform. And so basically that's what I do now. And, uh, through the course of that, I was always looking for a, you know, an opportunity to try to do something more on the business side. And when my partner in very long time, friend Michael Bennett started to think about starting an equity arm for a cadence. Uh, we continued to talk, I mean, we have been talking for for years anyway, and it was the right time. And so, uh, jumped ship in, uh, the beginning of 2018 to join him in building the platform further. And it's been a fun ride.

JP Maroney:

So when you make a big shift like that, after having been on a career path, the way you were, what were some of the biggest ahas or things that you didn't expect coming in?

Jay Soave:

Well, I think one of the biggest things is just, uh, there was, I will be Frank. It was a lot of fear of frankly, I've done this before. You know, I had went from a, a position where I was a passive, you know, things came to me and I dealt with them and certainly working in house was better than, you know, in my view, uh, at a law firm, at least then I had more control. I saw things from beginning to end. It was kind of my show to run things, but, uh, still wasn't really called on to kind of go out there and make it for myself. And so, you know, leading up to the time when it actually, I was a little bit petrified. Um, but, and, you know, I think when I first started, I was probably terrible. And, uh, but over time, what you just learned is that, you know, you put in the work you put in the time you make the calls and you get better and you get better. And, uh, the end of the day ends up, you look back and it's like, this isn't scary at all. This isn't a problem at all. And, uh, you know, I'm very glad that I did make the move. I've got a great boss.

JP Maroney:

Is there a specific area of the real estate that y'all gravitate towards? And then how have you seen that effected by this COVID post COVID?

Jay Soave:

Yeah, so we are, we are asset classic agnostic. Uh, that being said, uh, and we'll do acquisition deals and development deals, but generally we're, we're seeing most of our work is on the development side. And, um, today it's probably primarily multifamily and economy is the biggest asset class anyway. Uh, so those are probably where I spend the most time, both pre and post COVID. Uh, we also do opportunities though work too, but excuse me, it's not exclusive. Uh, it, it really was. I, I left it out and I was a tax attorney for those 17 years and in house. And so kind of when this came about, I just saw that it was a very, very powerful program and we should, should get involved there. Um, and it kinda really played into our strengths of our database and how we run our process. We can talk about that later.

Uh, so we do that to a COVID has affected a lot and, um, it really hasn't changed our focus all too much, other than continuing to be selective at our process. Uh, we, we, we have a screening tool that we put together with the MBA students from the university of Michigan. They have like an internship program that they're all required to take, uh, that helps us to look at the factors that capital finds important. So we connected them with some family offices and investors and developers give him a crash course and then sent a survey out to our sponsors to help us weed, these deals out, uh, because we work on a contingency basis and, uh, I don't want to work on things I'm not going to get paid on. So, uh, but that also helps us to, to make sure that we're taking on deals and we're beating up deals before we take them out.

We don't find the landmines three months into it, four months into it. And I think what's happened today in the postcode world is that there are groups who are, you know, kind of sitting out, waiting to see what happens because they think maybe there's going to be more trouble coming. Uh, you haven't seen a lot of it yet. Uh, and that might just be a factor of, there's been a lot of government intervention, like while you can't kick people out and you can't do this. Um, and we'll see what happens with that. And there's certainly been a lot of fiscal stimulus to date, you know, what happens in three or four months from now, and that doesn't take, I'm assuming that will take place, but, uh, regardless of what happens and, um, and so it just caused a big upheaval. And so people are just being, either sitting on the sidelines, waiting for the other shoe to drop, um, coincidentally, that's what happened in April.

They're like, Oh, well, you know, it's fine in April, but may even be worse than it ever did now will amaze fine. Maybe June is going to be worse than never did. Um, so it's been pretty resilient to some extent, but people are much more cautious and there's definitely a preference for existing product compared to development product. There's, uh, certainly multifamily and industrial are more preferred. I mean, hotel and retailer kind of a mess right now, retail is already a mess. It's just more mess. And, uh, office is the big unknown. And because it's a big unknown and how it's gonna play out, it also is not getting a whole lot of traction. And so, um, at the end of the day where we're just concentrating on the things that we think people are going to be interested in, and that's multifamily and industrial mostly so matter medical office as well.

JP Maroney:

You talked about office. Yeah, I saw the other day, I think it was California, an article I was reading about where they were dumping massive amounts of sublet office space into the market. Um, that certainly we've seen it. I mean, you're coming in virtually with us, whereas we would love to have you here on the set. Um, lot of people are figuring out that they can do business remotely, where it was an option before it became a mandate. And now I think many, many people will never go back to the way things were before. Um, incidentally, if you're watching or listening to this episode of the deal flow show, you can get access to our archives, our previous episodes, as well as our future episodes and subscribe and follow us by going to the deal flow show.com the deal flow show.com. Jay we've heard from many of the past guests about the jobs act. So we know that that's also impacted Caden's capital and maybe specifically, any opportunities zones you want to tell.

Jay Soave: 

Sure. So, um, so I say I do, I have a little bit of a deep inside knowledge. I mean, real estate has always been a very, uh, generous tax investment for investors. There's, there's a number of provisions that, uh, you can, you can defer recognizing income using depreciation and other methodology. So as great advantages, you can do tax planning for generational transfers. There's a lot of things there that are, um, you know, very, very detailed, but they're there. Uh, and, and when you say add the opportunities zones onto it, but basically where you can invest capital gains of any sort into a project, defer paying taxes on those for a number of years. Uh, and then once you, if you hold that asset for 10 years, you don't pay tax when you sell it, that's pretty, pretty powerful. And all the other stuff that already applied to real estate still applies to so that you don't lose out on those other benefits at the same time.

Um, and so I think, uh, it's continuing to be, and will continue to be something that people are interested in. I think what's happened to some extent was there was this idea in some people's minds that, Oh, opportunities zone I can charge, or I can, people will pay more for something. And so I, my returns don't have to be as strong from a sponsor perspective, and that has not played out to date. Uh, people are very cautious. They want to make sure that the real estate is a good, strong deal on its own, regardless because tax benefits don't matter if you have a loss. So, uh, they're, they're very concentrated on it. And people, people really are starting to gravitate more and more to it. It just it's complicated and it's not for everyone it's not for just jumping off the shelf and saying, you're going to learn about it because there's as with anything in tax, unfortunately it gets very complicated, very fast

JP Maroney: 

Bookends in terms of size of deals, smallest to the largest, and then kind of what is y'all sweets?

Jay Soave: 

Well, sure. We usually don't go below 10. We've done certainly a couple of sevens or eights on the equity side of things. Uh, and then on the larger side, you know, I like big deals. I'm, I'm used to big deals. So we're working on a couple hundred million dollar projects. I think we prefer typically to be in the 15 to say $30 million range. I think that's primarily because that's where the bulk of our capital resides. We have family offices, uh, private equity funds, big smart, small, large banks, insurance companies, et cetera. And it just kind of that range overlaps a lot of those groups. And so, um, again, from, from our standpoint, we want to take on deals that we think are going to have a high likelihood of being financed. And so like to play in this space where there's the most, uh, you know, arrows issue

JP Maroney:

Y'all are raising the equity for the projects.

Jay Soave:

Yeah. We raised it. We raised equity, we placed debt. I don't want to say that we don't do that. I mean, that's what my concentration on the equity side, but we have a whole debt team as well, uh, can do pres mez, construction bridge, whatever it might be. But, uh, on the equity side is, which was my specialty and the bulk of what my firm does. We're looking to find that single bullet investor to take 90% typically of the, of the common equity in the deal.

JP Maroney:

And are you selling it based on the tax strategies? I mean, does that come into play in your deal, making process, that background that you have?

Jay Soave: 

No. Um, on occasion I do. And maybe I did, uh, more when I was first getting going, but not, I don't even bring it up really at all. So Jane, let,

JP Maroney:

Let us understand that you look for a single

Jay Soave:

Check writers. Is that what you said? Yes, sir.

JP Maroney:

On the capital stack, when you're looking at let's, let's take a $50 million deal. How much of that is going to be equity?

Jay Soave:

Uh, typically 35%, 40% these days, uh, there, it was starting to creep up where you could get more pre COVID. Um, one of the things that's happened is that pretty much overnight the, the banks themselves have really cut back on lending. I think they're lending to their relationships. So, you know, like a bank of America type bank and the local banks. And then, um, on the, um, I think some of the debt funds got got hammered. Uh, and so, uh, leverage has come back down and people are being very conservative. What they're lending on, it's getting better. I mean, may compare it today is night and day, but it's still not anywhere near what it was six, nine months ago, whatever it was,

JP Maroney:

You played with your background, sorry to talk. You played a different role, as you said, with your legal background in the beginning days before making this shift. But you know, today, I guess, but I would be willing to bet that you take a different approach to vetting bills than the average bear because of your legal background, but when you're looking at deals and vetting deals that that pre deal making process, can you walk us through how you think the mindset, the process, maybe some of the steps.

Jay Soave:

Yeah. So I think the first thing we want to do is we're going to take a look at, we like to get dirty, uh, in. And so if there's something that's put together, that's great. As far as like an offering memorandum, we usually create our own, got our own ideas on how that should be done and, uh, what, we're, what we're getting the Excel underwriting. And we're going to go through that and we're going to beat it up. I would want, I want to make sure that investors expect to see things in a certain format and certain things are done on a monthly basis as opposed to an annual basis. Um, we have like a three year deal. If you do something annually, you get a much different answer when you do it over what might be 40 months anyway. Uh, so put it into a format that makes sense.

And then we're going to I'll use multifamily. Everyone, every deal has got their own kind of metrics, but multifamily. So what are the rents where, you know, how do those compare to market rents? How fast are you leasing this up? Are you, are you increasing rents during the construction period? How much, uh, where, where are you seeing, uh, exit cap rates and how does your exit cap rate compare? And then lastly, one of the big things that people focus on is the, the Delta between, uh, your exit cap rate and your yield on cost. So, um, what's that spread and they one and a half is a, a good, good rule of thumb. It's a little bit tighter in major markets. It's wider in not so major markets.

JP Maroney:

Yeah. To that point too. There's a lot of moving parts when the deals are being made, what are some of the red flags, or what are some of the deal breakers for you and for Kayden?

Jay Soave:

Well, I think sponsorship is important. I mean, it's, it's always been important and now I think it's even more important. I think that this is something that's pretty subjective, but you know, you always kind of get a feel for things or, you know, there's, if there's some kind of game playing going on or something that usually starts to not sit very well, um, from us, I think there's, there's usually should be a story. Uh, there should be a good geography, I think is one of our first things. If it's going to be outside of certain geography, probably not even going to look at it. Uh, and then the returns, we just have a certain return expectation in our mind where we think things should be today. And if it doesn't hit those, those, uh, initial benchmarks on our first pass, it's probably, you know, it's out. Um, and then where there could be landmines after that, it all everywhere just gotta be deal specific.

JP Maroney:

Anything else about the opportunity zones that you can share? I know that's been a big topic. There's entire conferences and events around it right now, where you see that going over the next few years.

Jay Soave:

I think it's going to continue to grow because it's really in the first, maybe it's in the second any now where at first people didn't understand it, uh, that it was a it's. I mean, it's a whole brand new, um, branch of the tax law, frankly. And when you typical tax stuff, not to get too, too nerdy about it, but they develop over 10, 20, 30, 40 years. I mean, I, my whole job was full time to figure out how to deal with tax rules that have been existence forever. And, and so that's the amount of complexity and I would, and we continually find in every person in that field finds gray areas all the time. So you can imagine when you have a whole new set of venue of everything with all these new rules of details, that again would falls off very quickly, high level.

It's very easy, but devil's in the details. Um, that's very hard to get your arms around and get comfortable with things, especially when you're talking about potentially get a single check writer for $40 million, the tax counts, cause it's going to be significant, bigger, even more. So people were getting very cautious because they didn't know how these things were going to play out. And then over the course of 2000, 19 more and more stuff came out, got people or comfortable. And now you're starting to see that put into practice where like, okay, we have a lot of the things taken care of. We are a lot of the questions, um, solved. Now let's go find deals that that makes sense. And I think that the, the market is maturing to the point where there are less of these deals out there, I think, or I haven't seen them any as many lately that are just pie in the sky type things.

Um, and I don't want to listen to any of that because it might be obvious, but you know, some of the things I've seen were just insane and it just went insane. And I just didn't understand. And sometimes like who thought they were a good idea, uh, and how they convinced themselves to spend time doing it, but you know, that continued to happen. And what, and what that happened to do too, was to turn a lot of people off from the investment side, because, you know, if you're sitting there, you're at a family office and you've got a lot of money to manage, and every time you get an opportunity zone deal with some crazy project that doesn't have any basis for reality, or the return expectations are just, you know, not realistic for someone who wants to make money, uh, you just kinda like get jaded to it. And I think that as that has died off and people have maybe done a deal, know someone who's done a deal, you're going to continue to say, okay, this is a good program. There are good opportunities out there. I should be looking at this and it's just going to continue to grow.

JP Maroney:

Other than the obvious, um, simplicity, maybe of having a single check writer. Why did cadence decide to go down that path? In other words, why is that your choice for raising the equity?

Jay Soave:

I think it's the simplicity and really, I mean, it's my comfort zone. And it's really where I think we spend a lot of time finding and harvesting investors. And we're looking to find people who are sophisticated and who can interface with, um, with the sponsorship group. We can do a lot of them, uh, because our, our database is very diverse and large. I think if you were to go down the path of finding a hundred thousand dollars check writers, you've got to amass a pretty substantial database of those you'll will take a very large amount of time. And I think at some point, unless you get to a pretty, really substantial number, it's going to impact the number of deals that you can do. Because obviously, even though you have a very large database, there's only so many deals that certain people will do. And obviously the check size might be bigger, smaller. And so your capacity will be constrained. And that altogether, I think that's really the primary reason.

JP Maroney:

How have you, and this may be secret sauce. I don't know, but how have y'all built that database? It's one thing to compile a list of potential targets. It's another thing to have a relationship with them to get in the door as well as to persuade them that, that it makes sense for y'all to be a part of the project. So what's been y'alls process for building that, that network and that, that database,

Jay Soave:

I think the secret sauce is hard work. Uh, and, and you're right. We have, I have two jobs. My, my one job is to find clients and execute on the deals for them. But my other job is to find other capital sources too. And so it's a background process that's happening, uh, both in connection with the deal and just passively and identifying people who we want to want to target. And so that, that could be from connections with other, other capital sources. We have a reading articles and you're like, well, who's that group I've never heard of them before. Um, and just general digging around you, you learn more and you find out other groups and then you do the hard work, which is trying to get ahold of them. I mean, a lot of our time we spend a particular on the family office side.

Uh, it's a hard, it's a hard, uh, cabal to kind of break into, but, you know, you spend the time because it's worth the energy. And as you do the, how did you do more deals with those, those, uh, types of groups, the more they're open to conversations with you and introductions to you. And so it's just, it's just part of the grind. And, uh, you know, it's, it's a good way to get those minor victories on a week to week basis where you, you get there and group you've been trying to get in front of it for six to nine months, and then they finally like, all right, let's, let's talk. And, um, part of it, and then obviously maintaining those relationships. But what we try to do specifically is we want to make sure we understand what everyone wants. It's not that I just know that this group is out there and they have money.

I want to know what do you want? Where do you want it? What's your risk profile? What's your check size range? What asset classes are you interested in? So that when there's an opportunity, I send them something they want not so that what we're trying to avoid is sending them a whole bunch of things they don't want so that when my email comes in, they just delete it. Um, I think some of our competitors have a different tactic and they just blast blast, blast, blast. And, you know, I don't, I don't want to hobby lobby in Tulsa. So, um, you know, there's, maybe there's a good deal, but you know, you just kind of get to the point where you're getting these emails that you might not want and you just get numb to it. So everything is really done to preserving and maintaining those relationships with capital, send them deals that they want send them deals that we've vetted, send them offering memorandums that are direct straight to the point. Here are all the things that you need to know, whether you want to talk about this further on page two, not at the end of this thing. After reading cruising through 50 pages, Oh, there's a tenant can kick out in two years. It's like the whole thing, like all of it done with a view to making sure that they're happy and continue to just answer our emails,

Paul Nicolini:

Uh, J outside of the opportunities zones, give us a 30,000 foot view of where you see the real estate market going. And then where does cadence capital fit into that scenario?

Jay Soave:

Sure. Uh, I think the, the easy part we fit in is that, um, when things get hard, we're, we're, we're a good group to know. We have a lot of relationships on the capital side with people who have money and are looking for opportunities and it's always about, and it really helps to know what you want. And when we spent a month, two months in April, may talking to probably four or 500, 600 different capital groups to understand, and banks and lenders, what do you want? What do you, what is it, what are you doing right now? So that's how we reacted to it. And so now when I have things that might be a little bit outside the box, or a distressed opportunity, I know some of the groups that want those. And so I'm just going to send it right to them. And maybe, you know, that's how we get really good at our job.

When we see opportunities where it's like Idaho wants that that's this group, and you could be very efficient with your, with your job. Um, and then, you know, as what's going on in the world, I think you're going to continue to see industrial being gangbuster. Uh, it's just, it was before COVID happened. It's even more so now I knew a group that was under contract on five or six deals in a portfolio pre COVID, dropped it in. COVID what it, 10% higher pricing after COVID kind of hit. So it just, it's on fire. You're going to continue to see, I think multifamily will continue to do well. And I think people are going to make some, some good bets on the office side and the retail side and the hospitality sites. It's not all going to fail. And, and I personally believe that office is going to come back, um, or maintain or whatever it is.

To some extent you're going to have maybe people want more space. There was a group that was, uh, just an Elise in Chicago, and one of the biggest things that they wanted to triple their size, I believe. And, uh, one of the reasons why they triple their size was because they wanted more space for the people. And maybe that becomes a theme where it offsets some of these people working from home. But I also believe too that, uh, the office has a go way because of the collaboration element. And maybe it doesn't isn't necessary for every job role, but when I certainly did transactions and when I was an attorney, I can't, I can't count how many times I would just quickly go down the hallway to get an answer on a question and, or sit in my boss's office for three hours, pounding through something.

That's very complicated trying to get to the bottom of it, where that is best done internally. And then in a collaborative environment together, or another way where you just go down the hall, you would talk to your body and you say, I'm working on this deal. And I got this thing and he's like, Oh, well, you should call this guy. Or did you think about this and takes that thing in a whole new direction? And I'm talking about transactions, but I think that's one of the reasons that you're going to continue to see them in the tech world. Facebook has been a doubling down. They basically said this during the first, during the great recession, they were like, well, what we're going to do is we're just going to get more space at a cheaper price. And you're seeing them do the exact same thing today.

They're just going to get gobbled more and more of that space, because that's what they see. And if Facebook is doing that, everyone's going to be doing that. What I also find is that it's hard to train people. And how are you if you're a small business, maybe four or five people. Sure. If you've got like Google hires, 20,000, 30,000 people a year, how do you train those people if they're all over the place. And then lastly, I think from a productivity perspective, I was a young guy. Once I know, I know Paul for personal income, he was like, man, who likes to have a good time? And, um, you know, did you want to have a 21 year old Paul? And just said here, no, here's eight grand, you know, check your monitor. I don't think that's really a very productive use of people's time. And so the small cost of real estate compared to having to train and bringing new people, we're finding people the work efficiently, uh, just doesn't, doesn't justify the work from home experience. And so I'm just a believer that it's going to continue to, uh, uh, it's going to come back or stay or whatever you want to call it. Maybe it was some tweaks here and there.

Paul Nicolini:

Did I hear him right? Was he throwing me under the bus? I don't know. I was looking at you. You look like a guy that's partied too much.

Jay Soave:

No, we did have a good time. The guy, man, Paul, Paul's a man.

Paul Nicolini:

Uh, Jay, tell us though, how not everything goes. It goes up and not everything goes your way. How does cadence deal and maybe yourself as well? How do you guys deal with failure?

Jay Soave:

It's inevitable. I mean, I think that's a good thing too to ask. I mean, what, so when I was first starting, I was another thing that was, I think hard for me to, we're getting into this type of business. It's a, is you try not to get too emotionally invested to, to say or may. And I mean, another one you don't, you know, you don't spend the, the, the checks before their cash kind of thing. And, um, you know, cause it could, you just don't have control at the end of the day. I don't have control over any of the decisions that the capital groups, I introduced two deals, what they're going to do. And you could show a deal through a 50 different people that have 50 different reasons why they don't like it. And, and so the hardest thing to do is just to kinda like take a very boring, just stable approach to everything and just know that, you know, it's, you're doing everything that you can and once I've done everything, I can, I start going and look for other deals to work on things to other work on, to occupy my time.

So I'm not sitting there just, you know, lamenting about it. And then if that negligible disappointment happens or this thing that, um, you know, it comes out of left field happens, you know, kind of looking like that's a little ridiculous thing I've ever heard. I can't even understand this then because I haven't gone and invested it. Um, you know, you get over it, you know, maybe two years ago, three years ago, that would have been like, you know, a couple of days I needed to recover. Now it's just like, this is absurd. And, you know, just you get thick skin for sure.

JP Maroney:

Fair enough. You know, when, when you think about failures or what I call learning experiences, uh, learning opportunities, you're looking in the past. I want to look into the future in just a moment, but if you're watching or listening to this episode of the deal flow show, you can get access to our archives, all of our previous episodes, as well as get access to our future episodes by subscribing and following us@thedealflowshowdotcomthedealflowshow.com. All right, Jay. So here's the question for yourself personally. It could, and I'm going to open it up just a little bit. It could be professionally, um, or personally, are there any unmet or, um, unattained as yet goals, things that you're still reaching for that gets you up and gets you excited in the morning?

Jay Soave:

Oh yeah, for sure. I mean, I think it's, uh, I enjoy the hunt. I enjoyed the chase, so that's always, always there, but, uh, I think it's continued to grow. I mean, I do look back, uh, from where we were to where we are today and, uh, I am very happy and very impressed. We've, we've, we've come a long way in a short period of time. We've come to be an effective source for, for, for doing something. That's very difficult on the equity side of things, and I'm very proud of our people for what they've done. And, um, and I think that, that the, the sky's the limit for growing that team further and growing on our platform further, we want to, uh, we're we're, we're in hiring mode, we're looking for a future investment sales people. We're talking to you there, we're talking to, uh, additional debt people. We could always use more leverage there and selectively on the equity side tail, and then finding creative ways to continue to find more of these great relationships that we have. Um, always on some other goal, but, uh, growth, growth.

JP Maroney:

Speaking of hiring more people to bring in more people on the team, it could be that, or it could be other resources here at the Dell flow show and then our own networks, professionally. Obviously we know a lot of people, we built a big network. What are the kinds of people that you would love to hear from as a result of seeing, or hearing you on the show, um, project-wise or potential team members, what are the kind of people that you would like to hear from?

Jay Soave:

Well, I like good people first and foremost. I think that makes everything more enjoyable. To be honest with you, time is short. I don't really want to, you know, I didn't do this and come and do this thing just to, just to make money. I don't want to work with a-holes. Uh, and, uh, life's too short for that kind of thing. So good people on the client side. And certainly that's, it's really, that is probably a gating issue. On our side. We have, uh, 15, 16 people, total, everyone gets along, everyone has a fun relationship with each other. We have annual, you know, we had annual retreats where we'd go out. We would usually go to Denver or the mountains or whatever, and hang out. Everyone has a good time. I mean, it's just like this, you know, got some, some terminology that I use, maybe it's not appropriate for here, but, uh, you know, it's like, Nope, no jerks policy and that's pretty, pretty solid. And then from there, it just depends on the role, but we're looking for people who have experienced the real estate world and they're hustlers because this is not a business for you waiting for things to happen. You got to get out there and grind it. And, uh, that's not for everyone. There's a

JP Maroney:

Rule or a quote. I use a lot of times, it's the law of emotional gravity, the law of emotional gravity States, that one negative person can pull down five positive people, but five positive people can't pull one negative person up and don't hire them to begin with if you can. And if you get them, get rid of them quickly, because they can destroy an organization, destroy morale, destroy your ability to do deals, uh, ruin relationships with potential clients, or as you said, equity sources, and definitely get all the negative people out of your life and out of your company as quickly as you can. And I'm not looking your way for anything.

Paul Nicolini:

I was just going to say, I can attest because his partner, Mike Bennett is a super guy, so I'm sure you guys got to go on over there at Katie's capital. Uh, uh, Jay, tell us something that maybe the audience or our listeners, whatever it wouldn't know about, uh, yourself,

Jay Soave:

Otherwise they want to know all the big names of Michigan fans. They might know that me and my partner and a few other guys own a house in Arbor, three doors from the stadium. So, I mean, I'm personally, I'm a, a big, like more Thai guy did that for 10 years. So, uh, love to do that. Um, no fights professionally, probably not going to happen at this point, but, uh, certainly enjoy that, uh, big, big, uh, adrenaline junkie.

JP Maroney:

Well, what is the best way for someone to reach out to you? Is it a website, a LinkedIn, what's the best way for them to get into contact with you?

Jay Soave:

It is great. And then, um, our, our website is a cadence rec.com and my emails and a phone number up there. So please reach out. We'd love to hear from a capital liquor for deals, uh, people looking for opportunities, um, looking for, uh, equity sources and happy to help a debt sources of all too

JP Maroney:

Excellent. Jay Solvay cadence, capital partners, glad to have you on the show. And on behalf of my partner here in crime, mr. Paul Nicoline, I'm JP Maroney from Harbor city and the deal flow show team. If you're watching or listening to this episode and you're thinking, you know what? I know the perfect guest for the show, Hey, maybe that guest is you get in touch with us, go to the deal flow show.com. There should be a link there in the menu for you to apply as a guest or suggest a guest for us. And we'd love to hear from you if you're listening or watching the show and you know, other people in deal making process, the capital markets, the investment space, and you know, they should hear about the show, share it, share it on your social media, get the word out there, and we'll see you again on another episode, very soon of the deal flow show. Take care. Thanks Jay.

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November 18, 2020

Episode – 22

Ecommerce and Social Media Expert Shares His Success Secrets

Description

Brock Felt is Co-founder and Partner of Salt City Partners, a growth firm specializing in e-commerce enterprises. Collectively, he has built companies that have exited or sold for over $1.5 billion and has raised over $300 million for multiple start-ups. He is a sought after speaker, educator, and keynote. He has launched businesses in multiple verticals including health, software, consulting services, e-commerce, lead generation, product development, real estate, and online acquisition.

In this interview, Brock shares a plethora of information he has gleaned from years of building companies and doing multi million dollar deals. He talks about how he uses social media to source deals. He explains his due diligence process. He talks about how a Facebook friend he had never met funded an $80 Million Deal. He tells how he made a fortune selling stuff he got for free. He explains how the pandemic has affected his business, and much much more.


What You Will Learn
- How a Facebook friend funded an $80 million deal
- How a sports background is helpful in business
- How he made a fortune selling items from the trash
- How he fills his deal pipeline using social media
- How Covid-19 has actually HELPED his business
- and much more


Connect with Brock:
LinkedIn

Full Transcript

COMING SOON

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November 16, 2020

Episode – 21

Branding Expert and Entrepreneur Shares His Million Dollar Secrets

Description

Brian J. Esposito is Founder & President of Esposito Intellectual Enterprises LLC., a 20-year-old holding company with operations in media, liquor, music, apparel, sea exploration, aviation, space, cryptocurrency, hemp, oil & gas, mining, tv & film, and technology. Brian is a branding expert, investor, and serial entrepreneur. He believes that “Time Is Our Most Precious Commodity” and has certainly lived up to that mantra over the years with a host of accomplishments before age 40.

In this interview, Brian shares a wealth of information that he has learned over many years of putting together deals. He talks about one of the biggest mistakes he made early on and why he still regrets it to this day. He explains how companies can grow without giving up equity. He talks about his #1 deal breaker. He talks about unrealistic company valuations and the proper way to value a company. He talks about how he deals with setbacks .. and much more.


What You Will Learn
- Brian’s biggest business mistake and why he still regrets it.
- How to grow a company without giving up equity
- The proper way to value a company
- Brian’s deal breakers
- How to build your business network properly
- and much more


Connect with Brian:
LinkedIn

Full Transcript

JP Maroney:

Greetings and welcome to another episode of the deal flow show. I'm JP Maroney, your host, along with my cohost, mr. Paul Nicoline here at Harbor city capital. We've got a good guest, very exciting guest. And, um, I've heard a lot of background. We know you're connected with one of our previous guests, uh, mr. Brian Esposito from Esposito intellectual enterprises. Appreciate you coming on the show and you're coming in. Um, I'm told Paul is jealous cause you're coming in from Jersey shore. Is that

Brian Esposito:

Presently in the Jersey shore? Yes, sir. All right.

JP Maroney: 

Nice. Um, so I wanted to get in and talk a little bit about your background first, and then we'll talk about the deal process and some of the ways that you approach things, how you deal with success, failure, setbacks, uh, you know, the whole gamut of this. A lot of the content that we're producing from this show is going to end up at a book that we'll talk about the deal flow and deal making process. So we're excited to kind of tap into the wealth of knowledge that you've built over the years in business, but maybe you could give us a little bit of background. You started your company 20 years ago. Um, how did you get started? What, what, what was the impetus for that and maybe bring us through that journey.

Brian Esposito:

Absolutely. And thank you gentlemen, again for your time. It's a real pleasure and honor to be speaking with you and be on your show. Uh, what started again just over 20 years now? Um, my first company was in the beauty industry, so it was good timing. I learned how to work with brands, obviously develop distribution networks and the idea of bringing people to me was something I started creating early on. So got lucky. I built the first B to B, B to C eCommerce platform in the beauty industry in the late nineties. Uh, again, we were disrupting an industry we're creating a new medium for eCommerce or actually a new medium for commerce in general. So through that challenge, there was so, uh, so many obstacles when you're breaking into what is the new norm and educating, uh, legacy, uh, manufacturers that had their traditional distribution models, which were direct to a salon direct to a spa direct to a store.

Now we opened up the web and we were selling products all over the world. Uh, and through that journey, I got to meet and work with some of the most incredible people, whether they were athletes, actresses, actors, musicians, entertainers, and we were building so much value for them because our reach was so big. We, we were servicing millions of customers around the world and it was fun and exciting. And then it turned into really not, not enjoyable because I just looked at it like an ant farm. I had a ceiling with moving products around and there's only so much that I could do what we're creating wealth for these entertainers, these management companies, these musicians, actors, and actresses. And I said, well, there's something wrong with my model. Yeah, I can keep doing what I'm doing, but if I don't continuously find the next big product or the next big actor, then you know, the growth stalls, I start to reverse.

I start to go backwards. So in my mind I started thinking, well, what if I own the ban or why launch the ban? And then we created products for them. And then we created a merchandising brand for them. And if we just kept doing things, making the pie bigger for everybody, we can protect the entire ecosystem. So if one division slow, well that's okay because our band's outperforming and that would raise awareness and keep things moving. So it really took me 15 years, maybe 16 years to perfect the model where we want to create value for ourselves. We want to create value for all of the products, services, technologies, um, anything that we're attached to and keep making sure that our tide keeps rising across everything that we're involved with and then invite people into our ecosystem rather than me being invited into there is to create value for them. Uh, so it started in the beauty industry and because that industry is involved in so many different industries that allowed me to meet all of the leaders and entrepreneur entrepreneurs and founders of great companies in those industries and, and together, we created something pretty special

Paul Nicolini:

With all that you started and all those businesses was that, did you go to the capital markets for that? Or was that self-funding or friends and family how'd you get started that way?

Brian Esposito:

All self-funded. Um, again, knowing, um, the beauty industry, it's a family industry. So my dad started the first, uh, distribution for salons and spas that comes to stores in the late sixties and seventies. So I understood that business model so well, and I knew the margins so well. So it's all the same stuff in a product, whether there's a brand that's a high end brand or a low end brand, unfortunately they're really all filled with almost the same exact items and same formulas. So because of what I was understanding, the margins, I was able to create by byproducts at the lowest possible price, sell it at the correct highest possible price with no discounting in the middle. So the cash flows were so strong. I use that to go out and launch a band. I used that to create an apparel line. I used that to go out and build our own technologies opposed to us licensing other technologies.

Again, the model that I wanted to create was not make other people or other companies wealthy without our involvement. So if I could create what I wanted to go out and buy or license or bring in, then I'm going to create it. And I'm going to increase the value of what we're doing, as opposed to helping somebody else become more wealthy and more rich with all of us being part of the upside. But in doing that, I've made every mistake you can possibly think of. I spent money that I should never have spent money on. Um, and when you go into new industries, such as the music industry of the TV and film industry, then the technology industry, um, even real estate hotel development, got my ass kicked along the way because I had no idea what I was doing, but I knew what I wanted to accomplish. And I didn't mind, I didn't mind learning everything I needed to learn and know that industry inside and out

JP Maroney:

In the process. I mean, even from the very beginning, this was all about putting deals together. It was a deal-making process. What were some of the early lessons that you learned? I like to call them lessons maybe through those mistakes, but what were some of the early lessons that you learned as you pioneered some of this process and business model?

Brian Esposito:

One of the things I always have regrets on how I do deals now and how I always create win-win opportunities. What I did so wrong for so many years is when we launched a brand and we brought it into our world and we, we made it become a brand that was in [inaudible] or a target. It was because of our reach and our awareness. I should have always been part of that brand. I should have had an equity ownership in that brand because it was our distribution. It was our model that made them become who they were. Now. It's not necessarily that they weren't going to become that. I don't want to take that away from anybody, but we were a big part of elevating and enhancing their journey. We're a big part of putting them on that trajectory, trajectory quicker. And, uh, one of the biggest mistakes I made and over a thousand times, because we launched a lot of brands, was not being an equity holder in that brand because of what we were able to do for that brand. So that's something that bothers me daily to this day.

JP Maroney:

I feel your pain. I, you know, I've been building companies for 30 years and during that time and process, I had an opportunity to mentor and consult and advise other companies. And early on, I was very shortsighted. Um, I would look at just the cashflow side and I would say, okay, well, if I'm not getting a big fee, I won't take this deal. Or maybe I am getting a big fee. And so that's good enough. And so you find yourself in that more advisory or maybe an organizational role, the way that y'all were doing it is you find yourself in the first 90 days, you're such a genius. Cause they never thought of this before, after that, it starts to wane and it's like, eventually they go, where did all these ideas come from anyway? And if you don't have that equity piece in there, it's, you don't have that longterm benefit from it. But I love the idea too, of the collaboration where you can have a piece of something and have a vested interest of why you keep running the race too. So it's not just to your benefit, but it's to their benefit to keep you engaged in that way. So the, you you've come a long way. Obviously 20 years of here now you've, um, accepted, uh, another role, right where the company that's associated with a publicly held company. Can you talk a little bit about that, how that deal was put together?

Brian Esposito:

Oh, there's 61 holdings in my holding company right now. There's three acquisitions underway and over 150 joint ventures. So what I'm able to do at this moment with this, uh, arrangement is have a liquidity event for all of those companies. Everybody that's been involved in those companies and add value to the overall general partnership. So this'll be a publicly traded general partnership and it's going to be completely yield driven, which I love. So I, and, and now more than ever investors, capital people in the market, people taking money out in the market, it's going to be very important that they're involved in companies that generate revenue, uh, profitable revenue. So a lot of the things I do with a lot of the companies that I'm brought on to work with is they come to me and ask me for help in raising capital. And, and I always say, yeah, that's great.

But then what they're like, what do you mean when you need a million dollars? For example? Okay. So what happens when you spend the million dollars? Well, then we're going to go out and have our next raise. To me, that model doesn't make any sense because you're diluting everybody down, including the founders of the cofounders or senior management. At some point, you're gonna dilute yourself out of your own company and why are you not focused on trying to make money? So that's what I love about doing what, what I build is we have companies across 18 industries now. So when companies invite me in, and this is a long way of explaining the, the general partnership, um, involvement, when we look very simple, you do a glorified matchmaking. It's OK, you're you guys are doing this and this industry while I'm holding X, Y, and Z, that a, we can make you more valuable.

Maybe your evaluation going out to market is 10 million maybe now, because we put together some real, tangible, uh, partnerships and, uh, pay pilot programs, new customers, your evaluation, maybe it's 20 million, maybe it's 15 million, maybe it's a hundred million. So now if you do need to raise capital, the equity going out for that capital is much less. And more importantly, we need to create a way for you to make money and have, have revenues come in. And if you want to grow your company, grow your company with your own capital, with your own incoming cash, or even better, because money is so cheap right now. If you are making money and revenues are coming in, it's the first time I ever am. Okay with taking on debt because the money is almost money's free. So if you, if you know, you have revenues coming in and you have partnership with real companies that can continue to support your growth, uh, it's the best time ever to, to go out and borrow money.

Uh, so with that being said, part of my process with these, with these companies is it's not fair for the equity holders that put their taxed income into your company to sit around and wait for a, for a liquidity event. It's not fair. I don't like that model. These people should be getting rewarded, some sort of dividend, some sort of monthly, quarterly biannually, or annually payment for their money. Why do they need to wait five, 10, 15, 20 years for the money that they put into your business? So if you start to train people to make money and be able to put out distributions, it forces them to be more careful with how they spend their money, what deals they want to put in place, what partners they want to bring on, what law firms they want to pay, what accountants do they want to pay?

If, if they're forced to put out money to their equity holders, much like we do with the structure of the general partnership, where we want to put out a 7% coupon to all of our LP holders in order to do that, every deal we make has to at least spin off 7% return. Otherwise the people are, are, are a net asset value is going to be destroyed people. Aren't going to invest into the LP. And, uh, and, and we're going to have to make announcements of reducing the dividends. So it's so important to go into every deal, every structure with some sort of profitable income, where you're forced to pay out distributions to, to people that believe in you and your company.

JP Maroney:

Wait a minute. So let me clarify. You mean, you actually expect the businesses that you're involved in to make money.

Brian Esposito:

I do now old me. He was like, Oh, let's keep we'll, we'll figure it out. I'll keep getting customers, keep getting new revenues. Now. Now more than ever, companies need to make money. I'm I hate seeing these unicorn deals. I, it, I think it's appalling the money that goes into valuations for companies that don't even have real positive earnings. Uh, and I think you guys experienced that multiple times, I've experienced it multiple times. There will be a day reckoning once again, where there's going to be real valuations based on real earnings. And that's the value of the company.

JP Maroney:

Paulie and I were looking at an insurance play here recently, and one of the comps in the market that had just gone public, um, how much money have they lost the year before it was insane. And they were getting this massive valuation in the market. And I it's, it's, it's all fluff and it's crazy, but yeah, or I want to talk to you or Paul has got a question I know about your deal making process, but before we do, if you're watching or listening to this episode of the deal flow show, you can get access to our archives, all of our previous episodes, as well as subscribe and follow us by going to the deal flow show.com the deal flow show.com.

Paul Nicolini:

Brian, it sounds like before this, this was all privately held or, or your companies that you've had. And would this be then the first, uh, you know, the first time that you're in a publicly held company. And then with that, you talked about yield. You talk about an exit strategy. What else attracted you to this? Going from a private to a public,

Brian Esposito:

The accounting firm. I use Mark home. I don't know if you're familiar with them, but they're a top tier STC account accounting firm. Uh, I think they're the top sec auditing firms. So as my journey grew and I got to really put a support system, me with, uh, professionals that I've trusted professionals that I believed in, I started to think more about, well, what, what does my reality now look like? What can I do that I couldn't do before now with this support system and learning more about the public markets, learning more about, you know, with everything that's going on in the world. Uh, the stock market has not yet failed to do what it's made to do. It's you can move, uh, equities around. You can raise investments. It's that machine is a machine that's going to continue to work and everything that I've built, I'm confident in it that partnering with the right entity, with the right mindset and, and a very, very tight inner circle at the GP level where we're not motivated by a personal greed.

We're not voted by Mo motivated by ego it's. It's hardworking people that came from families that built everything they have from nothing now, uh, historically third and fourth generations destroy all that. But right now, the people that I get to work with understanding, I had to go out and work. You gotta go out and work hard, and then you gotta go out and create value and, and get scrappy with this pandemic that, that, uh, the world's gone through. It's terrible to see what's happening to people and families and businesses around the world, but because we're involved in so much and because there's no real crazy hierarchy of decision making, we pivoted and we created some exceptional value. We created deals that the market now, uh, demanded and that the world needed. And with our technology holdings and our distribution partners and people that understand that they need to move and move fast in order to survive.

And, and, and, you know, when times like this happen, I often say to people, I'm the kind of person that works so much better with a thousand things going on because my mind can connect them and understand what works with white people that have one thing and they do it well. That's great. And, and I admire that, but if you do, if you only involved in one thing and you're going through, what's going on right now in the world, you don't have many options to go out and be creative with. You don't have many opportunities to go out and figure out, well, what can I start to play with to make value, create an opportunity to launch a new technology, wants a new product or a new service. And, um, and thankful, thankfully, because of this crazy ride I've been on and, and the nonsense I've been through this chapter has been great. It's been, it's been exciting to be able to create these things and, and make sure that we continue to grow.

Paul Nicolini:

You know, we asked this over and over and our audience loves this, and we just want to tap into your brain here for a second. So with all these deals that you've got going, and certainly this one, this big one that you've got on your plate right now, give us some advice and some, uh, just let us know, how do you prepare for this stuff

Brian Esposito:

In my mind? It's so easy. I go in since very young, even since 80, and I've went into every room with, Hey, listen, I have this, you have that. How, how do we make it more valuable together? So I've never gone into a room with my handout. I've never gone into a room, really asking for something without me giving something of equal value or greater in return. So as long as I'm dealing and speaking with people that understand, it makes sense to work together. Uh, and now that there's so much that we're involved with, I don't, I don't really have to go into a room and prove myself anymore. Um, and, and the, the age difference is starting to level off I'm 39 now, but I've always been the youngest person in the room. So there was a lot of hurdles I had to jump through just to get the respect from somebody that whether I knew more than they did was irrelevant, because I could never tell them that, how do you walk out of a room, putting a deal together if you insult somebody?

But, uh, it's been, it's been difficult. My age has been a very difficult hurdle to get over because that's what it is. And I think I'm an old soul. I, I see things that I understand that I, um, and I, and I have a, a quick reaction to knowing an answer to something that I have no reason to even know the answer to. And because of that, and, and, and trying to articulate that correctly with someone that's in their fifties, sixties or seventies, that's been very difficult, uh, because you know, a lot of people, for some reason, maybe feel intimidated by me, or they think I'm out to, to do, to do something wrong, or I don't have the experience or the history to, uh, to, to, to be involved in what I want to do. Um, so, you know, the, the preparation has gotten a lot easier because I know what the outcome I want.

Now it's about properly articulating it, showing how we accomplished this. And more importantly, anybody can go into a room and talk that's easy. Uh, the hard part is actually backing up what you just said you were going to do. So while I like to leave that meeting, or that idea of putting a partnership together with getting something in motion right then and there at the table, or, or recently through a zoom call. So if I say, Hey, listen, this is what we're going to do. Let's get in motion. I don't leave the room without an email going out, connecting everybody a text, going out, putting everybody in a WhatsApp group. I therefore, it's in motion. It's no longer talk. If I say, Hey, I want to do this with your company. I want to connect you to that person over there at that company it's done right then and there. And it's, then it's actually in motion. There's no more hoping that something happens. It's, it's actually in motion.

JP Maroney:

Can you talk about age? Age is all about time, right time. We've got under our belt time. We have left. Um, you've been known as talking about time is our most precious commodity. Talk about that.

Brian Esposito:

Not to get religious on you, but I was in a very bad car accident a few years ago. And, um, shouldn't, I feel like I shouldn't be here the way that accident happened. Um, really emphasize that I'm here for a purpose and it's not about making money. That's a byproduct. I definitely been set out to do something and I don't. I feel like I'm doing it now. This is the most I've ever felt rewarded in what I'm doing. And that's helping companies grow. I love that. I've been through so much garbage because I can help navigate somebody, not going through that garbage. However, there's a caveat to that because it is important to experience things. It is important for CEOs and founders to get knocked around a little bit and understand the industry that they're in and understand the way people are and look out for certain personalities, look out for certain characteristics.

That's a very important life lesson that I don't want to take from people, but I love being a solution for companies. I love giving them a way out and a way to grow. Um, and that ties into listen. Every second, you spend now more than ever needs to be in a positive, productive fashion. If somebody they're wasting your time being negative, trying to hurt you to try to use you. The more you experience people, the more that you pick up on those characteristics, the quicker you can fire them from your life and continue to move forward with the right support system with the right network of people. And one of my faults is I love being around people. I love working with people. I've put myself in terrible situations because of that. I've invited the wrong people into my inner circles because of that. And, um, and it's hard for me to, to push somebody away because naturally I like to work with people naturally. I like to build value and create opportunities with people, but it's unfortunate that you cannot do that with everyone. And you can not let someone come in and infiltrate or harm all of the work that you've done all of the time that you spent building, whatever it is that you or your listeners are building

Paul Nicolini:

On our first initial call that you, you had told us that you had been burned in the past by friends and others on deals. So tell us, how do you deal with those setbacks and how do you move forward from those?

Brian Esposito:

I had to rewire myself not to wake up in the morning and be bitter not to wake up in the morning and focus on what I no longer have control over that situation happened with that person. Um, it's not easy. You know, nobody likes to be hurt. Nobody likes to feel taken advantage of, but at the end of the day, that decision or that action, that that person or persons decide of the duty you, that is on them, that is their cross. The bear. What is on you is that you allowed it to happen once you come to terms with, okay, what did I do to put in that position? What can I do to no longer be in that position? Again, those are lessons you need to start teaching yourself. That's what allows you to continue to go forward and not be in those positions again.

Um, and another life lesson, I think it's taken me a decade to understand is, and you gentlemen may or may experience this some times I even get caught in it. You cannot give somebody else your thought process. It's not reality. You cannot drive yourself crazy. Wondering why that person did that. Why I wouldn't do that? Why? Well, you know what, they weren't raised like you, they weren't brought up in your household. They didn't go all of the experiences that you want to do that make you who you are today. So again, their actions is on them and you know what, throw a prayer up to them and hope you never have to see him again, wish them well.

JP Maroney:

You know, if you are watching or listening to this episode of the deal flow show, you can get access to our archives, our previous episodes, and also subscribe and follow us to get access to future episodes. As we release them every week, by going to the deal flow, show.com the deal flow show.com. We've got Brian Esposito on Esposito, intellectual. Um, so you have a quote and I'm going to read it so I don't get it wrong, but you have a quote that your people are quoted you as saying unafraid of creating and seizing business opportunities, expanding into new markets and launching innovative products and services. Um, what would you say are your personal characteristics that make that possible? Why, what is it that drives you like that

Brian Esposito:

I've, I've learned that everything's possible, you know, I've, I've learned that there's always a solution to get through whatever the case may be and the more resources you have available, the more realistic that that is, uh, it was funny is that people used to call me when they had a problem. And, and I would actually say, Oh man, you have nowhere to go. If you're calling me, I am, I am your last resort. If, if I'm the guy that you need to help you with something, well, what's ultimately grown from that is that, you know what, I, I do have a lot of resources. I do have a great network of people that when I call they, they not only pick up the phone, but they want to help me. And, you know, somethings take a day, somethings take 10 years, but I'm a man of my word. And I, and we get to where I said we were going to get. And hopefully we get beyond that. Um, uh, so to answer your question, you know, I've never, I've never been afraid to go after an opportunity. I mean, I will get in the trenches with anybody to help them accomplish whatever they want to accomplish and, uh, and, and, and move it forward.

JP Maroney:

Okay? So not every deal is the right deal. Not every person is the right person. Not every company is the right company. There are often those things that you go, you know what, this is a nonstarter for me, this is a deal breaker. So when you look at opportunities and you look at people that you could potentially work with, you could pull together, what are the deal breakers?

Brian Esposito:

The first thing I look for is obviously, can we work well together? Um, we want to make sure we're, uh, as, as like-minded as possible, uh, a deal breaker for me, and this isn't a knock towards anybody to each their own, but at anybody that maybe has a certain level of, um, too much interest in material, materialistic things. If I pick up during conversations that everything's about maybe what they have or where they vacation or their home or their car, or they're trying to flash meter or watch that stuff is just noise to me. So I don't, I don't, um, I don't relate well to that. And, uh, and if that person and me to go off and make a million dollars together, I still wouldn't want to be, I still wouldn't go into a deal with them because we just have, we're just on two different paths. That's the biggest deal breaker for me. I mean, if it's something that's looks like it's a hard, impossible journey, I jump into that even faster. Uh, so the biggest deal breaker for me is it makes sure that we're like-minded, and that we're as close as possible to understand the real importance of life. And, um, and just, I love simple as this. I love doing good things with good people. Uh, other than that, I don't, I don't get involved.

JP Maroney:

One of my favorite books I read many years ago, and, you know, building companies for 30 years, you're basically a glorified salesman, right? So you're out there selling your opportunity or selling your deal, selling your product, selling the next contract, whatever it is. But I read a book many years ago called dig your well before you're thirsty by Harvey McKay. And he talked about building that network, having a network of people that you can rely on on a GoTo basis, whether you're putting a fundraiser together for the president, whether you're putting the next project together or deal, or trying to launch a product or raise capital, whatever it is, what is your process and how have you over the last 20, 25 years worked on your network to continue to build that you obviously have a lot of deals on the table. You have a lot of interest in companies in your holding company. How have you built the network that's made that possible?

Brian Esposito:

Yeah, the, the important thing, and there's been times where I've almost jeopardized it it's, you gotta be very careful who you bring into that network. Uh, you know, one of the tricks that we have now is we have a compliance team, uh, as a private security division of, of our entity. So real people with real good intentions that have what they say they have will not go through that process. Uh, so that's allowed me to continue to properly build a network. Now I have a level of protection where we are not bringing in anybody that shouldn't be in that network. Um, and again, I'm a connector. So I, I always want to connect a B and makes the that's just what I love to do. So, but you have to be very careful who you connect. Uh, and I've also learned very important is it's not only great to connect the right people, but it's, you know, equally or even more important.

You've got to connect the right people at the right time. There's been so many times where I've been too soon as I was so excited about something, and I wanted that to happen. Uh, you know, reminds me of that scene from Tommy boy when he's going through how he killed the sale and that whole chicken wing scene. And, uh, I've been that guy because you, you see what you want to accomplish and you want to go out and get it and you want to get it right now. And that's the, um, I think that's the caveman in us. We, we, we want to go out and get it. We want to go out and make it happen. Uh, but in business, the timing is everything. Uh, there's been so many times where deals have fallen through and I've been excited because you know what, it's just not the right time.

There's a reason for everything. If it falls through, don't sit and cry about it, don't whine. And what is that going to do? Chop one off a thank you universe, wasn't the right time and continue to nourish it just because it didn't happen that day as you planned, or as you expected, keep it alive, keep it, um, uh, that's one of the things I do to it's exhausting, but I reach out to everybody and wish them well, and I'll happy birthdays to them or their kids happy holidays. And it's not ever, or always attached to an ask if people genuinely connect with you and you genuinely like them, it's important that you be on their mind because there will be a day when you will want to do something with them. There will be a day where you have an opportunity and because you are a genuine, good caring person, they will pick up the phone. They will answer the text. And before you know it, you have, um, they have something in motion, which is great, but it is exhausting.

JP Maroney:

I agree. What was it, Joe? I'm Joe Gerard, the car salesman, you know, used to have, he had two or three full time assistants that set on a daily basis and wrote birthday cards and anniversary cards and sent them out. He holds a world record for the most cars sold because of it, but it's not just building that network, but as you said, protecting that network and then making sure that you nurture that network. That's awesome.

Paul Nicolini:

You know, you've done a, you've done a lot, Brian, uh, up until now. And certainly, uh, you, you referenced Tommy boy, did you ever sell brakes anywhere in your lifetime? Uh, so what, so tell us, tell us, Brian, what are some of the goals that you hadn't reached? You want to share with us? Maybe some that you're trying to attain now as well,

Brian Esposito:

Find a way to balance some of my own passions and loves in my own life. I love to work. It's just how I'm bred. I need to, I need to figure out how to work on who am I outside of work? You know, I've, I've lost that person, um, which is okay, I'm not complaining, but that's something I need to figure out how to accomplish. I think a lot of entrepreneurs need to figure out, uh, how to accomplish that. And, and I don't want to say I'm on autopilot, but when it comes to work, it's I wake up and I do it. I do it throughout the day. And when I sleep, my brain is thinking of ways to solve that day's problems or come up with something new. I don't think that's necessarily healthy. Uh, I do know that's how I'm wired. That's how I've always worked. But I, I would like to, um, I'd like to hit pause when I can and, um, and, and work on myself outside of the professional world.

JP Maroney:

That's sounds familiar though. You say you get up at three at three o'clock in the morning with the wheels turning that your day. Right? We don't know anybody like that guy, man. I'll tell ya. Um, so what, what sort of people, you know, we have, we've built a network obviously through our own professions, but the deal flow show has really opened a lot of doors. We've had a wide variety of people on the show, everything from the original shark on shark tank, Kevin Harrington, your cousin, Howie D and his brother, John, but Holly, from the Backstreet boys, two guys that are just deep loaded into the capital markets attorneys, just a huge variety of people. What sort of people? And we have a lot of the same, many people listening to this and watching this show as well. What sort of people would you like to hear from, or connect with from our network that would help forward the things that you're working on or that you think would be interesting?

Brian Esposito:

Oh, by the way I watched how in John's show last night, it was great. So great work guys. Um, as far as people I'm open to everybody, I'm like the car salesman. I don't have four assistants, so I respond to everybody, uh, immediately. Um, people tend to think that it's not me even responding, cause I'm so quick. My mind is on and off the table. I can't leave anything lingering. Uh, so anybody that's listening when this air is five years from now, reach out to me, uh, and I will, I will get back to you with, Hey, I'll, I'll review. It would love to love to find a way to work together. If it's not for me, I don't just say good luck. I'll connect them with somebody that I think could add value to them. Uh, I think it takes a lot of courage to reach out to somebody, uh, even behind a keyboard and through an email. I think that that shows a person that has drive and initiative. Uh, and I want to respect the time that they took to reach out to me and, and I would, um, help them any way I can.

JP Maroney:

Fantastic. What's the best way for people to get in touch? Is it a website, LinkedIn? What do you prefer?

Brian Esposito:

I use LinkedIn for everything also Twitter. And then, um, so Brian JS, Zito, LinkedIn, and Twitter, and then the eie.rocks. So E I E dot R O C K S is the corporate page. And, um, yeah, that's how you can, I'm accessible. Uh, and again, I get back to everybody typically within an hour or so, tell us,

Paul Nicolini:

Well, Brian, tell us something that otherwise, uh, people in, in your, in your circle or actually in our circle as well, doesn't know about Brian Esposito. Can you share something about yourself?

Brian Esposito:

Yeah, I kind of, I put everything out there when I do these, these great talks with people. Um, you know, I'm here for the long haul. Uh, I, uh, my name's attached to something. I will work it to death to make sure that there was some level of success that it left behind. Um, a lot of failures that, that are, that I've been through were really only a failure is because of not the right timing. There's a tech that I developed in 2008, which is now not mine, but it is. Now, if you see what Venmo is, we created that in Oh eight called payback because I knew there was a whole micro lending economy of billions and billions of dollars. We've created the platform. We were, uh, we were collecting payments from people all over the world and we were printing out checks, mailing checks, and, and I had a token system.

It was much like crypto. I could not get a bank to understand what I was doing. I could not get a bank to back me. Uh, and I, I see the end of catch me if you can, when Leonardo DiCaprio has got that check machine spinning and all these checks are all over the place we were doing that, uh, on, I had unfortunately park it because I didn't have a banking license. Uh, some people would move to a Caribbean Island and keep doing that. That's just not how I am. I said, well, this sucks. We hit, we hit on something. Great. And, um, and, and we parked it, oddly enough, we have tech, that's rolling out. Now we have one tech, that's reaching over a hundred million people, and I'm going to bring that code back. I'm going to bring that technology and implement it into this system and offer.

I mean, honestly, what we created is so much better than what it's being used. Now I had, um, you know, a fun story for your listeners is that I knew I needed a marketing campaign for that tech and immediately thought, well, wimpy from Popeye, I'll gladly pay on Tuesday for a hamburger today. I mean, I couldn't ask for a better, for a better character. Went to Hearst. Media has offices in Manhattan with no appointment. I'm 22 at the time. And, um, and wound up in this woman's office, either Goldman, she's the head of their licensing for like 40 years. She first she goes, how did you get here? And I said, well, that's irrelevant. I'm here now. Let's, let's just talk. We spent a few hours talking and they handed me the rights to wimpy for nothing. They said, Hey, if it's a success, we'll win.

We believe in you. Good luck. And that's how you create opportunities. That's how you make things happen. You can not sit and hope it comes to that. You gotta get out there, you got to go out and figure it out. You got to meet the right people. And that's why, you're how you present yourself, how you articulate and, and going into a room. And I said to her, Hey, listen, this is what we're doing. We're already doing this amount of business. I'll guarantee you a royalty because I have, I have revenues to base it off of. Uh, and I just need to, I need to grow it. And you know, what sucks is, I'm just too early. And there's so many inventors and people that develop things that have been too early. And it's, it's a, it's a hardest thing to swallow, especially when you may not have anything else to fall back on.

Um, but when you weather the storm, like, like I like to do, when you sit with things, when you, when you support it with the resources needed, now it comes back, you know, neon colors came back, you know, leggings come back and the bell, bottom jeans they'll come back at some point. So things come back. If you can keep it alive and, and, and, and nourish it like your network, uh, you can recreate value, which was a dormant, maybe dead asset. And that's something that I love to do. And that's one of the things that I love to do when I work with companies all over the world,

JP Maroney:

As I said, pioneers, get slaughtered. It's, it's crazy. As you said, we've all been there. Uh, there are a lot of us have been there where you had this idea, you actually acted on it, built it. It was just not the right timing, but people come up with ideas and then they don't act on it. That's the scary part. And you look down the road and somebody come up with that idea. They they've put it into action. It's all about execution. So, yeah. Fantastic. And by the way, I'm thinking of bringing back parachute pants, don't you think that would look nice in a pair of pair of shoes.

Brian Esposito:

He knows desire to MC hammer. So let's do it. Let's just timing is now

JP Maroney:

I was thinking more overalls and you're a Texas guy, right? So that's right. Brian Esposito, Esposito, intellectual. Um, nice to have you on the show. Great to meet you finally, at least virtually if you're down this way, um, definitely look us up. If you're at your cousin's I'm over the fence, I live next door to him. So, uh, but yeah, but absolutely look forward to meeting you on behalf of mr. Cohost here, mr. Paul Nicoline, I'm JP Maroney, Brian Esposito. And by the way, if you're watching or listening to this episode of the deal flow show, and you're thinking, man, I know the perfect guest, maybe that's you, right. Or maybe I know somebody who would be the perfect guest, get in touch with us. Our producer, Daniel Penn Miranda, would be happy to share with you how you can get booked for the show and be able to find out if you qualify. And it makes sense if you're listening to this show and you know, other people that are in the deal making process, the capital markets, share it, tell other people about it. And we look forward to seeing you again, in another episode of the deal flow show, take care, everybody. Thanks, Brian. For more episodes, visit the deal flow show.com and subscribe

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November 11, 2020

Episode – 20

Biotech Entrepreneur Shares Secrets of Multi-Million Dollar Deals

Description

Peter Blaney is CEO of Induran Ventures, a Venture Philanthropy General Partnership. He has been an entrepreneur and venture investor across the spectrum of biotechnology for over 30 years. He was involved in the launch of BIOX, a $125M build of the world’s first continuous processing biodiesel refinery. He focuses on direct investments in projects aimed at specific human problems.

In this interview Peter shares nuggets from his 30 years of experience in doing multi-million dollar biotech deals. He talks about the 3 aspects he considers when looking at a deal. He explains why sometimes getting a good deal is better than getting a great deal. He talks about the qualities he looks for in the principals of a company. He explains how he keeps his pipeline full of quality deals. He talks about how he deals with failure and adversity. He explains why deals should be more than just about the money.


What You Will Learn
- How Peter keeps his deal pipeline full
- 3 important aspects of every deal
- Peter’s unique way of dealing with business stress
- What determines a good market
- Effects of Covid-19 on the biotech market
- and much more


Connect with Peter:
LinkedIn

Full Transcript

JP Maroney:

Hello, and welcome to another episode of the deal flow show. I'm JP Maroney, your host, along with my co-host for this episode, mr. Paul Nicoline, and we have a very special guest, Peter Blaney from Indorama ventures and super excited. I've heard about you. I've heard from George about you as well as the interview and pre-call that you had with our team, super excited to get to know you and your company a little bit better. Some of the deals that you're working on and really tap into your storehouse of knowledge over the years of doing lots of deals, because the deal flow show is not only to introduce people to great guests that have an interesting background and good stories to tell, but it's also to share with others about how you vet a deal, what you look for in great people, how you put together deal teams, the whole process. So we're going to be asking some of those questions as well, but I'd like to start by finding out the way back as far as you can. And talk about how you got started in the business. Can you share with us a little bit about that?

Peter Blaney:

I G I got started in the business, um, almost 40 years ago, um, because I decided that being a foreign correspondent was very hazardous as an occupation. I might get killed. I was in a couple of war zones and made the decision that I wanted a lot of adventure. So I did an MBA and started my own company right afterwards. Um, that's 40 years back and it was basically I wanted an exciting life.

JP Maroney:

What were some of the early deals that y'all did when you got started?

Peter Blaney:

Well, the first thing I did when I got started was shortly after graduating from an MBA, I started my own company, um, and it was in an industry, um, that I had a fair amount of experience in because of family, um, and commercialize some technology that came out of the university, um, and started my own company. Um, and that was my first deal. Um, so over the 40 years I've been on all sides of the table, an investor, an entrepreneur, a fund manager, and so on, but I started out, um, as a, you know, an entrepreneur starting up a little company,

JP Maroney:

Peter what's the largest deal that you've been a part of

Peter Blaney: 

The largest one I've done, uh, was a company called Bionics BIOX. It was the world's first continuous process biodiesel plant. And that was $125 million. Um, we ended up, um, taking the company public for awhile on the Toronto stock exchange. And then after that, it was taken out private again, but that was the largest single light deal I did. And what year was that? That would have been in the, uh, late nineties. Can

JP Maroney:

You describe where the company is today? The kind of things that y'all are working on and what you're looking for in terms of the future?

Peter Blaney:

I've always been in the biotech space, um, and across the spectrum in biotech. So, um, one of the earliest projects I did was a company called performance plants, which was an ag biotech play in that situation. What we were trying to do was get, um, crops ready for climate change. So we were making major agro crops, drought, tolerant, salt, tolerant, heat, tolerant, cold tolerant, whatever nature was going to throw at them. And we ended up licensing most of that technology out to major agro companies in Europe, the United States and Asia. Um, but it was kind of a start getting ready for climate change. We were concerned about what was happening socially. Um, something like the club of Rome was very popular at the time telling us that we weren't going to have enough to eat. Um, so we were trying to get ready and, um, it was, uh, driven in part by, um, adventure, but also driven in part by a desire to make a contribution to pressing global needs for humanity. It sounds very, um, noble, I suppose. Um, but actually that is what we were trying to do.

JP Maroney:

Well, that's a good point. We talk all the time when they are in fact with the team the other day, we were doing a video and that said one of the greatest ways to build something truly extraordinary is to find a big problem and find a solution for that problem. So that that's obviously where you guys have found a place to plug yourself into. Um, how do you see going forward? We're obviously hearing related to the, whether it's the pandemic or the, the plan DEMEC or whatever people want to call it right now, but what's going on. Um, how do you see things working out agriculturally? Because I keep hearing rumors about shortages and things like that. So what is, what is the perspective from, from you and your company?

Peter Blaney:

I can't really comment on today, whether food shortages are going to be a big concern in, in the near term or not. Um, I think that we have made enormous advances over the last couple of decades in biotech, and that would include certainly agricultural biotech, so we can do a lot more than anyone would ever have imagined. Um, in terms of developing functional foods, putting proteins into foods that aren't there now putting the vitamins and so on, essential nutrients. So I think it's, it's making a very positive contribution to the world, um, and, and playing out honestly pretty much the way I expected it to. How do y'all keep your full

Paul Nicolini:

In terms of deal flow for your organism?

Peter Blaney:

That's a critical question. And, um, you know, you have a couple of options. One of them is to wait for someone to throw a business plan over the transom and you take a look at it and it looks cool and you want to do it. That's really not the way I operate. Um, I identify problems I'm interested in. And then I find the first thing I look for is the people that can do something about it. Then I look for a technology technological fix that we can use to address the problem, but I don't wait for things to happen. I sort of identify what I'm particularly interested in solving in terms of big social problems. And a few years back, we started referring to ourselves as venture philanthropists, partly that reflected our age, um, being closer to the exit and the entrance, but it also just seemed to be consistent with what we had done over the 35 years. So yeah, I don't have any trouble whatsoever with deal flow because we create our own deals.

Paul Nicolini:

Yeah, yeah. Uh, Peter being in biotech, how has, or have you seen an uptick in the business? Uh, due to COVID?

Peter Blaney:

Oh, I started seeing a down tick for sure. Um, I had spent two years, um, getting a deal negotiated with an investor, first of all, finding the right kind of investor for the project. Um, we got through extensive, um, diligence with them. We even got to the point where every single document in the deal had been vetted and we'd gone through it line by line. Both the investors and ourselves were happy with it. Um, we didn't have to dot any more I's or cross any more teas, but we got to that finish line on March 15th of this year, and there's a French term force measure or, um, which I'm sure many entrepreneurs have become familiar with. So that deal got shelved. Um, and I had to go back and start over again. So that was very discouraging. And that was an outcome of, um, the, the COVID pandemic.

Um, I N I noticed it about that time of year. We like to try and get our money from family offices as much as possible. And the doors closed everywhere for several months. There was just nothing happening at all. And in many people headed to the sidelines and wanted to be, um, cash, you know, heavy on cash because no one was sure how it would play out and people weren't sure what they might need to be doing next. But I have noticed, um, along with the sun, um, a lot of light has come since, and I think the markets are opening back up for early stage investment. I think it's, it's getting reasonably good again as, as an environment. So while it started out doing something that was very difficult for entrepreneurs, I think it shut the markets right down. I think there's just a lot of demand now for, um, alternative investment and for early stage and it's coming back and particularly biotech. Um, it's, it's becoming much more, um, in fashion than it had been in previous years,

JP Maroney:

You said something about family office and the money we've experienced, the exact same thing. Uh, George, who, uh, I, I know, you know, and set some of this up with you with the show, but, uh, you know, we've had the same conversations. So much of the family office money is just sitting on the sidelines and very opportunistically waiting for what are very likely going to be some good opportunities coming over the next 18 to 24 months. But you also talked about that being a setback, hitting that wall and having to basically start over my assumption is over the last 40 years, that's not the first time. How do you walk through the mental process? What do you do when you hit the wall to reset and kind of get yourself prepared to go back again for another deal?

Peter Blaney:

Well, it's tough. I mean, it's, you're talking about, you know, really tough experiences. Um, but I think most, most entrepreneurs can bounce back pretty quickly. That's I think being able to the buzzword today is resiliency. You've gotta be able to come back from adversity. And, and I, I mentioned earlier, you know, we call our company, um, indirect ventures and it came from Miguel Indurain the Spanish cyclist, uh, at any stage of the tourist, very tough experience. The entire tour is unbelievably tough. I think business is the same, especially when you're in early stage, you're just going to have constant ups and downs, um, and huge disappointments. And you have to be able to pivot on a dime and it takes great mental flexibility, which is really one of the things I appreciate about the occupation, the fact that you have to be flexible. Um, so it's, I think a trait that sort of comes naturally to me.

Um, but if you start, uh, believing in the proposition and I said, I like to solve a problem that, that I think is really important for humanity. If I get an adverse shock. Um, yeah, it's very disappointing. But given that, I really believe in the mission and believe in what I'm trying to do. Um, a setback like that. It's not so hard to recover from because you just keep your eye on the prize. You keep a look on the, on the end zone where you want to go, and if it's solving a big problem, a setback, isn't that hard to deal with.

JP Maroney:

You mentioned prior to your entrepreneurial world, um, prior to the MBA being a foreign correspondent, any of those skill sets are connections or any of that history support, you are skills that you've been able to adapt to the deal-making process.

Peter Blaney:

Well, communication is really important. Being able to express yourself clearly, um, and being able to write it's also pretty valuable. And, and it's, it's a skill that a lot of entrepreneurs come from a technical background, a science background. So communication and writing is probably more of a challenge for them. Uh, if you love to write, which I do, um, you know, writing business plans can be a lot of fun because you can put some really positive stuff in, in, in it, um, anecdotes and stories and frames of reference and conveying information, all of that stuff, you know, it came out of, I suppose, in part a journalism background, but, um, I really came to the conclusion that journalism was like making sausages and I did not want to do it. So, um, I didn't spend a lot of time, um, working as a journalist.

JP Maroney:

Great. Peter, can you talk to us about the evaluation process you go through when you're looking at a deal and your due diligence process that you might have?

Peter Blaney:

Sure. I can do that. And so many people find this difficult. Um, for some reason, people find it often the most challenging part of the whole investment cycle. I think that's unfortunate. There's really how I deal with it is through frame, my frame of reference. There's only three aspects to a deal. You need to be concerned about three broad aspects. The first and foremost is the people, the people you're investing in. The second thing you need to focus on is the technology and thirdly, the markets, and I recommend you start with people. Um, a lot of people in the venture business have a science or, or an engineering background, and they tend to focus on the technology first. And I've seen a lot of people fall in love with a molecule or a formula and get into a deal because they loved the technology and they look at the people later.

Um, and I think it's just getting it completely backwards. You need to focus on the people. Are they competent? Are they honest? Can you get along with them? Do you want to spend time with them? Um, are they team players, you need to really focus on the entrepreneur first and foremost, before you ever look at what they're trying to sell, you try to get an assessment of the individual. Then I recommend you look at the markets, um, because if they're characterized by low entry barriers, heavy competition and not much profit, um, it's a mistake. Look at the technology at all. Um, and then thirdly would be the technology, which is where most people start. And I think it's backwards. Um, but as good as the technology is, that's fine. The reason why I say focus on the people first is in almost every case I've been involved in within six months of getting into the project, the initial technology's out the window and gone, and you've made a pivot to something else it's a new technology or an adoption to the technology that no one foresaw and what makes the difference there, the entrepreneur, the guy that you should have, or gal that you should have been focused on in the first instance.

So that's kind of my approach to diligence. I just look in those three broad categories and I start with people and just sort of work my way through it.

JP Maroney:

I love it. Bet the jockey, right Dan, on the jockey. Once again, this is JP Maroney and Paul Nicoline, and this is the deal flow show. If you're watching or listening to the deal flow show, you can get additional episodes previous and future episodes by going to the deal flow show.com. Um, our guest today is Peter Blaney. And Peter, you said something talking about, um, a lot of people look at the technology first and I've heard many, many entrepreneurs over the years, 30 years of building companies, myself, I've advised a lot of other entrepreneurs set on boards. And a lot of times people go out and create the solution and then try to figure out who's willing to buy it. And it's a, it's like backwards, right? And many years ago I heard one of my mentors said never, ever, ever sell something people don't already want to buy.

And it made a lot of sense and it'll serve, serve you well for a long, long time. So I love your idea of finding the great people. How do you keep your pipeline full? I got a text message from one of my buddies. He puts together, um, boards and he invited me to come on another board and, uh, today, and he's like, you're a perfect fit for that. And he's got this little deck of cards, right? Every time I talked to him, he's looking to place people and things like that for yourself. How are you keeping sort of a portfolio of contacts over the years and figuring out who would be best placed or best suited for a certain deal that you're putting together?

Peter Blaney:

Um, I start before the back of the envelope in a deal. So, um, if, if the back of the envelopes already out and there's writing on it, I'm getting there late. That's my first point. Um, I, uh, because I start there and usually go all the way through to if the exits in IPO, I'm all the way from the very, very beginning to the very end. Um, I don't really have a problem with deal flow. I think the later the stage, the investment you choose to make the more deal flow gets problematic. Um, so if you're a late stage investor, I probably don't have a lot of advice for you. Um, if you're early stage, you don't have a problem with deal flow. Um, there's a bazillion deals out there. In fact, there's way too many deals. I would think a question I'd be more expecting would be, how do you possibly deal with the deluge?

There's so much stuff coming at you. Um, that's, that's more of a problem, I think for early stage investors, the deal flow. Yeah. I think it reflects stage of investment. Um, and so since I tend to define, you know, sorta what's problems, I want to get involved with in the first place, um, and then look for the people to do it. I don't really have a problem with deal flow as for a stable of people that you can rely on. Um, you know, I certainly have a stable of accountants and lawyers and people that I've relied on and worked with over decades that are certainly there for me when I need them, but the specific entrepreneurs or board members, um, you know, if I was looking for a board member for biopics, which was the biodiesel company, not likely that, uh, a director from the agricultural biotech company performance plants is going to be the right fit. Um, so I, I don't really find, I can pick people out of one previous situation and drop them into another one very much. I pretty much looking for new, new, new blood. And one of my first, um, chairman, um, Jeff Island, who was the CEO of shock, or he, he made a point of telling me that, um, you need fresh blood. You always need to be bringing in fresh blood. So rather than look for people that have been tried and true as entrepreneur somewhere, I I'm more apt to go for a fresh jockey.

Paul Nicolini:

What are some of the characteristics of a deal or a person that would lead to a great deal for you? What do you look for?

Peter Blaney:

I start with people, um, w when I'm trying to raise money and I've been doing fundraising for decades now, um, so it's an activity I've been doing for a long time, and no matter what technology I'm in, I'm in the fundraising business. I start with the people and I try to make a connection with the people on the other side of the table. Um, try to find out what they want, what they need, what they like, what they don't like. It's a lot like selling really, um, one of the first mistakes that everyone makes when they sell is they present their goods immediately. They say, hello, hi, how are you? Here's my pitch. And I think it's a huge mistake. You got to qualify the buyer. That's just basic sales training. You really need to understand the people on the other side. So I started with that approach.

Um, and I look for people that I think I can form a connection with, um, the concept of negotiating terms with, um, a blank slate. On the other side, someone, I don't know, someone I haven't made any contact with. I have established no understanding with, honestly, I wouldn't know how to go about it, and I wouldn't recommend anyone do it. So how do I start? I look for people that I can connect with, and if they strike me as good people and they genuinely interested in what I'm doing, and there's a genuine fit with what they've done in the past or what they want to do and what they need. Um, then the terms, the next thing I look for is somebody who can share. And I often ask people this whole question, do you want a great deal out of me or a good deal? And if they say a great deal, I say, Hm, that means there's not much room for me. Um, if they say they're looking for a good deal, I think they're probably playing win-win and I'm more inclined to go. But yeah, I look for people that, um, I can connect with. And I look for people who are open to win-wins genuinely open to win-win where they want me to do well as, and they want to do well themselves. So I don't know if that's a great answer for you, but it's my answer.

JP Maroney:

Let's turn the tables for a moment. So what would your peers or business associates see in you? What would that sound like? Your characteristics? What do you bring to the table?

Peter Blaney:

Another tough question. I don't know how much time. I don't know how much time I spend in the mirror, but, um, I think people appreciate my determination and perseverance. Um, I think they appreciate the fact that I only come to the table if I genuinely care about what you're doing. So there's some passion there. I think there's an honesty there, but, you know, it's kind of lame for me to say, Oh yeah, I'm honest. Um, I believe I am, but I think that's it. That's what people look for. They're looking for some integrity and hopefully they've, they've seen some in me and they haven't been disappointed.

JP Maroney:

So last night I was watching the series Cobra, Kai, you know, are you familiar with it? No, it's a, it's a spinoff from the old karate kid movies. So, and it started on YouTube and they put it on Netflix. And so I've been watching these episodes. So anyone who's ever watched the old karate movies we'll know Ralph macho or whatever, that was the kid that mr. Miyagi trained and the blonde headed kid that he fought at the very end when he did the bird thing, you know, and kicked him. Those two guys are grown men in this new series and their fathers. So it's a very interesting, uh, interesting show, but you have a background and an interest in karate, anything from karate, um, discipline thought, processes, mindset, anything like that, that you felt like has carried over into the deal-making process. You felt like is applicable.

Peter Blaney:

Karate is not the only sport I do. Um, I do cycling, I do swimming. I do weight training. And over the last 40 years, I have never missed the minimum bar per year. It was 250 workouts. So I've done that for 40 years and karate is a big part of that, but it's just keeping yourself as fit as you possibly can because we're in a very stressful business. I found the best way to deal with stress is things like karate, karate is, um, you know, you might spend a thousand hours getting the techniques down the blocks, the kicks, the punches, the basics, um, to be any good at it. You spend probably 10,000 hours polishing it. And the next nine to 10,000 hours is training the brain, the mind, not the body. So keeping yourself really clear, um, in your thinking. Um, I find that athletics, karate, and other things really good for that. It's really good for the stress, um, karate itself. Um, it's really good for giving you mental focus.

JP Maroney:

I love it. Great answer. Peter, what kind of people would you like to connect with from our audience? And also from our past guests,

Peter Blaney:

You know, my ideal investors, let me talk about biopics. For an example, when I came to the deal, um, to be entrepreneurs, I came very late to this one. They had a working prototype going and it looked like a Rube Goldberg machine. It had binder, twine and duct tape and, you know, pipes all over the place in it stank, um, because they were converting animal renderings into fuel. So they had a signed term sheet from the largest venture cap group in Canada. And I came to them and I said, look, I think I can do something more for you than they can. Well, what's that I brought two strategic partners to the table. One was an oil and gas pipeline company that makes oil and gas pipelines for 40 or 50 countries around the world. The other was, um, a chemical processing company that makes car interiors for every major auto maker on the planet.

I recruited those two companies and their CEOs to get involved in the project. So what I had was companies that had their head office down the road from me, it was close by. I had access to the top level management in the firm. I had access to their scientists. I had access to their engineers and we also had access to their finance people and their bankers. And they brought all of that together. Um, and the large venture capital firm was kicked out of the deal. They said they wanted in the deal and they would take my term sheet. And I said, no, you can't come in because you will not have the courage. You will not have the stability or the intention to stay through to the end, because we're definitely going to hit problems in this. This has never been done before in the world.

So it's going to be tough. So we didn't let them in. Um, they were wiped out, um, in Oh eight and no longer exist. The VC firm I'm talking about. Um, so, you know, the families that I were dealing with was dealing with, they have family offices, but it wasn't just about the money. I could bring them in because they had expertise. They had interest, they want it to be involved. They cared about the projects. That's the kind of thing I'm looking for from investors. And that's part of the reason why I say it has to be a problem that I really care about. And I want to recruit investors who also really care about the problem. Do I want to make money? Yes, of course. I want to make money. Everyone wants to make money or almost everyone, but it can't be the only motivator they have to care about the problem. And you have to balance your concern about making money with your concern about solving the problem. And no one of those things should override the other. That's the kind of thing I'm looking for in investors. People who can do that. Well,

JP Maroney:

Hopefully some folks will be reaching out to you once again, if you're listening to this episode or watching it, this is the deal flow show, and you can get more episodes and also subscribe or follow us for future episodes@thedealflowshow.com. I'm JP Maroney. This is my co-host Paul Nicoline. We have Peter Blaney on the episode with us. And what I'd like to do as we finish up Peter is if you could give out whatever the best way is for people to get in touch with you. If it's email phone going to the website, what would be the Westway for people to reach out?

Peter Blaney: 

Email's probably the easiest it's Peter Blaney, um, all lower case. Peter P E T E R Blaney B L a N E Y. Add Indorama I N D U R

Paul Nicolini:

A N. ventures.com. Peter,

JP Maroney:

Uh, once again, we appreciate you being on the deal flow show on behalf, upon Nicoline myself, our team here at Harbor city and the deal flow show I'm JP Maroney. And once again, if you're watching or listening to this episode, you can get more episodes@thedealflowshow.com. We'll see you in another episode very soon, take care

Comments

November 9, 2020

Episode – 19

M&A Expert Talks Reg A+ & Covid-19 Buying Opportunities

Description

Laurent Ronald Gray is Chairman and Managing Partner of Versailles St. Germain. He attended the University of Michigan and is a banker with over 30 years of experience. He started at Solomon Brothers and later started a series of Investment banking boutiques. He is well versed in Mergers and Acquisitions (M&A), Investment Banking, Real Estate Sector, Company Valuation, Exit Strategies, Structuring Deals, and more.


In this interview, Laurent covers numerous topics in the deal flow process. He tells an interesting story of how he broke into the investment banking business. He talks about putting a valuation on a company. He shares his criteria for doing a deal as well as the red flags he looks to avoid. He gives his perspective on Reg A+. He talks about the effect of Covid-19 and identifies buying opportunities made possible by the pandemic. He discusses the disadvantages of going public.


What You Will Learn
- Disadvantages of Going Public
- Laurent’s Unique take on Reg A +
- Buying Opportunities due to the Pandemic
- Putting a Valuation on Your Company 
- Laurent’s Deal Breakers- and much more


Connect with Laurent
LinkedIn

Full Transcript

JP Maroney:

Well, greetings and welcome to another episode of the deal flow show. I'm JP Maroney, your host, along with my cohost, mr. Paul Nicoline here at Harbor city capital. Today, we have Laura Gray on the line with us and, uh, whether you're listening to this and audio or seeing it in video format, and Lauren is chairman and managing partner of Versailles st. Is a Jermaine. Correct. What I'd like to do is get into some of your background. You know, we'll talk about your own personal experiences in the capital market, what you brought you here today. And then I'd like to also dive into some of the questions that we'll be using the responses to put together a book called dealmakers deal-breakers. So we'd be talking about negotiation, the deal flow process, keeping your pipeline full, things like that as well. But why don't you take us back a little bit and talk to us about how you first got started in the capital markets and those early days,

Laurent Ronald Gray:

I actually became a banker by accident. We had a family business about 27 automobile dealerships across the country that my dad and his brother built a rolls Royce, Bentley, Mercedes, you name it, they owned it. Um, certain partnerships, um, some, some were company owned and just relationship. That was just a very exciting time in the automobile business. Um, in 1979 and my dad became ill and decided that it was about time to exit. I was a very young guy, did not have the capabilities to, you know, buy, buy the company away. Um, I had no clue how to access money. I was very, very young. Um, I did, I did help him as it turns out, you know, um, liquidate the relationships as well as the dealerships, as well as the real estate finally. But he basically said you need to fend for itself, you know, go and try to find something.

You want to have a passion with. Well, one of my childhood friends, best friends at the time worked at Solomon brothers and he said, why don't you come work here? And I go, I don't even know what do you do? I have no idea what you even do. He said, I'm an investment banker. Okay. Okay, good. I still don't know what that means. And he said, just come in for an interview. And I did, and it turns out that they were looking for some very, very senior anyway, fast forward. Um, I had left by my dad made a distribution. I decided to travel for a year, but I wanted this position so badly. I made it my, I made it my business, no matter where I was in the free world at seven in the morning, New York time, I was going, I was going to call the gentleman that I interviewed with.

It's just same as Tony. I'm not going to give you his last thing. And I will call him and say, Hey, good morning, Tony. This is Lauren calling you from aware of it. So fast forward, uh, I was, I happened to be in London and I was on my way home, call them on a Friday. And this is about 10 months out of traveling. I call them same thing. So when can you start? And I said, you're kidding me. He goes, I've never met a guy. So persistent in my life. You've got, gotta be, you've got to come here. I said, I'm leaving today. And I flew home. I started on that Monday and I stayed there about three years. That was my introduction. I wait, I actually worked for the same mortgage backed securities. John Goodfriend, John Barry weather, uh, Straus, Steve BOM, legendary. Um, after that, Michael Lewis wrote a book about that whole episode on, on the trading floor of som and I had been gone when he came in, but everything he wrote about was about half the truth of the things that went on there.

It was just crazy. I then decided to, I then decided to start my own business. And I said, I love this business. I really don't know what I'm doing, but I'm smart. I'm going to figure it out. And I did. And I, um, I incorporated a name and started going to the people that I knew met through my family, business attorneys, accountants, other investment bankers by that time. And I knew, I knew a lot of people down on the street. And when you start off, you really start out on the outer ring of everything. No one will tell you that, but if you're not connected with a Goldman, you're not connected with anybody. Right. And there's everybody in the vertical in between. And I just started getting a lot of very difficult deals and making and creating a great reputation of the guy who got deals done.

People would be taking bets that I couldn't get it done. And it was like one after another one after another. And then by chance, you know, fast forward from that experience, I got introduced to a, a very interesting deal called the Vermont Teddy bear and brought it into one of the broker dealers that I knew got that done. And then my neighbor, um, happened to have own Spanish forecasting systems, the Spanish radio, and probably was reluctant to share the infrastructure as to what was going on. But over flipping burgers at a pool party, he started to tell me about what was happening with the company. And, um, fast forward a year later, I closed, um, not only the Vermont Teddy bear deal. And then a month later, we closed on $110 million of a series, a, um, to basically get them. They were upside down to get them in a, in a more favorable position, wound up doing five acquisitions for them.

And then, uh, took them public at Lehman brothers. I did not do the offering, but because of the warrants. So I had achieved in the deal. I was able to exercise the Laurence. And from that, uh, he and I were on the cover of Spanish for our casting. And then, you know, basically I always equated to, you know, when you're an actor and you're struggling and you're work in a restaurant and you get a part, and then all of a sudden that part, you get nominated for an Academy award. That's how I felt. I went from really nothing to something. And from 1985 to 1994, it took that long in the process to really kind of hit my stride. And I haven't looked back since

JP Maroney:

A nine year overnight success. Right.

Laurent Ronald Gray:

Pretty much. Yeah, pretty much. Yeah.

JP Maroney:

That's a, that's that's interesting. Early on. I mean, obviously it was tenacity. Got you. That first job you were talking about persistence, persistence and tenacity, just bulldog tenacity. But once you got into the game, those, those first three years that you were there, um, what were some of the things that you learned, some of like being a babe in the woods, right. And just seeing a whole new industry from now the end side, in terms of the deal making process, you were there, obviously when there were some of the extraordinary historic dealmakers were doing some of their early projects, um, that, that went on to become famous,

Laurent Ronald Gray:

The mortgage back securities that sell them, I think represented 67% of the revenue. The years that I was there, it was the, the department that everybody was trying to get into, whether you are on the inside or the outside, you were trying to get into that department. And the biggest thing I learned, I think from coming from a family automotive business to one of the best investment banking bond houses on the street, probably not probably in the world at that time was to create a thick skin, uh, coming from a family business. You, you develop a thick skin, but when you're there on the floor, you quickly had to embrace a lot of, let's just say not favorable words and, and, and running around and doing the strangest things for partners. I think I was, I think I was 25 years old, maybe 26. And, um, getting there early, I'd be the first guy on the floor.

I'd be the very, very last guy to leave. I pick, I had sleep deprivation for about three years. I probably get home at 12. I was up at four, took the train in. I was always there at five 30 and I wanted to, I wanted to earn my way because I knew just based on the guys that were on the floor, that it was always going to be an uphill battle. It was a lot of nepotism. A lot of guys that got in there were very fortunate that fathers were traders or the uncles were trade as well, whatever, whatever the situation was. So I had to, I had to really prove myself and, and, and be persistent. I think that's where, when you look in the dictionary and you see the word persistency, my face is right next to it. I'm the most persistent person I know.

And that's the driver, that's the driver that I tell this to everybody. If you go in whatever you're going to do, you going to do something, have a goal, be persistent, and don't give up. Don't let people get in your head negativity. Don't let their fear of fear create a negativity in your head because you'll what will happen is you will look back and you'll, you'll be angry that you didn't listen to your inner self. You need to have a self driver. And I live by that. I'm 65 years old. I live by that every single day never stopped.

JP Maroney:

Absolutely. I mean, it goes back to, you're talking about mindset, having that, right. Mental attitude and not letting other people infect or affect how you feel about the deals as well. Um, we're going to have more questions for you, but before we do, if you're watching or listening to this episode of the deal flow show, you can get access to our previous episodes, our archives, as well as subscribe and follow us for future episodes. By going to the deal flow, show.com, the deal flow, show.com, the Ron, we really appreciate you, uh, you giving us those advice and that those tips about being persistent and what it takes to really, really be successful in the business. Bring us now up to date. What do you see hot in the capital markets today? Well,

Laurent Ronald Gray:

I think, um, it's a very unique time, you know, not withstanding the virus and what we are seeing for PSI is we are, we are essentially pure investment bankers, generalists, and all sectors with the exception of restaurants and cannabis, uh, restaurant. I have no idea how to, you know, invest in a restaurant. We go to restaurants and cannabis only because we don't understand the federal laws and how they may impact the overlay of state by state. So we for now we have stayed away from that. We're seeing a lot of the stress that, um, you can imagine what's been happening for the last six to seven months, that companies are struggling. Their balance sheet is struggling. So we're, we're doing a lot of hand re and enhancement value, either helping them restructure that debt and adding some additional equity to make their balance sheet stronger.

Um, we typically our turnaround, um, in, in, in the matter that trying to help companies that in March or late February, they were on a path to go through their goals where they were, they were acquiring other companies or putting on human capital, and then that tremendous bump in the road. And it was, it became a very slow drip, essentially that people were starting to back away from either ordering or, um, people couldn't get any further equipment for their, for their operations, their manufacturing. It was just a series of things. So from that perspective, it's that, um, we, we actually was, interestingly enough, we threw another business and another partner, we do a real estate financing. We just were one of the first guys in New York city to get a $47 million construction loan for a Hilton hotel down on 38th street. I think it's the first, probably three to four months that anybody has ever put that together.

So we're very proud of that. But hotels in itself are taking a serious bump. And I tell people all the time, you know, if you have, or you have a group that has the capital to make an acquisition in the hotel sector, they're trading 50 to 60% below market. And if you have the capital to what stand and hold until this curve comes back, whether it's one year or two years or three years, your trade is going to be very, very exciting trade at the end of the day. So those are, those are just a couple of things, you know, there is, there's a multiple of things that are out there that we are, we are seeing we're active in, but those are, those are a couple of

JP Maroney:

What is your deal process? I mean, when you are preparing to go to the table, looking at a new project, a new opportunity, can you walk us through the mindset and maybe some of the thought process?

Laurent Ronald Gray:

Yeah. It's, uh, it's, it's pretty much the same thing. Every time an opportunity comes to us, we have, uh, we have 14 partners. We'll have a conversation about the opportunity where it came from the viability of that sauce. You know, how close they are to the deal. We'll internalize. It, we'll take a read. And then one of my partners, who's my longest partner been with me over 20 years. He'll start to do the due diligence on the company to see what, see what the numbers look like, see how either, how good they are, how bad they are. And then we, we really spend a lot of time and having conversations with the management, from my perspective, I always look at managing expectations. I want to know how I can manage them and the process. And I want them to understand how they can manage the expectations to me and the company. And basically it's, it's, it's those beginning points that create the start of the beginning of a deal process. Obviously

JP Maroney:

Not every deal works out, right? Um, you have the ones that, whether they fall apart for the wrong, you know, for the wrong people or the wrong, the numbers don't make sense, et cetera. What are the deal breakers for you when you're looking at something? And you're like, other than it's cannabis, or it's a restaurant, what are the non-starters for you as you, if you see those red flags start to pop up,

Laurent Ronald Gray:

Well, it's, it's always management, right? If you, if you can't in those conversations, we may spend a month, sometimes two months. Um, perfect example, I've been dealing with this one group for about six months, trying to get this deal, trying to get this deal, moving it's in the animation space. And we happen to really, really like it, but that's, it becomes another story, maybe another time. Uh, but it it's, it's about the management. You have to understand the mindset of what you're dealing with on the other side of the table. Now, having said that in the past, we go meet the client. So the only basis you now have is a zoom call trying to get a body language and an understanding of what is going on, right? And you, and you have, you have as many conversations as you can to get a good feel of the management.

The CEO, the chairman is managers around him and it's, it's got to feel right. They have to understand our process. We have to understand their desires. If we feel, if we feel that their expectations are way beyond the pale, and we cannot manage that expectation, we will take a pass no matter how good the opportunity will be, because it's one of those things you're never going to make them happy. And if you go in knowing that it's just got it, it will be tortured. I think that's, that's, that's a very basic level. When, when management, when the bear management and our team there's harmony, it's a good conversation. Flow. Their deal makes sense. You do the due diligence on the bodies, on the principles. There is nothing, nothing works out that that's strange where you're going to sprint away. And then, then you're good to go. But yeah, I would say that for the most part, you have to be able to get along with the principals on the other side, same thing with us, you'll be in bed with them in some cases for a year and it's day in and day out. You're dealing with them in some form or fashion every day, sometimes seven days.

JP Maroney:

You mentioned before that, um, uh, Versailles Saint Germain, you guys are a more traditional investment banking firm. What's your take on, on regulation? A

Laurent Ronald Gray:

Why don't you should mention that. Um, um, I'm actually glad you mentioned that I was hired to do a reggae deal, um, by a guy that I have known for 15 years just happened to call him out of the blue. He was in bed with this firm. I'm not going to mention any names for liability purposes. I didn't agree with that structure at all. I felt that what, well, first, when he told me what they were doing, I did my research. I came back to him and I said, you know, this is not for me. I'm not comfortable with it. And, um, if you want me to do a traditional raise for you while you're doing the reggae, I will, I'll go parallel paths. You do that. I'll do this. And, um, hopefully it should work. The, the long and short of it is that it didn't work.

Laurent Ronald Gray: 

I got fired from the assignment, um, because the guy who is running the reggae was just a control freak, and he wants to all that activity flow going to him. Meanwhile, we brought, um, a considerable amount of opportunities for investment as a straight investment banking opportunity. And it's not the first time that I got fired. You know, it's a badge of honor, right. Talk to get fired. So when you get fired and you wear it and it's, it's fine, but the fast forward to this whole thing is that they're struggling. I know they're probably kicking themselves in the head of, of the why, why did we do that? And they're not any better off than they were, and they didn't let the process on the banking, go go far enough down the road in order for it to pay off. And I think it would have, I just think it would have, it would have work. I am very, very negative on reggae. I'm sorry to say that.

JP Maroney:

Well, so here's, it's interesting to hear you say that, and I didn't know what your feelings were on that, but there's a lot that's been going on, obviously with the deal flow show with season one, which we're filming, we'll have somewhere around, I want to say 34 episodes. I could be wrong, but I'd say 10 plus we've had this conversation come up about reggae, almost all cases, very positive, glowing. And this comes from everybody from the legal side, the teams to issuers who are raising founders, issuers that are raising the money to capital raisers and people who run reggae, FinTech platforms and things like that. It's nice to hear another perspective. And what's interesting is that reg a, which I, I have my own opinion about it. We talk about that at some point, but reggae has democratized in many ways, the capital raising process, not, not a rock throwing at you or the industry, but it's taken some of the teeth off of the good old boys investment, traditional investment bankers, and thrown it over to another side.

The other thing is that it's obviously opened up investment, raise raising or capital raising to mom and pop, not just a mom and pop accredited investors, or, but literally grandma can get out her checkbook and write a check. And I just read an article about a real estate fund to two rounds of a fund, two different funds, but by the same sponsor, both run on reggae. One of the investors came in at the minimum $5,000 on, on two different funds turn right around and filed a class action lawsuit. I'm alleging several things among which was self-dealing and misrepresentation, et cetera, which we know is being driven by an attorney. And I'm not signing on either one, but it does open up an entirely new set of problems. So it, it, while it opens up this massive capital resource out there, that's been virtually untapped by anyone outside of the public markets.

It also, I think, is creating its own set of problems. We're intending here at the deal flow show team and our team here at Harbor city capital to do a special episode or round table on reg a and if you're game and don't mind being maybe the one negative guy at the table, and we might consider having you come back in and present your side of the case. I think that would be very interesting to talk about the controversial components of reggae and where it works, where it doesn't, what the challenges are. I just read. One of my colleagues was posting. I think it was in a LinkedIn group was saying that the sec has literally organized a specific task force to look into reggae and the issues regarding what's going on within reggae. So they're, they're definitely being examined under a microscope. We saw it happen with the ICO, the tokenized offerings a couple of three years ago. Now I think we're going to see it with reg A's. My suspicion is the next one will be SPACs. So whatever the sexy thing of the weekends, that's the next target for, for the three letter agencies.

Laurent Ronald Gray:

Yeah. You know, it's funny that you say that. Um, so let's for a second, just talk about, talk about it a little bit further. You, you have the companies that are doing the formation of the right guy. They're there, the organizer, whatever you have, the, you have the law firms that are doing it, the accounting firms and the company looking for the money. So, you know, so you, you have that, that group, whatever the group is. And it just, it just appeared to me. And I, of course, this is a single focus, only one example. I only did one. Um, and I'm not back, I'm not backpedaling cause I'm still a nonbeliever, right. But it seems to be so many people that are in the pie that has to get paid by the, by the principal. Who's looking to access this reggae money. So, you know, $25,000 to the, to the company that is setting the process, then he's got to pay the legal and you have to have a marketing company.

And it just seems to be a lot, just a lot of, a lot of, a lot to even to break. Even you probably down 500,000 on this one particular deal. I think it was seven 50 that he was down and he was struggling. It was getting, as you were going to his investors to plug the holes, right. At the same time being fair, I have heard of a real estate firm, um, that raised 500 million on reggae. So go figure, you know, so if, if maybe if they're done right, it's like everything else. If, if you have the right people in the process from a to Z and no one is being really, maybe, maybe it happens, but I'm, I'm happy to jump in and articulate my feelings, um, and concerns, you know, it's the mom and pop that are jumping in looking to access some appreciation on their, on their dollars. Right. You know, when to do, when do those dollars paid or pay off and how are they protected? And that's, that's my, that's my issue.

JP Maroney:

I want to talk a little bit about the appetite for public markets, the traditional IPOs in a moment. But if you're watching or listening to this episode of the deal flow show, you can get access to our archives or previous episodes as well as subscribe and follow us for future episodes. By going to the deal flow, show.com the deal flow show.com. So Lauren Gray, we've got you on the show today, investment banker, I'm going to call you old school investment banker, right? So you sit in your lane, you know exactly what your lane is and to that, he might, he might be more interested in, in Ray gay, the music genre.

Laurent Ronald Gray:

Would you stop it?

JP Maroney:

So, so, so here's the, um, uh, here's, here's the question we've seen, um, pretty healthy IPO, uh, obviously covert affected some things, but going into it. And now, now coming out of it, some pretty interesting things happening. Where do you see the landscape over the next 12 to 24 months in the IPO market?

Laurent Ronald Gray:

Yeah, that's funny. Um, we do not do anything in the public market at all. Uh, we have, we have stayed away from that. I have stayed away from that my entire life. Uh, even, even when we did Spanish broadcasting, that that was teed off a long time ago. And I had, we had nothing, my company had nothing to do with it. We just had the benefit of having the warrants that, that came back to us, which is great. Um, I am, you know, I, I talk to my clients all the time. You know, when they say you think we should go public, do you think this, you think that I was representing, I'm now representing the same company. They told me they will go into, back into a shell. And I've heard, you know, over 30 years, nightmare stories about shells and how they work and how they don't work.

And you hear more stuff, you hear more stories about how they didn't work. And this guy happened to be one of my closest friends. And I said, you know, John, I think it's a bad idea. I don't know why you're doing it. Um, there's gotta be a better way to access capital. So they did it now, four years later, we, we for PSI are back engaging with them. You know, we, they, we have taken them out of the shell. We've taken them private. And now we're going to have a more traditional family office successful round series day that that gets them, gets them to where they should have been from 2015. So long-winded, um, we don't play in that space. You know, when you go public, you, the underwriting, the due diligence, all the investigations is a nightmare. Plus it's expensive and it's expensive to stay public. Now it's for a lot of people it's just not for, it's not for our practice. We're more comfortable in the, in the private private sector. Enjoy it, love it, better, easier for us. And that's where we, that's sort of where we serve. A lot of companies

JP Maroney:

Go public, um, for the exit strategy.

Laurent Ronald Gray:

So what, what, what do you guys do at your firm? Uh, we will put them in a position for a, a sell a merger, an acquisition, um, the, the benefits, the benefits for that, or most of our tier one, they'll get, they'll get their money when you sell the company. If it's a, if it's a hundred percent sale, you close, you have all your capital. If it's a tail, you you're staying in there for a number of years as a consultant, you'll get paid out. It's I think it's cleaner. It's for I, in my opinion, it's a cleaner way for companies to exit. Um, you just sell, you sell the company that falls into our M and a side of the business, and we're happy. We're happy. We love that side. We love consulting companies either on the buy side or the sell side, when you're

JP Maroney:

A founder or a team like that on toward an exit, through an acquisition, what, what are you saying to them? How are you preparing them to go to the deal table? What are the things you're telling them to look for, watch for be prepared

Laurent Ronald Gray:

Well in everything else, it starts with greed. If you, if you are too greedy, you will get beat up at the table. Always. Then the valuation course is always, you know, the first question is what's my valuation. What's my valuation. And my philosophy about valuations is you take a dart board, you draw a whole bunch of numbers on it, and you give anybody darts and let them throw it because we tell our clients all the time. It's not what, it's not what we think. And it's not what you think it's what the money is buying or investing their dollars into. But you, you, you want to, for the most part, you guide them into a, you know, a very successful close making sure that they understand that the dollars that are, that are being offered is fair. No one is going to overpay. Although things do get overpaid for, and if they're, if it's a clean deal, then it's just clean and, and they should be prepared for the due diligence process, which can take months to get to a closing table. If in fact that some of the management are staying behind, uh, as a, at what they call in or, and out then there are covenants in those contracts. And we're very anal making sure that the law firms or are really going through the covenants with a fine tooth comb, but that's pretty much that's, that's where it begins.

JP Maroney:

The hotel or hospitality industry, having severely under priced opportunities right now, what you feel like for the future, uh, an opportunity there to, to buy in, as long as you can sustain the operation over the gap, um, any other undervalued or maybe an unrealized opportunities that you're seeing out there in the market that people should be paying attention

Laurent Ronald Gray:

Real estate in general is taking a hit. I think the city is down like 30%, maybe 35%. When you have a downmarket or you have a, when you have a pandemic, right? This is, this is an oddity in the capital markets in the marketplace for everybody. There are a lot of people generating a lot of wealth off the pain and suffering of what's going on, right? But there are groups out there that are, that are buying. What was a good note, whether a developer is as an apartment complex and is now struggling to pay the banks, whether it be an investment thing. So banks, um, they're having issues. So there are, there are a lot of companies out there that are now buying the stretch notes. And so on the real estate sector, there's a tremendous buying opportunity, both in the hotel space, the commercial space, medical space and, uh, apartment space. Uh, student housing is interesting as well. There are a couple of companies out there that were, that we know of. We went up, participating in it, head or taking the opportunity to either build new housing or come in and take over the housing, the management side of it, and just have it kind of bell curve out,

JP Maroney:

Involved in facilitating any of those distressed note acquisition.

Laurent Ronald Gray:

We are not on my side, but my real estate partner that has a family office, they are not for any other reason. It's just, we're not seeing, we're not seeing for size, not seeing that they are seeing that they have primarily real estate, a real estate, opportunistic family office. They own five hotels, a multitude of different family, sorry, not family multifamily, uh, opportunities that they're in. So it's more their core. I just do real estate financing with him on opportunities, preferably hotels. Uh, I happen to love the hotel space very, very much. Who would you like to reach out to with regard to our audience or our, our guests? You know, I saw that in the questionnaire and I was like, that's, that's an interesting question. You know, it's, you know, we're always looking for opportunities, always going to be, uh, we're always looking for senior bankers that are looking to join our platform.

You know, we have a, we have a group out in San Diego, uh, Vermont, uh, five in Greenwich, Connecticut, two in Pennsylvania, I'm in, I'm in New York city. So I think we, we offer very interesting dynamics of our own deal flow, as well as the ability to execute the deal flow. We deal primarily with family offices, uh, for the most case, until they get up to around a hundred million and then it's private equity. And, and in some rare cases, it's hedge funds. Uh, we generally will not get an opportunity, you know, over 200 million, if they're coming to me, frankly, why are they coming to me? It wouldn't make any sense. That generally means that they've gone to everybody else. And everyone else said no. And somehow some way they made it here and we're saying no to. So it doesn't matter.

JP Maroney: 

What's the easiest way for someone to reach out to you. LinkedIn email, phone

Laurent Ronald Gray:

Email, it's a L R S gray, G R a Y double O seven. The James Bond reference and achieve mail.com.

JP Maroney: 

Lauren, we appreciate you being on the show, listen to our guests. If you're watching or listening to this episode of the deal flow show, and you think, Hey, I know a good guest, or Hey, maybe I'd be a good guest. Go to the deal flow show.com and you can apply to be a guest or suggest a guest to us. If you're watching, you're listening to the show, please share it. We have a lot of people in the capital markets, the investment space, um, all across the spectrum from service providers and on broker dealers, our IAS individuals that are really getting excited about the show. And if you know people like that, be sure to share it out to other people on behalf of myself, JP Maroney, my partner here in crime, mr. Paul Nicoline, Lauren, thank you so much for coming on the show and on the behalf of the deal flow show, team and Harbor city capital. We'll see you in another episode of the deal flow show very soon. Take care everybody. Bye bye. Thanks Lauren. For more episodes, visit the deal flow show.com and subscribe.

Comments

November 4, 2020

Episode – 18

Self Directed IRA’s and Using Them To Raise Business Capital

Description

Ryan Fischer is a graduate of Villanova University and a self-directed IRA expert with Camaplan. Ryan joined Camaplan in 2011 where he is responsible for new accounts, transfers, inside sales and marketing, and customer service. He is a national online educator on self-directed retirement plans. He has taught about using Self Directed IRA’s to invest in real estate, private lending and many other alternative investments.


In this interview, Ryan does a deep dive into the self directed IRA (SDIRA). He talks about how to set up a SDIRA and the difference between a rollover and a transfer. He explains which investments are prohibited by the IRS. He talks about the misconceptions that people have about SDIRA’s and the benefits. He explains the difference between tax deferred and tax free. He discusses the benefits of a Roth IRA and why you should have one. He explains why Retirement funds are a great source of investment capital.


What You Will Learn
- Self directed IRA vs. Regular IRA
- Difference between Tax-Deferred and Tax-Free
- Which Investments are prohibited by the IRS?
- Myths and Misconceptions about Self Directed IRA’s
- How to Raise Capital using Retirement Account Funds
- Rollover vs Transfer- and much more


Connect with Ryan:
LinkedIn

Full Transcript

JP Maroney:

Well, hello there. Welcome everyone to the deal flow show. I'm JP Maroney, your host. This is my cohost Paul Nicoline. I'm the CEO and founder of Harbor city capital. Paul is our regional director who works with our investment professionals. That's our IAS broker dealers, advisor community. And, uh, we have a really special guest for you today on the deal flow show. It's someone that you have a background, his father, you said you played basketball. I did, as I go. So we have a great guest on the show today. He, his name is Ryan Fisher. He's with a company named Kayla plan. And you'd first heard about a plan from one of our strategic partners, right? That's correct. Yes. Yes. I know. Ironically, I ended up knowing who Ryan wasn't his dad, which was really cool. Yeah. Very cool. So, Ryan, it's good to have you here on the show and he's joining us. Where are you? You're in? Is it Philadelphia?

Ryan Fischer:

Ah, yes, we're just, uh, outside of Philadelphia in Ambler, Pennsylvania, but I'm happy to be here and I appreciate the invite to the deal flow.

JP Maroney:

All right. Going back a little bit. And I think I talked to you about this the other day. I did not know what a self directed IRA was until about 2015 and I was working with a client. This is just like a little personal story. I was working with a client who wanted to become an investor with Harbor city. I had known this guy for quite a long time. He had been a client of mine, bought all of my information and training products that I'd put out over the years. We've gotten to know each other and he was going to invest in Harbor city. And because the rate of return was so good, he was going to take money out of an old 401k and an old IRA and take the tax and penalty hit on rolling that or taking that money out, just withdrawing it.

And instead of doing that, I was having a conversation with a guy that I know who I found out, did self directed IRAs. And as I was talking to him, I said, what do you do? And he's telling me about them and how you can roll money out and do these things and how beneficial it is. And I said, wait a minute. So my client could, and I laid out the plan. He said, absolutely. And the guy ended up saving like $43,000 in taxes and penalties as a result of doing your best friend and became my best, my new best friend. So, um, that was a really delightful introduction to, but I also find that a lot of people have a lot of myths and misunderstandings about self directed IRAs. So as we back up just a little bit, I want you to tell us a little bit about kamma plan, the history of the company, and then let's dive into a little bit of what you guys do and how you do it.

Ryan Fischer:

So the history, uh, I grew up in Florida, uh, Paul's obviously aware of that. That's where I first met Paul, but my dad was a rocket scientist at the space center. So he was launching rockets and for most of his career, and then he decided to get out of that. And he went into business where there's sister Maggie, Maggie, Paula Sano. And that's how they, they started camel plan. They're there they're partners in that and still are. So that's kind of where they, they kind of teamed up and said, Hey, do we want to do this and start a business? And they kind of put those pieces together. My dad had been using self directed IRAs and was telling his family and stuff about them and friends when he was retired, because people had access to those funds now. And he didn't think there was anything, you know, better than it. Uh, he said, I mean, I can go from forever tax to never tax paid. It, he, you know, so it kinda, it kinda, it kinda grew on him and he was telling them when people kind of said, you know, well, why don't you just start a business doing this? And so then he kind of thought that out and he talked to his sister, Maggie and they've, uh, taken it to the next level now. And here we are today, you know, over 17 years later, um, with a plan

JP Maroney:

For the, yeah, for the average person that doesn't know what y'all do. Can you walk us through the model, the business model, the product it's per se, um, or service and how it works.

Ryan Fischer:

Yeah. So back up a little bit and make it pretty, pretty simple here. Um, self-directed is just an adjective in front of an IRA. The brokerage houses will tell you that you have a self directed IRA, but what they mean by that is, Hey, can, here's a list of stocks, bonds, mutual funds, et cetera. You can direct it into anything that you want that's on that list. So for example, someone says, Hey, JP, I'd like to invest into Harbor city, well, Harbor city isn't on their platform. So they're going to say, well, you can't invest in that. Or I want to lend John DOE money. Okay, well, you can't do that because John, Doe's not on their list. Or I want to buy one, two, three ocean, well, one, two, three ocean app isn't on their list. So all the rules are exactly the same.

An IRA is an IRA. They don't, um, all distributions contributions are the same. The only thing that's changing is the investment. So instead of buying, you know, a stock or a mutual fund or whatnot, you're buying into a private fund, for example, or you're buying a piece of piece of real estate. Um, there are rules that go along with that. Uh, the IRS never tells you what you can invest in only what you cannot invest in. And that's a pretty simple list, collectibles and life insurance, which includes booze and piece works of art antiques, that kind of stuff. Um, so as long as it doesn't classify as that, then most likely you're able to use your IRA to invest in it. The reason a lot of people don't know about this is because the brokerage houses, aren't going to tell you this, the really wealthy people, um, have been doing this since the beginning, right? I mean, this is nothing new. Uh, you've been able to do this since the seventies when IRAs were created, but not everybody had a big legal team or accounting team to tell them to do it. And for the average person, they're not going to do it when you have a billion dollars, they usually don't tell you no. Um, so the really wealthy have always been, um, able to do this and, or camel plan has done is help open that up to anybody else out there that, you know, wants to get into the alternative space.

Paul Nicolini:

My experience as a retail broker was, was people that were pre retired and retiring. So, so my experience with self directed IRAs was that for the first time in a lot of people's lives, they understood that, okay, I'm not with the company anymore. And I have this 401k, what do I do with it? How do I do something with it? Because you can, you know, all the cumbersome ways of a 401k, especially in a large company. And so could you just tell us a little bit about that? Transferring, opening up a self directed IRA, maybe retiring and moving your funds out of a 401k into your own self direct

Ryan Fischer:

Denier. It's quite simple. Um, you would just open up an IRA with us, like you would at any brokerage house, you can do it online from our website and about 15 minutes. Um, so there's two way, well, there's three ways to bring money over, right? Um, a transfer. So it's already in an IRA. You would just transfer it over, no taxes or penalties. Uh, if it's in a 401k or three, B or other qualified plans, it would be a roll over into the IRA. And then obviously you can make a contribution like you can anywhere else, but it's a very simple process. You'll fill out a transfer form or, um, a rollover form. There's, there's no taxes or penalties for either. Um, the transfers or non recordable events. Rollovers are reportable Ben, but no big deal, basically tax wise. That means whoever you roll it over from is going to give you a 10 99, we're going to file a 54 98 so they can see everything out. And, um, it's no big deal for people and it can be done within about a week or two time. Uh, they can have their truly self directed IRA up and running.

Paul Nicolini:

And I always remember that the checks that people got, they directly to the cleaner way to do it would be to have the 401k, send it directly to their new, newly established self directed IRA. Correct.

Ryan Fischer:

Right. Um, indirect rollovers, you're only allowed. So if you make it out to yourself, you can only do that once per 12 months then allow you to do more than once. But, um, yeah. It's so what you would want to do typically is just a direct rollover. So for example, you would make the check payable to cam a plan FBO that's for benefit of so camel plan, FBO Paul's IRA issued, the check would be made payable to sometimes they send it to the address on file, which is fine, which is your address. When you get it, send it to us. If they'll send it directly to us, have them do that. I will save you a few days.

JP Maroney:

Yeah. As you were talking, you were talking about your background as a broker. So the deal flow show is primarily targeted as an audience toward professionals, as opposed to the end retail user. You and I talked a bit, a little bit about that. So we have everything from a accounting, legal professionals, uh, people in with platforms, fundraising platforms, sponsors, um, issuers, you know, VCs, private equity, people watching this show. So here's my question. Do you find that even though we're all in some aspect of the industry considered a, an expert or a professional, do you find that maybe there are some myths are misunderstanding about how self-directed work from the professional side? Like if someone's bringing you a potential client to do a rollover, or maybe if they open their eyes and understood it better, it would allow them to bring in more assets for whatever their project is, et cetera. But do you find that there are some myths and misunderstandings within the professional industry?

Ryan Fischer:

Um, I do, uh, I kind of related back to something as simple as you know, when you're a, and you're trying to learn multiplication, it's tough, but once you understand it, it becomes really easy because most of the objections I see out there are it's complicated. It's difficult to do. It's risky. And a lot of people say that on risk. And it's like, well, I mean, is the stock market risky? What's, what's more risky, some tangible asset that I can look at and know that I can collect rental income on. Right? I mean, I at least have a margin of what it's going to be worth. I mean, you know, wall street, you can wake up and it can be worth 3 cents on Monday morning when it was at $33 on Friday, right. We have no control over what happens with these companies, what happens overseas.

So I think the goal is to mitigate the risk. And it's not complicated. It's as easy as opening a bank account. Right. You know, you go anywhere else and you open the account. Like I said, all the rules are the same. You're just changing the investment. Now we don't give any tax or legal advice. We don't tell the clients, you know, this is a good investment, or this is a bad investment that's that is up to them. But most of the people in this space understand, uh, what they're getting into and they can look at those details. They can talk to someone like yourself. They can talk to the other people in the network. They can talk to their attorneys and accountants and other professionals and analyze what they're doing. I mean, there's risk in everything that we do, but the goal is to take some of that out.

Like I know if I buy a property for X dollars, well, I'm only buying that property for X dollars based on the rent. Cause people will ask all the time. Well, how'd you guys do, you know, in Oh eight and Oh nine when real estate crash fine. I would say 99%. I mean, unless you were caught up in some big deal that went South, that I didn't even see that happen with our clients, but I don't want to say a hundred percent because nothing's a hundred percent, but our clients did fine because when you buy it with an IRA, it's an investment. You're not living in it from what I've seen in my experience and my family and friends and people, what are we overpay for? We overpaid for ourselves. We overpaid for, you know, the ocean view, the mountain view, our kids' school districts.

Uh, and we're willing to overpay for ourselves, but you and I both know if you buy a property, we don't care that it's not in a noisy road. Well, and we're only gonna pay what it's going to rent for. Economy does a little better. Okay? Maybe you raise the rent, does a little bit worse. Maybe you have to go down, but you have a range. You know, it's, you know, it's not going to zero. People need a roof over their head. And even in that time, actually our clients did, some of them did a lot better because people ended up upside down in their mortgages and they let their house go and now they needed something to rent. So it really depends, you know, on the, on the environment. And you know what a investment you're, you're comfortable with, obviously everybody is uncomfortable, uh, with certain things. So, but at least you get the chance to analyze that,

Paul Nicolini:

You know, to that point too, about the myths. I remember in my experience, people that didn't know what a self directed IRA was. One of the biggest things was, Oh my God, don't do it because the IRS is going to come after me. Right. How many times have you heard that? They felt like they put a target on their back. Exactly. Exactly. How, how, how true is that?

Ryan Fischer:

Um, well, generally speaking and I don't want to speak for the IRS, but really,

Paul Nicolini:

Really you don't want to, you don't want to speak for it. Come on there. You don't want to, I'm sorry. Go ahead.

Ryan Fischer:

IRAs are not audited. Very often. They have been audited. I I've been doing this for about 10 years now. I've only known one of our clients. That doesn't mean that there wasn't more, but I've only known one and he's a high net worth individual. And he gets audited pretty much every few years. Anyway. So there's, this was in one of them, everything came out clean, but the con to that also is, there's not a lot of precedent. So when somebody says, you know, Hey, can I do this? Well, I told you, the IRS said what you can't do. So maybe, you know, but go look at it because you know, like I said, we don't give them that advice. Everyone's able to look at the publications that the IRS puts out. We have them on our website as well. So it's not, it's not complicated. Anybody. You know, I can get them over that in two or three minutes and show them publications. You know, that the IRS says, Hey, here you go. And they define the republication five 90 and they define things, you know, in the word property, but they never tell you what you can invest in. You know, again, all we, what you can. So sure.

JP Maroney:

I want to talk a little bit about the mechanics of doing an investment in just a moment. But before I do, if you're watching this or listening to this, I'm JP Maroney with Paul Nicolini, this is the deal deal flow show. And if you're not subscribed currently to the deal flow show, you can go to the deal flow show.com. All right. So let's continue when someone wants to make an investment, because you said it's really just a different name on the investment. When someone wants to make an investment inside of a, I'm going to say a conventional self directed IRA. Cause we're going to talk about another layer of this in a moment, but in a conventional self directed IRA that you all put together for someone when they're ready to make an investment, what is the process look like?

Ryan Fischer:

Um, the prospect is basically very simply accounts open. The FA the funds are there to do the deal. Basically all we need is the investment paperwork. Obviously, if you're closing on real estate, it would be the real estate paperwork you're investing in, you know, a private placement. And you'll give us, you know, the subscription agreement, uh, in the IRA's name, camel plan, FBO Paul's IRA, right? And you're going to give us a form that we call our asset purchase directive, which instructs us to, you know, make that investment into the paperwork. Very simple. It's just like any other deal that you do. You're just doing it in the IRA's name. And yet the IRA is treated as its own entity. It's not you, it's going to get its own tax ID number by the way, because obviously if you were making money on your social security number, you'd be paying taxes. So it's just treated like a separate entity. Just like if you went and made an investment out of an LLC or the LLC made it well in this case, the IRA makes it

JP Maroney:

From that point of view of tax. I know you said this, I'm going to say this will probably in fact, Daniel want to put a disclaimer at the beginning of every show, since we're dealing with financial things, but we're not here offering any sort of legal accounting or investment advice. This is purely educational purposes and anything that said here, you should vet pasture or legal or a financial advisor. So my question is though, how is a self directed tax? You mentioned your father saying I can pay, what was it? How did you say it?

Ryan Fischer:

Forever taxed and never taxed. Okay.

JP Maroney:

And go from the forever tax to the never tax. I like that. That's it. That's a new headline for us that we need to put out there. We'll have to quote your fonts, but talk about how they're handled, how it's treated for taxes.

Ryan Fischer:

Absolutely. So the tax treatment is the same with us as is anywhere else, but there's, there's two sides to it. And then, and I know this, I might be getting ahead of you here, but you have tax deferred accounts, such as a traditional IRA, SEP simple, et cetera. And then you have, um, tax free accounts, Ross, HSA, you know, educational savings accounts, et cetera. Um, I'm a big fan. My dad's also a big fan of the Roth IRA. Um, so it really, and I kinda describe it as do you want to pay on the seeds or the crop? You're going to make the money in either account exactly the same. You won't pay any taxes, but you're going to get tax deferred money. And I'll just use the traditional IRA for example. Now, so let's say you take $50,000 in your traditional IRA and you turn it into $2 million.

Well, now let's say you're 75 years old and you want to take the money out. I'm just going to just say, take the whole $2 million out, for example. Well, now you owe taxes on $2 million at whatever rate it is when you're 75, right? If it stayed the same as it does today, you lose, you lose 40% of that. Right now, let's say back in 2020, you took that $50,000 and you converted it to your Roth. Now you do pay the taxes on that $50,000 today. Well, not today when you do your taxes, but for 2020, you'll pay the taxes on the 50,000. But now that 50,000 is worth 2 million, right? You actually take $2 million out and you put it in your pocket. You paid back in 2020 on your 50,000. Now you don't have to ever pay again. That's why I'm saying forever taxed and never taxed. I mean, I think it's one of the greatest tools out there for wealth building. I'm not saying that the traditional IRA is bad because you're saving all that. You're not paying any taxes, so you have more money to keep making money, but you'll, you'll pay at the end. That's why I describe it as, you know, pay on the seeds or the crop there.

Paul Nicolini:

Ryan, do you pay it up front if you open up a Roth or is there a time that you can pay, you know, pay the taxes over time? Or is it a one lump sum or, or is it a couple years you get to pay that tax? Um, no.

Ryan Fischer:

So, uh, conversions are done in a calendar year, so anytime, I mean, you don't have to convert it all at once. Um, and I'll give you a quick example when I'm second, but January 1st to December 31st, whatever you convert in that time period, whether it's, you know, every few months or one lump sum, you know, Yolo in April 15th of that following year. Right. But I have seen other people and it doesn't have to be half and half. I'm just going to give you an example here. I have seen people when the timing worked out for them and they had an investment, right. They'll go and they'll say, okay, well, all right, I'm going to convert half of my account here in December. And then come the first week of January, they converted now. They just, now they just split. Yeah. They lessened that they lessened

JP Maroney:

The liability over, over a two year period. Yeah.

Ryan Fischer:

Right. Gotcha. Um, so people should look at that, you know, especially if they have losses or they made less income, uh, there's other, people's say either, you know, accountants or professionals, you know, well, how much can I convert before I go into the next tax bracket, for example. Right. So they can, you can slowly start getting that money over. I mean, I've also seen people, you know, um, about a year ago I had a doctor come in with close to 2 million. Um, but he knew what his return was and what he was investing in. And he's like, I'm not going to pay on all that later, but not everybody's in a position to convert, you know, a million bucks and pay have the money and he's sitting in their pocket. He was in that position and he didn't want to pay, you know, later on because he knows what his return's going to be on, the stuff that he was doing. And, um, you know, so

JP Maroney:

Very good. So let's talk a little bit about professionals. Again, this is the deal flow show after all. And we're constantly talking about in the deal flow process, where does your business set, where, you know, whether you're an attorney or in your case, self directed IRAs. So if I'm a dealmaker, I'm somewhere in the capital stack of raising money, facilitating capital, raising IPO, whatever, wherever they're at in that whole process of raising funds, how does the professional or the issuer or the money raiser, how do they look at this as sort of a tool in their tool belt?

Ryan Fischer:

Well, I think it was one of the greatest tools. And from my experience with Anne, I'll just stick with someone raising money, for example, uh, from what I've seen, um, professionally, someone who hasn't raised money using self directed IRAs, it's, you know, a gift from God because what, when we go back and we look at it usually more than 50%, you know, 60, 70% of the money that they raise, once they start doing it ends up coming from IRAs one, they raise it a lot more quickly, and this is just a general statistic, but they say people have seven times more money in their retirement accounts and they do. And discretionary funds, uh, obviously that's not for everybody, but generally speaking. So when someone says, Oh, well, you know, JP, I only have $50,000. I can lend you. And then you say, well, what about your IRA or 401k?

They say, well, I have a half a million dollars in there. Sure. I'll give you 250 out of that. It makes, or they might do both. I've seen plenty of people do it personally. And, and people use their, their, their IRA. And that also helps when people have, um, minimums as well. Okay. Well, you have a hundred thousand dollar minimum. I don't have a hundred, but I do have the a hundred thousand in my IRA. So now you didn't just lose an investor because you gave him another option and most people don't know what I tell. And I'm saying this for your audience. I tell people to get that right there in their paperwork. So when somebody says, okay, well, how do I invest? Well, right in your subscription agreement, it says, okay, you're investing personally, you're investing, you know, through your LLC, you're investing, you're in, you're investing through retirement account.

And then they say, Whoa, wait a minute. I, I can do this. I can take my brokerage account and take it out of stocks and mutual funds and put it into this deal. It just puts it right there in front of them and makes them aware of it, because then they're gonna ask questions and they can look it up, you know, and they can talk to me and I can help them and answer any of the questions that they have, but it puts it right there. I mean, if you talk to anybody that hasn't raised, money was self directed IRAs, and then does they raise more money and they raise more money quickly.

JP Maroney:

That's a good point, really is such more than putting it on a form, putting it on the form and knowing, telling the client investor it's available under qualified funds. Not only that you need to share back with the team and the sales team and Betsy and everyone else to make that part of a scripting say, so how are you intending to invest where you're going to invest with cashflow and Anne, were you intending to use your investment account to invest? That could be a great part of that script question. I'm going to give you a free copywriting headline of Ryan, no charge, no extra charge for this. All right. This is a JP Maroney special. So this is for issuers and sponsors out there that are raising capital. Here's the headline, a little known source of new capital for your business or project that seven times larger than the average discretionary fund. There you go. Great.

Ryan Fischer:

Well, I will also add this to it. I'm assuming you're probably aware of it, but there's trillions, not billions, trillions of dollars in retirement.

JP Maroney:

I want you to, I want you to, okay. I don't want you to just throw that because I was going to ask you that number, if you had some sense, because you're in the industry, is there a quantifiable or is it just a thrown about number? Is there something that's quantified that we can, uh, can know

Ryan Fischer:

There is, I don't know the exact number off the top of my head, but it's in, it's in the trillions of dollars.

JP Maroney:

All right. If we, if you can find this statistic, get it to us and we'll have Jesse put it up on the screen right here at this point. So guys y'all look right here. Maybe there'll be a number here, but I'm very curious about that because I hadn't heard that I had heard the T word as well, that there were trillions of dollars log and I consider it locked up because you're, as most people do. Yeah, really you're at, you're literally at the mercy of whoever's pushing the buttons on the other side, and this doesn't happen everywhere, of course, but you're at mercy of potentially someone who's going to churn your money, right. For commissions. That's how they make their money by making investments. So if you've got a pile of cash sitting there potentially you're, you can be a victim to that. And in many cases, fees, um, there, do you have a rundown because we wanted to talk about that. In fact, Jesse has started a storyboarding, a documentary about self directed IRAs. And one of the things we were talking about was the menu of fees, both obvious and listed as well as sort of hidden drag on the performance of a traditional retirement account. Can you speak to that at all?

Ryan Fischer:

Yeah. I'll give you our fees basically, but one of 'em, you know, you've probably known, um, mr. Bogle was started Vanguard. Um, he did a great documentary year, years ago on how the brokerage houses make money and how it depletes money out of what you're getting with the fees and everything. Um, it's, it's actually pretty creative. It was, it was a, it was a great, um, it was, it was a great documentary that he did. Uh, most people don't know how they're getting fees and what they're, you know, the brokerage houses are getting kickbacks and stuff on. I don't want to quote anything, but, um, it's, uh, it's kind of crazy how much money the average person loses. Cause he did a little graph with, if they didn't take it out, how much more, um, you would have. And it was, and it was really crazy amount that they did there when Carl and Maggie started the company, they are investors and they wanted it to work for investors as well.

They use these accounts themselves. Our fees are all transparent. There's nothing hidden. There's nothing tricky about it. I mean, it's unfair, you know, when the brokerage houses will say, okay, well you lost 10% this month, but then next month they say you made 15%. Well, you made a 15% on 10% of your losses. So you lost that money. So what, what did you really make? Um, so they, so they make it a little bit con confusing. Our fees are transparent and they can also be paid cam a plan fees can be paid outside of the IRA, or you can take them out of the IRA, but they're straightforward. It's all on one page, there is no hidden fees. You know, we have two ways of doing it asset-based which is $275 per asset. It doesn't matter whether you buy a $50,000 investment or $50 million investment. It's $275. We don't do any more work to push that paper through whether it's 50 or 50 million. Um, so Carl Maggie didn't believe in charging summary more. Um, a lot of our competitors will charge you more based on that, but we do also have a value based method and you can always switch between those. And that's based on the value of the account times a multiplier, depending on how much is in there and whatever whatever's best for you. We want people to have options and we wanted it to work for people. That's right.

Paul Nicolini:

Great. That's great. Ryan, can you tell us about borrowing against your account? Alright,

Ryan Fischer:

So you're not BARR, you're not borrowing against your account. Um, there is no self-dealing and I encourage everybody, um, or other sponsors or money raisers to, uh, familiarize themselves on our website under, um, resource centers, prohibited transactions. Uh, you should read through that. Uh, it only take you a few minutes, but your IRA can get alone. It can get a non what they call a nonrecourse loan. A lot of people want to say, can I buy a property and get a mortgage? You know, mortgages the wrong term. Your IRA can get a nonrecourse loan. Um, it can get it from institutions. I can give people those. If they ask me or email me, uh, cause most likely, I mean, I don't want to speak for the banks, but most likely the big banks aren't going to entertain that idea. Uh, should I just quickly kind of define nonrecourse loan?

Paul Nicolini:

Sure. Yeah, because I was going to ask you to explain it.

Ryan Fischer:

Okay. Um, well it's pretty straightforward. It's used in real estate all the time. Uh, so I'm going to back up a little bit, like I was telling you before the IRA is its own entity. You can't personally guarantee anything for it. You can't give a benefit for it. They're not running your credit for it. The is the IRA, right? It's its own entity. Basically the nonrecourse loan basically States they, if your IRA fails to pay the lender back, the lender is going to take the property, which happens anyway with mortgages and stuff too. But there is no personal guarantee. They can't come after you or your house or your car or your boat. They can only come after the asset, that's in the IRA. Um, and most people understand that, uh, your IRA does not have to get it from an institution. So I'll give you a quick example, say JP, you were buying a house for half a million dollars and you said, Hey, Ryan, I'm going to put, um, $250,000 in from my IRA.

Would you lend my IRA, the other $250,000 to purchase this property? Let's say the numbers and everything made sense. Okay, great. Pay me 10% or whatever. Right. Whatever we, we, we agree on. I would feel pretty comfortable with that. I can lend that out of my pocket, right. Or I can lend that out of my IRA to your IRA as well, but I'm pretty sure that you're going to do, I mean see that, that I don't find as a risky situation to me. Um, you put 50% in, I mean, me, I grew up in real estate. My dad was in real estate stills in real estate. His parents were in it. So I'm really comfortable with real estate. I would really be sitting there saying, I hope JP doesn't pay me back because I'm going to get, I'm going to get the property for, you know, 250,000 and is worth half a million.

I'll take that all. I'll take that all day long. So I'm pretty sure that JP will do whatever it takes to make sure that I get paid. So people just have to kind of understand it. We won't go into too much detail on this, but I do want to mention it. Um, you may have heard before of UBIT and UDFI UBIT is unrelated business income tax. If you're running a business out of your IRA, you would, even though it's an IRA, you'd pay some taxes. And then again with UDFI unrelated debt financing income, for example, if your IRA gets that non-recourse loan, um, you do end up paying taxes on the borrowed money. Um, and your accountant will take care of this for you. So it's a simple equation for them, but now that you're paying taxes on the borrowed money, you do get depreciation on the borrowed money, for example, there. So that's a topic for another time. I just wanted to mention it that there are ways to pay taxes if you know, depending on the deal. Okay.

JP Maroney:

Excellent. All right. So we're going to get into a Roth versus a traditional IRA in just a moment before we do once again, if you're watching this or listening to this, this is the deal flow show. I'm JP Maroney. This is my cohost Paul Nicoline. And um, so here's our next question. Roth IRA versus traditional IRA. Can you give us kind of the rundown on each, how they compare what the uniqueness is?

Ryan Fischer:

Yeah, like I was describing a little bit before the traditional IRA is tax deferred and the Roth IRA is tax-free. So I'm kind of go back and think of this as, as a, as a bar graph. Um, I present this graph a lot. Um, maybe I'll send it to you. You can put a visual up for this, but I'm gonna use three different accounts to show you the power of these, right? So $50,000 in your traditional IRA, $50,000 in your Roth, IRA, $50,000 as you personally. Okay. There's each one. So three accounts, you do the same deal. You're making the 10% return, right? And I used a 30% tax bracket, um, for this graph that I did and I stretched it out to 40 years. Same thing, no different investment, 10% return. Your Roth IRA ends up with 2.2 and change. I'm not, I'm just going to round off here.

Your off area is 2.2 million in it. Your traditional IRA also has 2.2 million, but you have to pay uncle Sam back. And like I said, we'll say everything stays the same. And I did it with 30% tax bracket. Um, so you ended up with 1.5 million in your traditional IRA, and then you personally end up with 748,000. So 748, 1.5 and two point that's, that's a really big difference. So that's how you can be the extent that you can grow your wealth using these accounts because you're keeping all of the money. And that was obviously assuming that everything was invested at 10%. You know, it won't be exact, but it's just to kind of, uh, illustrate the point of the power of using these tax deferred and tax-free accounts. Ryan, just curious, how many Roth

Paul Nicolini:

Accounts do you guys have as opposed to just the traditional self directed IRA? Um, because I feel like people, aren't people, a lot of people maybe haven't heard of Roth, so they're not educated enough. Do you find that?

Ryan Fischer:

Well, that's actually a good point. We do a lot of education on it. And like I said, I speak about it all the time and it makes sense to people. We have, we have a lot of Roth accounts. Yes. We have people that have converted and had, you know, a traditional and Roth. And the only reason they have that is so, you know, so for example, there is a myth out there that if you make too much money, you can't have a Roth. Now everybody can have a Roth. Um, you might not be able to contribute directly to it, but everybody can contribute. And we have clients that do this, um, word on the street, you know, you'll hear backdoor Roth. It's not necessarily backdoor, but, um, that's kind of the name it took on. So basically if you make too much money, you can, you contribute to your traditional IRA.

Then you fill out the conversion form when we converted the next day. So the money goes in the Roth, the IRS changed that back in 2010, they were only supposed to do it for a year, but then they got caught up doing other stuff and they left it there. So everybody's been able to do it, you know, with those contributions, but you've always been able to, uh, convert granted you do pay the taxes when you convert, but if you remember that guy Mitt Romney, when he was running, he, uh, you know, disclosed and, you know, he had over a hundred million dollars in his IRA. So, you know, it's any, anybody, anybody you can have these accounts. I think that was an oops moment.

JP Maroney:

Who was it? The Swift that really stopped me. Um, alright, so here's, here's the next question. Now when I was first exposed, as I mentioned to the self directed RAs, my client was introduced to a concept that some people call, um, an LLC are a self directed IRA or checkbook are a or S checkbook control. I hear different terms that are out there, but as opposed to being introduced in the very beginning to the concept of IRA, my very first exposure was to that version of it, which I think has some really interesting aspects to it. Some probably benefits and drawbacks, both, but I'd like you to talk about that a little bit about what the difference is, what maybe elements of complexity adds and costs, but also maybe some of the benefits that it brings as well,

Ryan Fischer:

Right? There is pro there is pros and cons to this, but basically what the checkbook LLC, which, you know, you said, you've heard it referred to a few different ways. Checkbook control checkbook, LLC. It basically gives you control what you're not supposed to have for your audience and for you as well. They can look up Swanson versus the IRS. There was four points. I think they want on two of the weakest points. I think if the IRS comes back and looks at it, they might change that rule. However, they've been it's plenty of people do them. I don't necessarily encourage them. It does put more responsibility on the individual with the account because when everything is run through camel plan, you're going to have a record of it through, you know, our account, obviously. But basically when you do the LLC, the LLC is the investment.

You'll give us the paperwork, showing that the IRA. So the owner of the LLCs cam a plan, FBO JPS, a IRA, for example, right then you'll say, okay, we'll transfer it to the checking account that you opened up for the LLC. And now the LLC can, don't make the purchases without became a plan's involvement. That's great. I mean, yeah, you might save $95 on a fee or $150, you know, here and there, but everything is now run through that and you just need to understand the rules. And I encourage everybody that does that to get their accountant and their attorney and everybody on the same page, because you're going to want a working relationship. I wouldn't say go set something up online and say, here it is because you're going to have questions. If anything needs to be filed for the LLC, you know, we're not doing anything for the LLC, right?

So you do have a responsibility to make sure that you're running that correctly. So, you know, you should have a relationship and, you know, talk to your professionals, uh, when doing that. And I'll just give you a quick example as to a simple mistake, right? So when these IRAs, I said this before, um, no, self-dealing, you're a prohibited person. So if you think you can just go to, you know, home Depot and, you know, buy the lumber, buy a refrigerator or whatever it is, and just swipe your credit card and then say, Oh, well, I'll just write myself a check from my LLC. Well, we're never going to know you did it, but if the IRS audits you and looks at that, well, now you just, you just messed up your whole IRA because you paid yourself and you're in, you're a prohibited person. And if you're under 59 and a half, you're gonna have a 10% penalty on the taxes from the time when you did it.

And maybe even some penalties out, if he did that through Kayla plan, and you said, Hey, you came, uh, you know, I bought the refrigerator. Can you cut me a check? We're going to say, Hey, no, actually can't do that return and get the contractor to do it. And we're going to send you, you know, w and we'll pay the contractor. So it's, it's simple things like that. Like I said, as long as you understand the rules and most people who do do the LLCs are not saying this in a negative light kind of control freak. So they're aware of it and they understand that, but it's not for everybody. I mean, you just want to look at it and what's the best way to do it. I mean, if you're going to invest into a private fund, right, are you gonna invest into Harbor city?

For example, that's easy. Do it out of the IRA. There's no need for an LLC. Some people will say, well, I'm going to be doing, you know, real estate out of this number. You paid a bunch of people in this and buying multiple properties. I want to be in control of it. So I don't have to say, you know, Kayla plan send it, send the check to him, which we do a lot of real estate out of the IRAs. It's not a problem. Um, people understand that when you get someone, Hey, this is coming, you know, they're, they're, they're sending a check or wire or an ACH. It's not difficult. We, you know, we do it every day, uh, search it's really a preference, a preference thing for the individual. Uh, the other thing is from accountants and attorneys that I've worked with in the past LLCs and unsecured notes, get audited more often, like I said, I don't know that it's great, but supposedly the ILCs and the unsecured notes get audited more often.

JP Maroney:

I should still do the reporting at the end of the year

Ryan Fischer:

On that. Okay. Yeah. I mean, basically what the individual would do while they're required to do is give us fair market value. And that's for any asset, whether you're holding a piece of real estate, you'll tell us what it's worth. If you're holding an LLC, you'll say, Hey, here's what my LLC is worth. And we do the reporting for that. Yes, correct. Okay.

JP Maroney:

So this is the deal flow show, and, um, we're going to be working actually on a book called dealmakers deal breakers. So I want to kind of shift gears a little bit away from the mechanics of your profession and talk a little bit about the deal flow process, because as our guests want to know, um, you know, how do you keep your pipeline for, how do you do good deals? How do you continue to work with the best people in your industry? Things like that. So I want to talk a little bit about deals for you. And as you think back over the years of doing what you do, any particular deals that are memorable or stand out and, uh, that we could talk about a little bit, just as kind of a framework of this, then going into some of these deal related

Ryan Fischer:

Questions. Yeah. I've seen some pretty interesting deals out there. I'll just start with, um, our most popular investments are physical, real estate, private placements that includes, you know, no funds, real estate funds, et cetera. There's plenty of space in that area. Um, precious metals, that's physical bullying stored in a, and then, uh, just straight up private lending. Private lending has been pretty big for people, especially with the banks being tight over the past few years and things. Uh, but it's kind of funny. I mean, we had, we had a girl, you know, she had llamas in her Roth IRA and they got shaved. Heard of that before. I've actually heard of that before. That's funny. Um, I think, uh, I had client buy, like one of those big, a commercial dump truck that gets rented out to, you know, like big commercial projects are the ones big wheels, like in mine, mining, stuff like that. Yeah. Um, so there, there are some random things, you know, coffee, beans and Costa Rica. Uh, it's actually funny. You asked me that today. I talked to a guy which I haven't heard. I mean, I've seen this before, but I haven't seen someone do it and he's going to do it out of his IRA. They build these like really fancy a tree forge. He's doing it up in the Catskills. And he's like, it's crazy because he's like, they're there they're booked a year and a half out because they, you know, people want, people want to stay in these. And I was literally earlier this morning that I was talking. So there are unique things that, that, that people do. I mean, I think we've had people, you know, invest in Christmas trees and stuff. So, um, those are more one off deals, but I always tell people, you know, as long as it's not as a life insurance, most likely you can do it.

Um, a lot of the time too stuff comes down to, you know, structure, how you're putting it, how you're putting it together. And you know, most of the time you can accomplish what you want to accomplish cases where I see people can't is, and I get this all the time. People want to lend themselves the money. And they're like, well, is there a workaround? No, there's not a work around and you can't lend yourself the money or you're a prohibited person. So I've seen, I've seen that. And then, well, I'll, I'll buy, you know, a house for my son or daughter in college and you know, no, they can't live there. You know, you can't do that. Um, with that being said, though, just elaborate real quick. Cause people get confused. Everybody gets confused with people talking out there. They're like, Oh no family, family, no, that's all prohibited.

So it's linear a cent and decent. So stemming from you, you, your spouse, parents, grandparents, kids, grandkids, or any business around any you own 50% or more of, or have control of is a prohibited person or entity. You could buy a house and rent it to your brother, sister, aunt, uncle, cousin. You could, if your brother's a contractor, you could hire your brother to do the contracting work. If your dad's a contractor, you can't hire him because he's a prohibited person, right. If you're a contractor, you can't hire yourself because you're a prohibited person. So that gets there. We have a nice chart under prohibited transactions that people can look at on that. But that's definitely a misconception out there as to, you know, prohibited people. What about franchises? Um, you can, you can do franchises. We've had, um, we've had people do that. Um, again, you want to look at the structure, you may be paying that UBIT tax if you're running a business, but I also have had people lend money to someone who's buying it. And then it's just a loan. Um, and they wouldn't have that, but yeah, no, it's definitely something you know, that they can do.

JP Maroney:

Very cool. You're in business development account executive, you called it, um, sales. By the way, I have one of my favorite phrases. My mentor said this to me years ago, and I say this to a lot of people. In fact, I told that to Daniel who just joined our sales team in the last couple of months, sales is the only profession where you get paid. Exactly what you're worth. That's true. Think about that's right. Think about that. So here's my question for you. The deal pipeline, keeping the deal full dual pipeline full, whether it's strategic alliances for y'alls business, whether it's clients wa continuing to, to make that happen. What is your process or what are some of the things that you do to keep that pipeline full?

Ryan Fischer:

Um, we do. And obviously I'm part of it. We do have a little sales and marketing department. Obviously marketing helps us with videos and content. So we have, we have two sides. We have people with investments like yourself, for example, that we'll need clients to open up self directed IRAs. And a lot of those people work exclusively with us just because it's easy. They got to get fair market values. Instead of giving them the five different people, they can just give everything to camel plan. It can get updated. So we have a lot of contacts that we work with and we, we like to work with good people. We make friends slowly. Again, we can't tell a client, you know, whether it's a good deal or bad deal or anything, most of the time, if they're, if they're working with you, they, you know, I've already gotten those details and understand what they're investing in.

And the IRAs, just a simple part of where they're going to be funding it from. Um, but we do also get a lot of, um, retail business of people that, you know, just for example, Hey, I buy single family homes and I heard somebody told me I can buy it and not have to pay taxes. I don't need the money. So they start doing it out of their retirement accounts. Obviously we're always trying to work and keep that pipeline going with content. And we're on a lot of different platform. I'm sure you probably are aware of like bigger pockets and stuff. So we just try to make our presence as well known in social media so that we can get more of the information out there. And this is good information for you and your audience. This has a lot of potential and a lot of space to grow, which is great for us as well and great for investors like yourself. Somewhere around 3% of the country uses truly self directed IRAs right now. So that has a lot of room to grow. That's a market.

JP Maroney:

Let me think. Trillions of dollars, only 3% market penetrations. Maybe that's something sponsors and issuers should pay it and money managers should pay attention.

Ryan Fischer:

Yeah. I mean, the thing is the brokerage houses aren't gonna, you know, tell their clients that they can do this, or most people aren't going to say, because that takes, that takes money out of, out of their own, their own pocket. So people have to kind of stumble along this, you know, and, and then there's also a little bit of a learning curve. They have to check it out because I've literally seen this happen. Hundreds of times, probably someone would come over and say, all right, well, I'm going to try this out. I'm going to do an investment for 50,000 or 150,000, whatever it is. And six months later, a year later, I talked to them, you know, and they have a half a million dollars. They're like, Oh wow. I tested it out at work, which is actually pretty cool. So it's out there.

There's books, there's articles. It does get on TV. If you're probably up at two in the morning watching a one of those intro ads. But the, the, the information is there. It's nothing new. It's been around since the seventies, you know, when IRAs were created, but really only the really wealthy, you know, had access to it. When you have a billion dollars, they don't tell, you know, so I don't want to say that a brokerage house won't do it. Um, but they definitely don't do it for a common person. And they don't like to do it. They don't want to do it. It's not in their wheelhouse, but they have done it. I've also gotten assets transferred from big brokerage houses to came a plan because they don't want to deal with it anymore anyway. And they charge a lot, um, to do that. Cause they're, they have a special, a special team, uh, that has to handle that. And most people aren't that familiar with like the alternative space and what they're doing and how to do it. So they have to have a little dedicated person to figure that out for them.

JP Maroney:

Couple of more questions. And then we're going to let you go. These are again, deal related questions once again, if you're listening or watching, this is the deal flow show. I'm JP Maroney, your host with Paul Nicoline, our cohost here at Harbor city capital. Alright, so deal makers, deal breakers. Let's talk about deal makers. What are some of the things that you're looking for in a relationship with someone on the other side of the deal table? What are the positive characteristics or behaviors are elements to that person or the deal that make you go? This is something I think we need to look at.

Ryan Fischer:

Um, yeah. W like, again, we, we can't quote unquote analyze the deal or anything, but if I don't have, like, if I don't trust someone, I don't want to work with them because we want our clients to do well. I don't, I don't want to, I don't want to have my name next to, you know, Bernie Madoff's right. So we do our best, not like, obviously nothing's, you know, a hundred percent proof. Um, but you know, we like, we like to kind of get to know the person, you know, when someone's making their payments and they've never missed a payment, that's a good thing. If someone misses a payment, you know, well, what happened, what happened here? What's going on. And sometimes there's, there's a reason for, for something like that to happen. But now we want to work with good, honest people. If you know, you've started a fund and then you never paid anyone back and it's in the newspapers. And then you say, Hey, I have a new fund. You know, we're going to be raising money for this. Um, that doesn't make me feel comfortable. How do I know that you wouldn't do that again? So, so we just look at, you know, want to work with, uh, with good bid, honest people.

JP Maroney:

Excellent. Anything else? Questions? I have one last question, but anything,

Paul Nicolini:

No. Well, I was going to say to that point too, other than the gut instinct, which I get, because that's, you know, you want to work with, you know, honest people and what have you, but did you guys have a due diligence kind of protocol? You know, do you have a, sort of a structured due diligence that when you might get involved in a deal that, you know, these people have to check certain boxes? Um, no, we're not. We're, we're not allowed

Ryan Fischer:

To, to, to do that, but I mean, we don't have to take business from people that we're not comfortable with. I mean, we do get all the, you know, we're not going to do a deal with someone if they don't have all their paperwork. I mean, for example, with a PPM, you're going to give us articles of incorporation, the operating agreement, and then obviously for each client or give us a subscription agreement. So there are required documents, you know, that we'll need to see, to be able to, uh, you know, do like people make investments into that. But, uh, we can't do, you know, the due diligence on John DOE. Okay.

JP Maroney:

Alright. Once again, deal flow show JP Maroney, Paul Nicoline. We've got Ryan Fisher with us from cam a plan. And as we finish up this interview and thanks for spending a little bit of extra time with us, Ryan, as we finish up this interview, um, I'm a big believer that the more you give, the more you get, but you got to give, give, give before you get, get, get that's law. And so we want to give to you, and we want our audience to have a chance to give to you. What kind of people or opportunities would you like to connect with that would help you and cam a plan as y'all grow your business? Um, we love to work with

Ryan Fischer:

People that have an investment, right? Um, if you're raising money, we can help you. And I think, I think a, I think it's a win win for everybody out there. Um, it opens up access to more funds and obviously it helps came a plan. And I did want to mention too that I'll give my contact information here, here at the end, if you don't mind JP. Uh, but yeah, anybody that's looking to do that, but even if it's a single deal, uh, I won't go into this in detail and we can talk privately on this, but you're not just limited. Your IRA can also partner into deals. It can even partner with you. Like I said, you're two separate entities. I don't want to confuse you there with self-dealing though. Um, but say you and your wife wanted to buy a property and I'm just going to say 50 50.

It doesn't need to be 50 50, but it could be Kim, a plan, FBO, JPS, IRA, and cannon plan, FBO JPS wife's IRA 50% and they can buy it. Or they're, you know, I have people that include their kids and stuff in it. Uh, so there's, there's, there's a lot of ways. Um, and on our website@camelplan.com, there's a 20 ways to fund a deal underneath resource center. So I'd encourage people to look at that because it just can help, you know, in the back of your mind for whatever deal that you're looking at, uh, there's multiple ways to, uh, to fund a fun deal. And that gives you 20 of them.

JP Maroney:

Excellent. Any last comments? No, I'm I'm good. This has been, Ryan's really hit it out of the park here. I, man, I really appreciate you. And on behalf of our team here at Harbor city, our video genius, Jesse McMahon, Daniel [inaudible], who helped set this up and laid a lot of the groundwork. We really appreciate you and your team, your family there at cam a plan, being a part of the deal flow show. If you're watching our listing, this is JP Maroney. My cohort here, Paul Nicoline, we're from Harbor city capital. And this is the deal flow show. If you're involved in the capital stack, if you're involved in the deal making process, if you're involved in raising capital, deploying capital on the legal side, on the accounting side, if you're a service provider, if you have a platform like cam a plan, you have a fundraising platform or some sort of platform that facilitates, um, anything that's involved in that whole deal, making process administration, everything, and you have a story to tell and you have information and value to give to our audience. We want to hear from you, reach out to us. You can go to the deal flow, show.com the deal flow, show.com and get us your information. Um, one thing before we go, why don't you give out your contact information for us, Ryan?

Ryan Fischer:

Sure. It's Ryan Fisher. That's R Y a N F I S C H E R. And my email is R Fisher again, R F I S C H E r@camelplan.com. That's C a M a P L I N. Dot com. I can be reached at (215) 283-2868. Get that it's (215) 283-2868. And there's a lot of resources that you can do research on from our website and under Cameron Academy as well@camelplan.com. Uh, thanks for having me here today, guys. I appreciate it. And

JP Maroney:

Look forward to the future. Absolutely. Our pleasure and Paul Nicole, J P Maroney take care of it. One, go out, fill your pipeline and do your deals. We'll see you in another episode of the deal flow show. See you again.

Comments

November 2, 2020

Episode – 17

SPAC’s, Uplisting, IPO’s, Reg A+, and More With Andrea Cataneo

Description

Andrea Cateneo is a partner at Mitchell Silberberg & Knupp LLP where she is a member of the Business Transactions Practice Group. Her practice focuses on preparing companies for capital raises, structuring financing, and taking companies public. She serves on the Board of Directors of the National Investment Banking Association (NIBA) and is a frequent panelist at capital markets, health and wellness, and cannabis-focused conferences.In this interview, Andrea goes into a lot of detail on a very hot topic, the Special Purpose Acquisition Company (SPAC). She talks about the advantages of SPAC’S and why investors love them so much. She talks about reverse mergers. She explains the difference between an Uplist and an IPO. She talks about Reg A+. She discusses deal breakers and red flags and how to avoid them. If you are interested in the capital markets and deal flow process this is an interview you shouldn’t miss.


What You Will Learn
- The benefits of SPAC'S and why investors love them
- REG A+ and why it’s not as popular as it should be
- Andrea’s due diligence process when looking at deals
- The difference between an Uplist and an IPO and much more!


Connect with Andrea:
LinkedIn

Full Transcript

JP Maroney:

Greetings and welcome to another episode of the deal flow show. I'm JP Maroney, your host, along with my cohost, mr. Paul Nicoline here from Harbor city capital in the deal flow show team. We've got Andrea [inaudible] here as a special guest. You all have a background in the past. We do, and I believe Andrea has become part of a new firm. And we're going to be talking about that. She is with Mitchell Silverburg and NEP. And we're going to talk a little bit about your transition, but let's go back a little bit and talk about how you got started in law. We want to hear about the work that you do in the capital markets and everything, but let's, let's go back to where you got started. How'd you get started? What was the driving motivation? Cause it seems like people that go into law always have something from their childhood or their past. That was that catalyst.

Andrea Cataneo:

It's actually pretty funny because I started out in the music business. I had been a summer associate with a corporate and bankruptcy firm and we represented power station and power station entertainment, Tony Bongiovi studio. And, um, they kept in touch with me after I clerked with a judge, I really enjoyed the work. I come from a musical family. My brother's a professor Julliard. My father always sang. And um, just throughout that relationship, I ended up joining their legal department and the bug that really got, got me going was I was instrumental in helping them raise capital. I worked under a corporate securities and tax attorney who really was a Renaissance man. He's in his nineties now he's still doing deals. And, uh, it was really a matter of helping them build and grow and I'm entrepreneurial. And I just really enjoyed helping them out of a little mess and then helping them get to another level they've since sold the studio and moved to Florida.

But, um, I formed my own firm when I had two little daughters and I worked out of my basement and build this farm with Rick Fox, my initial mentor, who I met at our station. And I've built a pretty far I've in practice for a young mom who worked from home during the time when no one was doing that lawyers were not working from home, but I said, I can do this. I'm a I'm writing deal documents. I'm writing a private placement for a company. I'm talking on the phone with my client. I don't have to be in court. Of course I could do this. So I'm building a practice that was a viable book of business. I became attractive to firms that were in the space and that's really how I got introduced to what was then called McKenzie, Ross, Friedman barons, Richard Friedman.

And I became friendly because we worked on opposite sides of transactions and I'll never forget how helpful he was to me when I felt unable to go on a family vacation because I was so busy with my, and especially public company clients. I know it was essentially a solo with a paralegal and, uh, he did something really that we'll never forget. He offered to help babysit my clients while I went on this 10 day cruise. And during that time, like in 2002, if you were on a cruise, you were at sea for a few days, there was no wifi. And as a corporate insecurities attorney, there are deadlines. It's very deadline sensitive. So, uh, it was really a gift that, that, that he gave me giving me that peace of mind. And when I came back, I realized plugging into a platform, made a lot of sense.

So that's where I spent my longest run thus far, um, in really representing issuers in deals. And I was there 14 years, first woman partner, first woman equity partner. First of all, my lawyer there, believe it or not. And, um, we all remained close and then Richard and I, and a couple of other partners joined up a bigger firm about four years ago, Sheppard Mullin, which was really a great run. Um, I love having that pedigree on my resume. However, the rates, I, I had some rate sensitivity with some of the microcap clients that I really enjoy representing. I'm very, as I said, entrepreneurial, and, um, I missed being able to, uh, be more of a business person in transactions and offer a flat fee parts stock and really enjoy the process of the growth of the company. Um, as I was often instrumental in helping them grow.

So, um, I had been always in contact with Nimesh Patel. He, uh, had been the founder of a firm called Richardson Patel, and they were really a peer firm to [inaudible] Ross Friedman parents. For years, we did a lot of pipes that a lot of going public transactions, IPOs, and, uh, he merged that company with MSK in late 2014. And, uh, it was really a wonderful infusion of capital markets expertise into a company. You had mentioned that, uh, it was a new, it's actually new for me, but MSK was founded in 1908. So it's a very established firm, um, in capital markets, real estate entertainment, which is where the really thrive. And we represent Disney and Sony and many others. Uh, but it's a farm that's really about being entrepreneurial. And I can't tell you, I'm here three weeks and I so blend and, um, I, I bring value beyond the legal work to my clients.

I'm doing capital markets work and, uh, public company worked for 22 years. So mechanically, technically of course, I know the regulations and I can help my clients and I can guide them. But frankly, so can a lot of lawyers, what I bring to the table is a network of relationships and a business sense where I'm not only helping a client build their team, their internal team, the business development, they're independent directors, they're most appropriate funding sources that aren't going to negatively impact the company's cap table long term, because I'm looking in terms of where does this company want to be in five years? So my role is really to help them think strategically about where they want to be. And if they want to list on a national exchange, well, we better be getting prepared. Now there are committees that need to be formed. There were things that need to be done with cleaning up.

Um, basically the corporate records before a company is going to be on display to the public. And that's really what I do best. It's a matter of looking at the big picture and doing everything from soup to nuts. And I had the good fortune of learning that from my roots in this industry, I didn't just work for one large firm where I did tiny pieces of deals and then never really understood the business or the big picture. I can kind of look at the whole thing and help my clients grow from start to finish. And that's really what I find most gratifying too.

JP Maroney:

And the way that you've put the deals together, you mentioned where, what you like to do, and you were a bit restricted than the most recent firm was taking a flat fee and some equity. Can you talk a little bit about how those bills are structured? That may be commonplace with some folks, but there may be some founders or issuers out there that are maybe strapped, um, in the early days of putting together all of the fees and the money that it takes to go public or to go to the next funding round. And if you could explain that, I think that'd be helpful for some folks.

Andrea Cataneo:

I'm so glad that you asked that because you're right. A lot of early stage companies really do need team players. They need people to come and kind of as partners. And I don't want to suggest that I, I can take on five or 10 startups. That's really not my focus, but if it's a private company that is already on its way and can afford some legal fees, but not $900 an hour, New York lawyers, um, and they're looking for the strategic, intelligent, uh, longterm guidance. It's not just a matter of, Oh, review this document and make sure that I'm not going to get in trouble, but you want me to come in and help strategize. I can put together a small initial retainer, not a 10 or $20,000 initial retainer, like a large firm would require, but something smaller, like $5,000 initial retainer and some equity, um, equity, really not only to offset some of the discounted hourly rate that I'm going to offer, but, and my, my colleagues and associates, but to provide compensation for all of this added value that I keep talking about, which is I'm going to introduce these clients to valid funding sources that are appropriate for this client that know their industry, that I know from years of experience in doing transactions with them are not going to take advantage or be toxic.

There there's a time and a place for very expensive lenders. And if my client can return that, that capital quickly, and it's a temporary emergency, sure. I've got lots of places that I could take my clients for that with money, but for longterm Rose and for credibility as a company, and as an issuer, you have to be careful about those decisions. And having me on the team provides really the capability of a company to not meet the States on their path. So that's what I do best is I'm a big picture person. Um, I call myself sometimes the issuer's advocate because even though I enjoy representing underwriters and investors, I like representing the company because I can do so much for our company long term. And if I can be part of the success, meaning I have part equity, we all win. When the company succeeds, my firm wins and my firm MSK is very supportive.

And in fact, many of their IPOs, they have provided a discounted, um, flat fee in combination with some equity. And that helps companies tremendously that have limited operating capital. And once they're funded, sure, what I do going forward is often flat fee public company representation, which is also appreciated by my clients. And I'll be talking about that more often with my base of contacts, because I think lawyers need to be providing services like these companies are looking for that type of, um, trust. And, uh, just really the relationship being one where my client's not afraid to pick up the phone and call me. They're not going to think it's going to be a thousand dollar phone call. When I call Andrea and know that's included in your flat monthly public company, I call it 34 op reporting a representation. I want my clients to feel comfortable to call God forbid. They're about to make a big mistake. And then I'm asked to come in and clean up that mistake, which I don't mind doing, but why go through that anguish as a, as an issue where if you don't have to feel comfortable calling me, I'll see what I can do to resolve the problem. Okay.

Paul Nicolini:

I think the two operative words you said before was maybe strapped, right? Startup companies generally are right. Uh, Andrea knowing you for many years. I know if you have a lot of areas of expertise, but there's two in particular that I'd like to know. And certainly I know our audience would like to know one is, uh, talk about up listing. And then the second one second one, which is a big topic with some of our guests, uh, talk about specs and how they they're hitting the market.

Andrea Cataneo:

Yeah. I thought you were going to say cannabis. Okay. Love to talk about the up list is a terrific, uh, path for a company that is already public and trading. Usually it's a company that's reporting already to the sec and on the OTC chief Bay, if they're just a pink sheet company and OTC markets pink, you can also do an uplift, but it involves more steps because the company needs to first become reporting. So, um, when I, when I look at the uplift versus an IPO, uh, I often explain to a client that's looking to apply just to be prepared for it, to be a little more work and more juggling with regulators than an IPO. It's almost like refurbishing a home that might be falling apart versus building a new home to spec and code from scratch. When you have a private company or already public company, that's been operating for a while without the tight, uh, controls that a listed company needs to have.

You've got to build all of these things into place. There are committees that have to be set up. Like I mentioned earlier, there are independent directors that need to be brought in, and there's a certain higher level of, of governance that the company has to be prepared for. In addition to a lot of other things like having the securities and exchange commission approve a registration statement and having NASDAQ or the New York stock exchange American approve the listing application and the company has to qualify too. So having a team on board counsel, accountants, the independent auditors, um, even an IRR from a stock transfer agent that have the requisite experience and up listing will help guide the company and make sure that the company can meet the listing standards even before starting often. The last thing that accompany will do to meet the listing standards is get their stock price where it needs to be.

And sometimes that involves a reverse split, which I generally my clients to do really at the very end, given that hopefully other things are going on with the company. There's an underwriter involved. There's a lot of discussion about how the company is going to be generating sufficient revenues and so on. So that reverse split, we tend to wait until the end because the company may very well be having a stock price. That's finding a higher level, just organically. Um, but other little things that I would recommend a client do well before getting into the real, um, the real crux of, of the steps involved is decide when to have a shareholder meeting where things can be approved in advance. Like if there needs to be an increase in authorized capital, if there needs to be a reverse split approved of in advance, you know, a range of, uh, of split.

So ratio. So that later down the road, when, when the issue where it needs to take care of all of these things, nothing is going to interrupt the process of the list because you'll already have approval and the process while complex. And while there are a lot of regulators involved, FINRA is also involved with an up list, whereas with an IPO, it seems like, and it's true. You have fewer, fewer regulators that you're dealing with. It's just important that so many of the things are taken into account at the beginning and what I've strongly recommend right at the onset. Once there's a, an underwriter involved, we put together a pretty tight timeline and we get as much buy-in as we can from the working group. Uh, in terms of, do you think you can meet these deadlines, everything from the company, auditor's all the others that I mentioned, particularly the underwriters and their counsel. We all weigh in on. Yeah, we could do X, Y, and Z by a certain date. And then we stick to it and have regular meetings. And that's, that's how you, you get through it. It's, it's rewarding, but it is a bit of juggling. And it's available for companies that qualify to list and that are already already reporting and trading.

JP Maroney:

I want to talk a little bit about specs, which you brought up in just a moment, but if you're listening or watching this episode of the deal flow show, you can get access to our archives by going to the deal flow show.com. When you get to the website, you can also follow or subscribe to get access to future episodes. And of course, follow us on all of your favorite podcasting and video platforms. Andrea, good to have you on. And I know you've got some knowledge in the specs as I was sitting here, it's kind of childish, but I was thinking a spec spec here, a spec spec, they're here, spec their spec everywhere. A spec spec that's been 2020, I think in 2019, 2020, it's like everywhere I spikes back, what, what the heck is going on with specs? Why are they the hottest, newest buzzword in the industry? What's your involvement? Uh, let's talk a little bit about that.

Andrea Cataneo:

Absolutely. And you're right. Specs are very hot right now. And if I can sort of go back in time a little bit back in, I would say from the nineties to about 2010, reverse mergers were King. That was the way for a private company to have a shortcut, to being public. And often private companies were convinced to merge into an operating shell or a pure shell by a promoter or by someone who thought or would tell these private companies that as low, as long as you're public, you're going to get invest investors jumping in no matter what your company is doing. And frankly, that's just not true. The company needs to be viable. It needs to have good fundamentals. It needs to be investible as it is. As a private company, the public portion does open more eyes because being public makes the company forced to be transparent.

Um, it makes them obligated to have their financial statements audited. So yeah, in a lot of ways, certain investors are more comfortable with the company's public, but there's no guarantee that just being public is going to make dollars rain on you as a private company. The stack becomes at Stanford special purpose acquisition company. The spec becomes attractive in recent years, or has it become more attractive? Although it's been on and off for decades because generally specs or with a listed company and the typical profile of a spec these days, or companies that were formed either by investment bankers or by attorneys with deals that have a certain number of months to merge something in, in accordance with, with what's called rule one 18 and as a public company, it's public it's reporting to the sec transaction has to happen within a certain amount of time.

The ones that are the hottest though, or often entities that investment bankers are holding because they might've had another company that they took public that's having issues. And that may be a subject to delisting. Maybe the company's stock prices too low. And he received a letter from NASDAQ or from the New York stock exchange. And the clock is ticking and they need to bring in another asset or another company. And they will then start that clock over and look for a merger candidate. Sometimes there are already dollars in the stack, which makes them even more interesting to issuers are private companies that are looking to go public. Um, so there is a bit of an inventory. Uh, if you were to call me today, if anyone in the listening called me today and said, Hey, look, I've got a great company. We have two years of audited financials.

We're in the healthcare space. We have revenues, we have great management. Can I send you some background on my company? We'd really like to go public. And we would really like to merge into a stack. I could absolutely arrange for meetings with a couple of holders or owners of stacks that are investment bankers that also have funding now, but the company really has to be ready. It can't be, Oh, you know what? I, um, I think this is something I might want to do. And it's going to take me eight weeks to get a, uh, get my audits done. I don't want to dissuade companies that, um, have to finish their audit, but if you haven't started it yet, in my opinion, you may as well wait until you're closer to having your ducks in a row. And that's the appropriate time to start looking for something that is right and looking for a transaction.

And then it really comes down to due diligence. It's essentially a combination of business combination into an already public company that has financing that has a listing already with one of the exchanges and understand that merging with a listed company. If the private company is to be the survivor, you still have to almost reapply to NASDAQ or the New York stock exchange American. There are things that they're going to require the private company. You've got to prove that you qualify. You're going to have to show that you need the requisite standards and that you have the right corporate governance and committees, um, and, and independent directors that you would have to, um, otherwise. So yeah, the SPAC is a, is a great vehicle or the companies that are appropriate and yes, there's an inventory, but they get ripe pretty quickly. And, uh, I'd be delighted to speak with anyone that you know of that thinks they have a company that would like to take advantage of this path to going public.

What I will say though, it's worth doing your homework because as an issuer and working with council experienced with bringing companies public, there's more than one way to go public. And depending on where the company is in their, in their growth, it may make more sense for them to do it more, gradually, more organically. And in my experience, the mad rush is always for that finance. And, but sometimes getting a smaller financing, a few million dollars meeting some milestones, and then maybe merging with that stack or doing an IPO or filing an S one registration statement, becoming reporting with an aid and hope listing a company is able to preserve more of its equity because it's building valuation as it goes through that process. And then isn't giving away the store when they're doing their final transaction. So happy, happy to discuss it further. It's definitely a hot topic these days,

JP Maroney:

Many of the advantages from the investment banker side from maybe as you said, a company it's already public looking for reset on the clot, what is making it so sexy for the investor? And why do you see them going into these with such Gusto right now, I saw a statistic and I'm going to get it wrong by a few points probably, but it's something like 71% of spectrum right now are trading below their listed price, um, or their, their initial price offering price. Um, but what is it that investors are flocking to this for how much of this is emotion and how much of this is true law?

Andrea Cataneo:

Well, I will tell you, and that's a great question. The reason that SPAC investors are much more intrigued and I'm willing to take that risk. Then the investors in the old days after a reverse merger took place for a company that was, let's say on the bulletin board or later the OTC Q big is a SPAC is often a listed company. So it's, it's listed with a national exchange meeting, meaning that it has to comply with all of those requirements. And it's also public and reporting to the securities and exchange commission. So an investor knows that there is transparency that the financial statements were audited, but even better yet, the SPAC investor has a clear cut exit strategy. And that's really what investors want the investors in public companies. They obviously want a good company. They want the management to be good. They want to like the business model, but they want to know that there's a light at the end of the tunnel for them and that there's liquidity.

And in a spec transaction, often the registration statement is registering shares. Sometimes there's an [inaudible], which is a very complex registration statement of, of both companies. If you're talking about two public companies coming together and the investor has all that disclosure at his or her fingertips and is not going in blind and sees that once the registration statement is effective, they could sell their shares in the open market, or they can wait and watch quarter to quarter how the company progresses and have that ability to get out of it when they want, if you compare that with investing at a private company, um, no transparency per se, um, no clear cut exit strategy. So you're taking, you know, the friends and family that might invest, or even the institutions or private investors that want to take a risk, let's say on a wholly stage biotech, if it's, if the company is not public or not listed, it's more of a longterm risk that the investor is taking.

So specs give that advantage, not only of the public company reporting requirements, but very often the listed, uh, strategy of, Hey, this company's on NASDAQ already, or it's about to Bayer or it's on the New York stock exchange American already. I know they've got to comply with all of those requirements on a regular basis. I know they can't be issuing a exaggerated press releases without getting slapped down by the regulators. I know they can't say things that aren't true. I know the officers and directors can't be buying and selling without disclosing it to the public, you know, which tells the public and the investors, Hey, something nice must be happening or maybe something not so nice as happening. So lots of advantages with public company, um, uh, disclosures, um, and with SPACs. And I think investors take comfort in that

Paul Nicolini:

We know specs are generally larger check writers, right. So where does the, where does a come in and, and, uh, can you tell us a little bit about reggae and how many companies you see today using reggae as, as a way to get, get, uh, get capital investment?

Andrea Cataneo:

Yeah, I'm, I'm really glad you asked because the, um, really the legal community was a little, I think, surprised and disappointed with how, um, little reggae, you know, the new reggae plus, as of it was really December of 2012, and it took until may of 2015 before the sec had provided the appropriate guidance for these to be done. And this whole idea of the mini IPO, unfortunately, with a handful of, um, registrations are actually, they got qualified, not registered with the sec. The review period is much shorter. Um, the sec through the jobs, after they're much more willing to accept, uh, these, uh, form one A's and all of the accompanying disclosure, um, more readily than an S one registration statement, but, um, the sad news was some of these bigger deals that got done. Didn't have proper aftermarket support and then NASDAQ in particular and also the New York stock exchange, but NASDAQ really soured on, um, on reggae's for at least a couple of years, because the sec, and, and it's not just my opinion, it's the factually support this since they were a bit more lenient in how they reviewed these companies and NASDAQ had gotten so comfortable relying on sec registrations and acceptances.

Now, in fact might not have done it an extremely thorough, uh, analysis and due diligence like they would ordinarily do on some of these companies, assuming the sec had done all of their heavy lifting and the sad news is they regretted listing a few companies and decided, you know, what, no more rabies for awhile. What happened in January of 2019, which I was happy to say is reggae became available to all very public companies. And I was thrilled to see that because so many of my issue were clients were annoyed. Why can't we use reggae? It's a shorter review period. Was it 72 days instead of 120 days on average to have the sec review and approve? Why can't we use it? So it came around just through a lot of letter writing and a lot of discussion. Um, the rules were modified and here we are more than a year and a half later.

And I'm kind of baffled why more public companies aren't utilizing reg a. So I'm actually in the midst of writing a piece on this, I've done some significant research on all of the public companies that have utilized reg and what may be some of the common ground. And I see it as an exemption that is under utilized. And one reason might be if you've got a convertible note instrument and you've got the stock already trading, you have a situation where maybe the investor can be buying something that's free trading and they can do well on their investment when they sell into the open market. But if you're just selling equity and investor might say, why should I buy from this reggae if I can just buy in the open market? What's the advantage? So there has to be a discount. And if there's a discount in a qualified form, one a, um, unfortunately what's happened many times is that makes the stock price in the market, reached that level. So there are, there are ways to improve this phenomenon. I have some ideas and I want to explore with some clients how to utilize the exemption and how to build in protections so that it can really be helpful in getting companies the money they need. I'm all about capital formation in a way that's going to protect the company, the issuer,

JP Maroney:

Andrea, you obviously have seen a lot of deals come across your desk. You've been on both sides of the table. You've been at multiple firms. You've seen public private, many different types of deals. We're going to talk a little bit about what some of the deal makers and deal breakers are because a lot of the content from this show is being put into a new book called deal breakers. So we're share that in just a moment, but if you're watching or listening to this episode of the Dell flow show, you can get access to our previous shows our archives and our future shows by subscribing and following us@thedealflowshow.com. That's www.thedealflowshow.com. All right. So I want to talk a little bit about the deal breakers. When you walk into a deal, when you're looking at an opportunity when you're interacting with certain people, what are some of those red flags or things that come up and you go, this is a deal stopper for me. I'm not going to go any further until either this is solved, or maybe I'm just not going to do this deal.

Andrea Cataneo:

Um, you know, these are such important things to consider. It's not just about willing investor, um, see these red flags it's as a professional. Do I want to represent a company that has these red flags and I don't. So I am looking, cause I often put myself in the shoes of the investor has I think a corporate insecurities attorney should we should be looking at a company, um, through the lens of someone who's going to be partying with with an investment. And, you know, the first obvious red flag is if the company was not forthcoming, not, not, not completely honest in their disclosures. And one way to really nip that in the bud early on is there's a little bit of research that's done at the beginning. It doesn't take tons of time, but every officer and director needs to complete a DNO questionnaire. And I think for any investment banker, any placement agent, or even any high net worth, they should be asking to see the DNO questionnaires or ask if the attorneys or the bankers have collected DNO questionnaires on the officers and directors, because sometimes just Googling the, you know, the affiliates, the officers directors, and those that hold 5% or more of the issue in outstanding common stock.

You might not find out that there are issues or problems or reasons to run for the Hills. So as you, as I do my homework, which I do as quickly as I can at the onset, I flagged some of these things. And if there are issues, problems, um, that, uh, I know are going to end up hurting a potential listing, like if someone is a convicted felon, for example, that's obvious. Uh, but, um, if there are other things that might interfere with the ability to get financed, I like to, if it's easy enough for a company to get in front of and explain, and I've done this with clients before I see something in my research that I know an investor's going to flag and they explain, Oh, that was nothing. That was a misunderstanding that was X, Y, and Z. That was dismissed. I strongly recommend that the company get a head of that.

Not I'm not suggesting that that's the first thing they say to an investor, but it may be indicated in either a risk factor or it can be in a meeting, something that is brought up by the company, luck in your research. You may come across something that I'm a little embarrassed about. Let me just tell you what happened. I don't want you to get the wrong idea sometimes that saves the deal. Um, so those are sort of obvious, I guess, obvious things that other red flags or, you know, litigation, um, where if it's a company that's public, that was from a merger long ago. I wouldn't say it's a red flag. I would say it is requiring additional homework from council to take a look at the history to make sure that there aren't skeletons that are going to jump out and bite anyone later, like contingent liabilities, like lenders that have been really quiet.

But as soon as the company has money, they're going to come out of the woodwork and Sue. Uh, so I'm looking for stuff like that. I spot it because I know what to look for and an investor coming into a deal. They're going to do their own homework. They're going to hopefully like the industry they're going to hopefully have met with management, either on a call like this or in person, hopefully that resumes one day soon. And hopefully they've, um, maybe gone to see the facility, the sort of general business homework is this a company that I want to invest in for the fundamentals of the business, but also on the sort of, um, hap structure, corporate governance picture, which is where I would come in and help them package a company. Uh, do they look clean? Do they look investible, uh, the red flags or those that I mentioned and could also be big shareholders that have had issues or problems that are easy enough to research? Um, my firm, I've got great resources to do, um, background checks or just, you know, an initial quick sweep to see if we have any reason for concern and kind of once we're past fall, all of that, then we're at a place where we could start focusing on the fundamentals of the business and whether or not the investor feels good about it.

Paul Nicolini:

Andrea I'm in, in closing and it's been wonderful. Uh, you serve on the board of directors of the together one heart foundation. Would you like to talk about that for a moment,

Andrea Cataneo:

For sure. I also serve on the board of NEBA and I'm just going to give me a pitch. The national investment banking association has 9,000 active members and I am in connection with so many of them. So my clients benefit greatly from my ability to always reach out to NEBA members and tell them about that I'm excited about, or that I think they should be paying attention to. And I'm talking about, you know, selling groups and, uh, syndicators and people that either, whether they sit on the board with me or they're just members, those are great connections together. One heart is something I'm passionate about. It's a, an organization that was formed about 30 years ago to help traffic, women and girls primarily out of Cambodia and other developing countries. And this is just a worldwide problem, a human and sex trafficking. And, um, and Anna Lynn McCord, you may remember her from Beverly Hills [inaudible].

Andrea Cataneo:

She took this on, uh, probably about eight years ago and is our president. Susan Surandon is an active member. And, um, w what we're doing is really training and rehabilitating women. We're not in the rescue business anymore, actually through our efforts, the governments in these countries, they're now doing the rescue in, which is phenomenal. And then we come in with training, you know, what, get trained for a career, even if it's becoming a hairdresser, something that you can do to be independent, and you are worth your, your you're worth it. That's really the message that we're giving these. Some of these women are so young or freaking, uh, but, um, I'm happy that I'm able to help in this small, but important way,

JP Maroney:

Always in our network here at the show, we've got people that are listing watching also, even some of our other guests that go back and watch and listen to the show. They're looking to connect and do deals and have opportunities. What are the kinds of people that you would like to hear from, from the deal flow show, audience and fellow guests, people that you'd like to connect with to be able to do additional deals in your product,

Andrea Cataneo: 

I'm helpful to any growing company investors, um, in the public or capital market space, um, investment bankers, underwriters, but I've said this before. My true passion is really with the issuer, uh, any company that is not a startup, although I could probably handle one at a time, um, a company that's got at least a few years under its belt and is achieving things and has, uh, a, a business plan that has some real credibility, and that has maybe done their first round. And they want to be smart about their next race. They want to make sure that they're not diluting their company too much, giving too much of it away. That's the kind of guidance that I can provide. And if the company is in any number of industries that I have really become just more familiar with, uh, you know, health and wellness, alcohol, and, um, and food and beverages happened to be areas that I've, I've worked on a lot of transactions with also, uh, content and digital media. And, uh, there, the whole blockchain world is exploding. There are a lot of, a lot of deals in that space. I'm also passionate about that cannabis space, and you'll be hearing more about panel MSK is going to be launching with my knee at the home, the cannabis team where we'll be working on hemp CBD and cannabis related, uh, financings and eventually going public transactions.

JP Maroney:

Excellent. Well, Andrea was good to have you on the show. Um, if people want to reach out what's the best way, is it a website, LinkedIn? What do you, what's your best connection method?

Andrea Cataneo:

LinkedIn? I I'm responsive@ajcatnsk.com is my email address. And I welcome your emails. I am quick to respond, happy to get on a call and talk about what your hopes and dreams are. Um, that's, that's really what I enjoy. And I really look forward to hearing back from some of your audience. And I thank you guys so much for having me on this is really great.

JP Maroney: 

It was great to have you on, and I appreciate your taking some of the depth. Uh, you know, we have people from all walks and all parts of the capital markets, and some people have super in depth information. Some people have stories, uh, different people have passions and it's, it's made for a good, um, season one of the deal flow show. And speaking of which, if you're watching or listening to this episode of the deal flow show, you can get access to our archives as well as subscribe and follow us for future episodes@thedealflowshowdotcomthedealflowshow.com on behalf of our team here at the deal flow show and Harbor city capital, my cohost, mr. Paul Nicoline on J P Maroney. And we'll see you in another episode very, very soon. Take care everybody. Thank you, Andrea. For more episodes, visit the deal flow show.com and subscribe

Comments

October 28, 2020

Episode – 16

Mark Elenowitz  Did The First EVER Reg A+ IPO on The NYSE

Description

Mark Elenowitz is President of Horizon Fintex and co-founder and managing director of TriPoint Capital. He is a Wall Street veteran with over 29 years experience. His firm is responsible for the first successful Reg A+ IPO to list on a National Securities Exchange — the New York Stock Exchange (NYSE). He is a noted speaker at Small-Cap and Reg A events, including the SEC Small Business Forum, and has been profiled in Business Week, CNBC, and several other publications.


In this interview, Mark goes into detail on Reg CF and Reg A+. He talks about the current definition of “accredited investor” and why it is flawed. He talks about his criteria for doing a deal. He discusses Irrational exuberance and how it can result in unrealistic valuations. He talks about Covid-19 and how it has affected the markets. He warns about the red flags that can destroy a deal and much more. This is a great interview that you will not want to miss!


What You Will Learn
- The benefits and downside of Reg A+ and Reg CF
- Mark’s unique perspective on what to look for when doing a deal
- Why the current definition of “accredited investor” may be flawed
- Deal killing red flags and how to avoid them


Connect with Mark:
LinkedIn

Full Transcript

JP Maroney:

Well, greetings and welcome to another edition of the deal flow show. I'm JP Maroney, your host, along with my cohost, mr. Paul Nicoline, we've got Mark [inaudible] from horizon fintechs, and we're going to be talking about a lot of things among others, reg A's we've talked about those with other guests, but I'm kind of eager to hear about the approach that you've taken to that, uh, Mark. What we'd like to do is kind of back up just a little bit and talk how you got started in the capital markets, what your first movements, there were maybe some memorable deals, memorable deals and things like that.

Mark Elenowitz:

Well, thank you very much for having me here today. So I've been in the market now for almost 29 years. I got licensed back in two, actually 1990. Um, it's been a while. The focus of the last few years though, has been primarily around the jobs act back in 2012. When jobs act first came to the marketplace, when people started talking about it, it was something that we as a broker dealer started looking at and getting involved for a number of years from 2007, till just this past year, I owned and operated one of my own broker dealers. And we became the pioneers primarily around jobs act, title four. So when jobs act first came out, there was a lot of excitement around title two, which is the general solicitation of private placements. There was discussions of title three, which was crowdfunding reg CF, and then there was title four and back in 2012, most of my competitors got excited about the ability to be able to market private placements to a, an accredited community, but more importantly, to the general public utilizing general solicitation, it was something that we had was unheard of.

Um, there was the, the way deals used to be marketed, where we had a preexisting relationship and we would go out. So initially the investment community was focused primarily around actually marketing this to hedge funds, to be able to be a third party marketer and re raise capital for them. So at the time, uh, my competitors started focusing on that. There was a big one out there. I don't think they're around anymore, which was called Merryman capital. And we took a little bit of a different approach. We looked at it and got excited that reggae plus was basically going to unlock and bring back what we call an coined, the phrase, which now a lot of my competitors and other service providers use bringing back the small cap IPO, because in the late nineties we saw there was a big decline in the ability for small cap issuers to be able to raise capital if you were a larger issue.

And there was no problem raising, but if you were in the smaller and the kind of call it the 15 to $25 million range, there really wasn't a lot of options. And wall street itself was a little antiquated. It was old fashioned in the sense that we could only market using traditional techniques where we would use a prospectus and we would use a red herring. And we would out to groups that we had preexisted relationships and do the traditional marketing for an underwritten deal. Well reggae plus title four changed that. So I went and I looked at it, my firm studied it. And what we recognized immediately was that originally their approach was not used as intermediaries, not to use broker dealers, which we found to be inconsistent with investor protection and disclosure and doing it the right way. And what we recognized was that this was the ability now to market traditional IPLS or the concept of a traditional IPO, but to allow the crowd, to finally have a position, to go step side by side, directly with the institutions and in really the elite world, as we used to like to say it.

So I went out and I contacted the New York stock exchange, who we were working with on several of our issuers. And I brought it to their attention. And the first thing they said, isn't this a non traded OTC, early stage opportunity. I said it is, but look at it a different way. I have the methodology that utilizing certain regulatory filings with the sec, we can make this look, act and feel more like a traditional underwriting and allow syndicate and the broker dealers to participate. And at first they thought I was crazy. It took me two years of convincing the MYFC and working with them market reg and their attorneys to come up with the concept and the methodology to allow this to happen. So our firm did the first ever jobs act security title for reggae plus onto the New York stock exchange of heck. We'd done the only two onto the NYC, and we'd done several onto NASDAQ since that time. So it was a real exciting moment to see finally allowing modern techniques, meaning social media, digital marketing, and all the other ways to communicate in a modern world and take traditional underwriting. So traditional offerings, and now offer them to the mass.

JP Maroney: 

How did that compare in the productivity of it or the capital raised or the ease of raising the capital to the traditional methodology?

Mark Elenowitz:

It was extremely difficult. It took a year of going up and down the street, talking to all the institutions that we worked with talking to all the syndicate numbers and the traditional broker dealers on wall street. And they just didn't have the concept or the understanding that you could put out an email or put out an ad on Facebook or Instagram and have retail investors come in and subscribe to the offering. It was just something we had never dealt with before. And then on top of it was trying to understand how could an investment go into the, uh, an escrow account or using our methodology where we have the ability to accept funds, utilizing some, no action letters from the FCC to allow those shares then to close and the next morning to trade on a national securities exchange. So we, we it's embarrassing to say, but at the same time, we're proud to say that we raised about $8 million.

What was, I think the most exciting aspect of that deal though, was that it proved the point that you can use reggae, plus not only to raise capital for yourself as an issuer, but it's also a way to be able to create brand visibility and be able to attract customers to allow those customers to now participate, not only in the offering, but to become aware of you. And I'll give you an example, because this is exactly what happened with that first deal. The name of the company was called my Elmo and my Elmo was an exoskeleton robotic arm. Uh, the medical device company. So basically worked for people who had paralysis or any type of, uh, immobility of their arm. And at the time the company had absolutely no social media following no visibility and no real awareness in the marketplace. So when we conducted the offering and as I said, it took about a year to raise that 8 million.

What ended up happening is that we were able to create visibility for that product. So although we were marking the security, we were really creating the ability for patients to find therapeutic benefit and become aware of a product that they didn't even know existed. So what we ended up seeing is that customers would call the company, and these were either family members or somebody that knew somebody who had an issue. And they were able then to get relief and be able to contact the company to find that product was available for them. So after the IPO occurred, we had so many people call us after the fact saying, thank you. I would have never known about this product and I would have never seen it. And now I've been able to help somebody in my family. So it really proved the point that using general solicitation creates much more of an opportunity for the company beyond just the capital raise. As we would see in a traditional offering,

JP Maroney:

We've heard the same thing, you know, from shark tank, for example, companies that go on shark tank, even if the sharks don't choose to fund or whatever, um, they, many, many of those businesses have seen a bump. And in fact, we've heard of companies going on shark tank with no intention of accepting an offer from the sharks, but knowing that it was going to give them a bump and an access to a massive audience. Um, but you mentioned that you've only probably have done two the only two, et cetera, and three of, but is it because it's so hard, why do you think that methodology has not been accepted by other capital raisers?

Mark Elenowitz:

So what ended up, I think with what's happened here on fortunately is the media had a misunderstanding of what reggae is. Unfortunately, reggae [inaudible] any type of small cap. Underwriting is a small cap underwriting. So I view reggae is incredibly successful. We raised for a company. The next offering we did was a company called fat brands and fat brands. We raised over 20. It was actually a $24 million offering. We were three times over subscribed. It's a well known brand. That's ended up doing a series of additional capital raises. Since that time they've made some pretty good acquisitions, but what happened was the stock didn't perform well in the aftermarket. My Elmo did perform well at first, first few days, it didn't trade much. We did the offering at seven 50 and then word got out. It caught on, and that stock ended up trading, uh, at as high as $21.

And it traded up well above deal market price for over three months, but like most traditional small cap underwritings without the ability of continued research and the ability of street participation, these stocks ultimately then tend to trade and find them, find their, uh, their appropriate price in the market. What we saw after the success of my was that a lot of my competitors came in and focused on utilizing the crowd that created irrational exuberance rather than pricing the deals based upon fundamental analysis and looking at comps and peers. So in the end, a lot of deals came to the market from competitors that ended up not performing well because they were overvalued. Some of them, I tried to short it myself, but in the end, the media picked up on it and said, Reddit reggae is broken. Reggae works perfectly. What's broken, is small cap underwriting.

That's a whole other conversation. And I'm sure some of your other guests that are lawyers and people that are in the industry will have the same opinions as myself. But I think if you look at reggae we've, we took a pause. We looked at some of the areas that could be improved. Our firms spoke with the FCC, and we tried to figure out a way to do a combination of a best efforts, which allows the crowd to participate at the same time, doing a firm commitment, which allows institutions, but more importantly to Al allow a penalty bid and stabilization to occur in the aftermarket trading. And that's, what's called a green shoe. You can't do that in a best efforts offering. I know there's a lot of groups out there that are now talking about that in the marketplace, but they don't quite have the understanding that it's a little more complex than that because the ability to allow the crowd to participate, you can't have money in advance and that creates economic risks for the broker dealer. So I think in time, the sec is going to become more aware. Uh, I was a keynote speaker at the sec, uh, on, on reggae or one of their small business conferences and a moderator for their second small business conference. And we brought these things to their attention. What we've seen though, is a trend now to doing non-traded reggae's, which is just as exciting. That's an opportunity for these issuers to raise capital from their customers and from the crowd, but not have that pressure.

Paul Nicolini:

I'd like to know Mark, uh, not all reggae's go public. So what are some of the determining factors that whether a company goes public or not?

Mark Elenowitz:

So there are some companies that actually trade OTC and there's 34 act issuers. These are companies that are already reporting and trading either on NASDAQ NYC or OTC that are using reggae to raise additional capital. I think for the most part, a lot when in today's marketplace, when you're looking at the comparison between a reggae or affirm commitment, traditional offering, which has done under [inaudible], the benefits of reggae, being able to use general solicitation and general marketing. What we found is because of the negative press around those types of IPOs investment banks have gone back to what they know best and know how to do. In fact, we've done several of them, ourselves with partner banks that we work with where we're doing the more traditional IPL, why do we do that? We know we have an institutional base that will take down the majority offering.

We have retail syndicate of other broker dealers that participate, and it's a comfort level. So I think for issuers to decide whether to come using reggae in a, in a traditional sense to be able to trade on the NASDAQ or the NYC, I think people are rethinking that and saying, if I'm going to go that path, why have the negative press around the media? Why don't I just go and get something done? Because it's going to cost me the same amount in the end. Emissions tend to be the same disclosures about the same and the cost of service providers, meaning lawyers and accountants, and all the regulatory of filing fees with the sec. And the exchanges all are about the same. So at least this way, you know, you're going to get at the question is you're going to get the valuation you want versus the irrational exuberance of the crowd.

JP Maroney:

Yeah. We've all heard the term. If all you have is a hammer, the whole world looks like a nail and it seems to be whatever the flavor of the season is for capital raising. That's what people try to fit their offering into that box. And it doesn't always work. I can't remember which guests we had on, but we had a guest on the show that was pretty opposed to reg A's and had some, some good reasons why they were opposed to them, but, um, and, and preferred traditional filings, um, for public offerings. But I look at it as an arsenal, you know, or a toolbox. You've got all these opportunities out there. I know that you've got some exposure with the CFS and you were, we were talking off air about the difference between the number of reg A's and number of CFS. But to me it's all about having a toolbox. I'd like to talk about some of that in just a moment, but if you're watching or listening to this episode of the deal flow show, you can get access to our archives, our previous episodes, as well as subscribe and follow us for our future episodes, by going to the deal flow show.com. So you talked about private versus public offerings. What, um, and you mentioned the institutional, are you seeing an appetite in the institutional, uh, space for the reggaes?

Mark Elenowitz:

So when we did the first one, uh, as I said, we raised $8 million. We had $200,000 from the institutions, our second and third, we had a lot more institutional interests, but these companies were much greater, uh, in terms of maturity, uh, market cap, enterprise value. So they had the cashflow and the revenue to support an institutional investment. I think what you find with reggae is a lot of the companies that are utilizing it tend to be earlier stage in nature. And these are companies that probably wouldn't attract the institutional interest. What it's interesting that you or your other guests said that they weren't a fan of reggae. I agree with your statement, that reggae is just one of the tools in your tool belt, because there's so many different opportunities and, uh, techniques that are available today for capital formation, that issuers have a lot more choices than they had in the past.

What's nice about a non traded traded reggae is that the cost to conduct that offering is significantly less than you, what you would be doing in a traditional IPO. So if a company is not quite ready to trade, not quite ready to have the responsibility of dealing with the marketplace, and I'll give you an example of that in a moment, then reggae is a great opportunity what we're seeing. And I think one of the interesting things is the SCC. And there's been a proposal to change the, the ceiling from 50 million to 75 million. The reality is we don't really see very many $50 million IPOs that are occurring using reggae. So I'm not quite sure where, why we're seeing that change, but we're certainly seeing something pretty exciting about reg CF, which currently is 1,000,070. That's being proposed to change to 5 million, which now that's a game changer because you can come out for a fraction of the price that you would raise reggae and now raise up to 5 million.

So I think that's a greater opportunity for issuers to be able to use the one thing I will say the other reason. And we have this with one of our clients, uh, is this client happens to be a very well known celebrity. And the celebrity is focused on building his own brand and wants to utilize reggae, to build brand ambassadors, to market there, that particular product. So the fans that he has a hundred million followers that he has, would be focused more so on, not only wanting to be a shareholder, but using that product when they go out into the marketplace and know that that's something they want the company itself thought about going public traded. And what they realize is that then the gyrations of the market, whether it has any fundamental relationship to the price per earnings or the earnings per share, or the enterprise value of the company, sometimes there's a variables that cause fluctuations that are not directly related to the performance. So he would have to deal with investors constantly asking him when he was on tour, on stage, what's going on with my stock, why's it down to points rather than focused on what he wants to do. So it wasn't a great tool, but a non trader reggae, great opportunity for him.

JP Maroney: 

Yeah. And you mentioned the CFS, the disproportionate number of CS versus let's say Ray gays, but in many cases we've talked to people who use those as a stepping stone, right. To get to another offering, to maybe to get a product, a initial concept stages or whatever. But if it were to move to 5 million, I could see that being substantial. There's been some talk about taking the reg a two plus two to 75 million as well. Correct.

Mark Elenowitz:

That's what I had just mentioned, but I don't think that's going to be something that's going to be too interesting at least to wall street, because we haven't seen many of the 50 million talk. We're not even seeing many public offerings where it's, where it's traded on a national security exchange, even anything over 25 million. Um, so it's a great tool where issuers could, if they have a certain type of product that that would demand a higher capital raise. But I think it's going to be few and far between, I think that we're going to continue to see raise and the smaller, um, numbers. And I think what you're finding also, and there's one of the things that there's, um, various views on this, whether you use a broker dealer or not broker dealers do charge higher fees than a lot of the broker dealers that are acting purely as KYC or AML vendors.

There's a lot of, um, third party non-licensed individuals that are recommending do it yourself. Don't use a platform, which I agree in certain aspects, but having a broker dealer gives some, a level of investor protection because the broker dealer will analyze and review the financials and determine is that valuation of management setting the right valuation. And that's, again, going back to what I said at the beginning of that was one of the problems that we found that banks were being pressured more so from the issuer and from the crowd focused on the irrational exuberance rather than fundamental analysis. And I think that we might see that again, if too many issuers are attempting to do this on their own, without somebody there challenging them, because valuation analysis is really more of an art and a science. And what happens is sometimes investors tend to become a little too excited about the opportunities of that flying car or that three wheel car or whatever it might be not recognizing that, yes, there's going to be capital raise to get you started, but you need another three or 400 million just to build that plant. And that's what we ended up seeing where these people paid valuations that were just unrealistic. And in the end, the professionals came in and said, that's a great short, because it's not worth even anything close to that.

JP Maroney:

There's some updates recently where our opinion statements or whatever coming out from the sec regarding accredited investor status and the qualifications, including professional education and professional slots, I guess, or guidelines. Can you speak to any of that? And do you see that since, you know, let's say a reg D five Oh six C obviously can generally solicit, which is the advantage of the reggae, but obviously can only go to accredited investors. Do you see that impacting ultimately the reggae market, um, when the barrier sort of start to drop on the reg D side?

Mark Elenowitz:

No. Um, because that, I think is it's a great stepping stone, but it's not, um, it doesn't really solve the problem, uh, accreditation itself. I think it's important to understand that accreditation as much more than just having a, a million dollar net worth or $200,000 income, you can be a plumber who had a slip and fall and you have a $5 million net worth because you had to pay out that does not mean that that investment is suitable for you. So I think relying on even just going to say, which is definitely a good step that a professional who has the education experience and qualifications to analyze that investment should be included in the investor definition of accredited. That's something that I think is good, but how many, those are few and far between, I think the concept is you're dealing with 1% versus the 99%, the 1% that are accredited and then needs to be expanded because there are many investors who, who probably could meet the definition.

They just don't have that, that net worth. They might have other aspects that would give them the comfort and the knowledge to make informed decisions, to decide whether they want to invest or not. So I think it needs to be much more than just a number. I think the sec is taking the right steps forward and expanding it, but there's still work to be done. So how does that affect the reggae market? I don't think it reflects on it at all because reggae is designed not to focus on that, that particular group of investors, but relative rather than mass. So one of the things that we, um, have employed, and it was interesting because we dealt with the FCC on this at the very beginning, is that if you trade on a national securities exchange, there's no limitation in the amount of investment. It's up to the broker dealer to determine what is proper in terms of suitability and whether that's investment is appropriate for the proof of that particular investor, based upon the facts and circumstances of that individual investor. But we always took the approach, which the rule is for a non trader that you can invest more than 10% of your net income or net worth. And I think those types of investor protections allow investors then to be able to participate and be able experience what it feels to be a part of an issue or at an early stage, without putting them at great risk where they're investing more than they should, based on some type of irrational, exuberance, or excitement around a product.

Paul Nicolini:

Mark, can you talk to us about your company horizon, fintechs? Where does that fit into the capital structure here?

Mark Elenowitz:

When I first started getting acted in the, uh, let's call it the, um, the webinars and the conferences and the panels back in 2012, 13 and 14, uh, I was really the only registered and licensed personnel on the panel. And a lot of the people that were on these panels with me, uh, talking about reg CF and crowdfunding were people from a non-regulated world. They were great marketers. They had an understanding of how to do social media campaigns, fantastic in what they did, but they didn't understand securities law. And one of the things I used to always say is that crowdfunding to me was nothing other than a charitable donation, because you're going in desk, you're going to drink all the beer you want. You're going to love that brewery. You're going to love the bakery. You're going to eat the bread, but at some point you want to get your money back.

So that's why I came up with the methodology for reggae to trade on a national securities exchange because it offered liquidity. It offered an exit strategy because the likelihood that our public and you'd get your money back, really, I thought it was close to slim to none. You know, there were a few outliers that actually did well, but for the most part, at some point, investors have to get it back. So since 2015, there's been over between reg CF and reg a plus there has been over 2.4 billion raised from 2000 issuers. So that's 2000 companies that have raised a lot of money were probably millions of investors that have no ability to exit and no ability to get a return on capital. So horizon is a software provider and I've combined basically Silicon Valley with wall street where my partner built high frequency trading systems for firms in Europe.

And we have a team of programmers. And what we did is we examined each aspect of what it would take in order to create liquidity for these types of offerings. So we focused on KYC and AML. We focused on custody and clearing in order to facilitate these type of opportunities. You need to have a transfer agent. It's interesting that most of my competitors would argue with me for the last two years that you, that a technology can replace regulation, where I said technology would enhance regulation. And many of these individual firms who told me I was crazy that I don't need to employ these types of methodologies suddenly changed their tune, and they're now become transfer agents and other types of service providers recognizing that the only way to facilitate capital markets is to be able to comply with all aspects. So that's what horizon does.

And it's unique because we have an understanding of secondary trading. We have an understanding of primary issuance, and by combining technology with capital markets, we are building a marketplace for the ability for those crowd-funded securities here in the U S and more importantly, globally last year, there was over 4.7 billion raised in the global capital market, global crowdfunding marketplace that has no ability to trade. We have a marketplace that will be up at the end of this year. That's a national securities exchange, not an ATS here in the U S and I'll explain that in a moment, but this is part of the world Federation of exchanges. So it's a real exchange that will allow complete liquidity for those issuers in Europe and globally, to be able to provide liquidity to their investors in a safe, secure, compliant marketplace, where investors could trade without having fear of market manipulation or spoofing or layering.

Short-selling all the things that affect the small cap capital markets here in the U S and that's to us is really exciting. So that's what horizon does, and it will be coming out here in a few months on the U S side, we have partnered with a broker dealer. I happen to be affiliated with that broker dealer for in full disclosure. And that broker dealer has applied within road to become an ATS, which is a alternative trading system. It's an essence of private marketplace that will allow us issuers that have conducted jobs, X securities offerings, to be able to have secondary liquidity. And our technology is an app based technology. That's downloadable off the app or Google store. And it allows very similar to what Robin hood has, where investors can download, open an account, fund their account, uh, and be able to trade and deposit their track crowdfunded securities.

Paul Nicolini:

Is that also, does that, does upstream have any, is that the other part of this?

Mark Elenowitz:

So upstream is the international marketplace. I can tell you the name we're, we're quite excited about that. And what's actually pretty exciting about upstream is because it's part of the, uh, the, the, from the rather the exchange that we're powering, it's part of the world Federation of exchanges. So what that allows is that issuers that quote in our marketplace and have their securities traded there will have their securities traded there. Well, if they qualify and they meet the, uh, qualitative and quantitative requirements, they could actually do a list back on the Toronto stock exchange, the London stock exchange OTC. And if they meet the conditions even big enough to be here on that as decorative in New York, because part of the world Federation of exchanges is about 240 members allows the passporting of those securities. So what's pretty unique about this is it's a full exchange. So investors are able to, we can do primary issuances and have the secondary trading. And as I said, in a safe compliant manner, and allow the ability for investors to deposit, trade, and receive their funds back the next day, if they so desire,

JP Maroney:

We've seen a lot of public bills, private bills you've been around this, what you said 1990 was when you got your original license. So I know you've seen a lot of different deals come across the table, probably from the buy and sell side and a part of different projects. I want to talk a little bit about deal breakers in just a few moments, but if you're watching or listening to this episode of the deal flow show, you can get access to our archives, all of our previous episodes, as well as subscribe, follow us and get access to future episodes by going to the deal flow show.com. So as folks know where producing a book out of a lot of the content that comes from the deal flow show, ultimately called deal-makers deal breakers. When you're getting ready to go to the table for a deal, you're becoming a part of a new project, a new group of people, et cetera. What are some of the red flags or the deal breakers, the deal stoppers that stand out to you that you go either this has to be fixed, or I'm not going to be a part of this, or maybe this is just not the right opportunity for me. What are those things that throw out the big red flags for you?

Mark Elenowitz:

So I think the biggest thing is the unlicensed unregistered people. Um, unfortunately in the small cap marketplace, when you're dealing with capital formation for early companies, those early stage companies are looking for any and all opportunities to raise capital. And a lot of these entrepreneurs are very successful at what they do from their business perspective, but they really don't understand the securities law perspective. And they'll meet a finder individual who has all the best intentions, but they're not licensed. And we pay the tax and we pay the fines. We pay the fees. Some of us, including myself over the years have had hits where it's it being part of an SRO, which is FINRA. We have to play by the rules. And sometimes if, if, uh, the interpretation of the rules are, are not quite as Finn receives it, they're, you're reprimanded. That's important because those rules have the ability to protect investors and the issuers.

So I think a red flag that I see a lot of times is I'll have somebody come to bring in a deal to my office, sit down with me, tell me all about it, get all excited about it, and then stick their hand out, expecting to receive a fee non-licensed on rugged, licensed, and unregulated people can not receive commissions or fees. So there's a lot of, I want to call it a game playing where they try to get creative and try to find other ways to receive that compensation, whether it's through a marketing agreement or a referral agreement. And I think in time, the FCC is going to become wise to this because we're seeing more and more of these issuers not use broker dealers, which means that there's no gatekeeper. And that means those issuers are probably paying fees. They really shouldn't. The problem is that gives a lot of investors in certain the right of rescission.

So if the deal doesn't work out in an unregistered and unlicensed person was paid a fee, there's a chance that those investors could demand their money back. Not issue would be left in a very dangerous situation. The one thing I think though, the sec has done and they proposed is expanding the finder's exemption, which will clearly define when an unregistered person can receive the fee and how that fee can be paid and for what services can be provided. So I applaud the FCC that they're making a step forward. I think that's that to me is a deal breaker. The other thing that's a deal breaker is these companies that come in that the entrepreneur I want to say is drinking the Koolaid where they just believe that their company is worth a billion dollars. And he made the joke about the flying car. I mean, I actually had people come in with a flying car.

Um, that was, that was a deal that was shopped around a number of years ago. I think most of my competitors are solid on the street, but I think it's important that, uh, a CEO looks in the mirror and understands because the other thing that they say to me many times is I don't care. I just want the money with the money comes responsibility. You have shareholders, you have a responsibility and a petitionary responsibility to do what's right for them at all times. So sometimes I think entrepreneurs lose sight of that and don't understand quite what they're getting into. They're being brought into a, um, a capital raising. I don't want to call it a scheme, a capital raising, um, structure that they're excited because they get the cash, but they don't understand the responsibility that comes with it. And suddenly they're left with thousands of shareholders that are demanding to know what's going on and rightfully so deserve to know what's going on. And sometimes those issuers lose sight of that.

Paul Nicolini:

Covert effected you guys this year. It's certainly affected most businesses,

Mark Elenowitz:

Ask my wife. She says, I need to go back to work. Um, it's, it's definitely, you know, our, my world, uh, is a lot of travel and face to face. I have global clients. Um, we, I do a lot of, um, onsite and in person meetings, our office was in, in Midtown Manhattan. Um, we have, I haven't been to the office since, uh, March. In fact, we actually vacated our office. We no longer needed. So the positive is our travel budget is down considerably. The negative is that, uh, I'm locked here at home in New York and not really get to see the world. Uh, but what I'm finding actually is, is more and more people are waking up to, this is actually the new norm. I don't think we're going to go back to have, we had 8,000 square feet in downtown Manhattan. And that certainly is a large monthly expense when people now are comfortable.

And I start my day at five 30 in the morning talking to European clients and we just get on zoom and have it. Uh, the conversation, the interesting thing is to see where deal flow is going to go from the ability to conduct due diligence. We've been utilizing some of the new techniques of being able to use, um, videos that are recorded and, and directed where we can do onsite due diligence, uh, which is actually, if you think about it, exactly what reggae it is. And that's one of the things that got me excited about it because not many issuers, um, are in areas where investors are located right in that know in a general geographic region. So if you're an investor in Florida and you're looking at a deal in Seattle utilizing what is now available under general slits, solicitation of reggae, you can have a virtual road show and you can invite that investor to come in and meet management, do a tour of facility and see what's happening.

And that's what we did with our reggae. So actually COVID is really just an extension of what we did in the past. So I think it's the new norm. I think people are now used to doing road shows virtually. And I think that, um, at least from the perspective of wall street, syndicate broker dealers, we're now used to it. So being able to get on with another BD and their Salesforce doing a zoom, the CEO's like it because they don't have to jump from city to city. They can sit in their desk and be able to do a world tour in a matter of hours rather than days,

JP Maroney:

I guess, not kicking the tires anymore. I guess that statement will be gone. Yeah. And kick him, kicking the wifi, kicking the wifi. Um, when you're preparing for the deal process, walk us through, as you evaluate a new opportunity, uh, and maybe another issue or founders come to you, what walk us through your process? What are the things that you're looking for and how do you prepare for the deal deal flow?

Mark Elenowitz: 

So the first thing that we ask ourselves is, is this something that we would want to invest in ourselves? Is it a viable opportunity that we see that, um, there are a lot of companies that have great ideas, but when you look at the management team, they can't execute. And then you have a lot of great opportunities where the management team has a great idea. Um, they can execute and they just need the capital, get them to the next level. What we're we try to focus on is not raising capital for issuers that need the money to keep the lights on, but rather need the money to grow. Um, our focus is identifying early stage opportunities that have a crowd component. I tend to work with consumer entertainment and hospitality. I work with a lot of celebrity clients, clients that have large social media, followings, customer base, or affinity groups that are passionate about the brand.

And that's important because of they're passionate about the brand and they're passionate the product. Then it demonstrates to us that there'll be continued growth, uh, beyond the initial excitement phase around that particular company. What we also look for is understanding, and I said this before, what it means to be a public company is that management team understand truly what they're getting involved with. This is not having four or five accredited investors or friends and family. This is having potentially thousands of investors and what that responsibility truly is. So the very first thing we do in every meeting is we have, we asked the candid conversation, have the, can have the conversation with the issuer and the CEO. Are you sure you want to embark on this because it's not a silver bullet. There's a lot of work that goes on to do an offering. There's a lot of expense.

There's a lot of time in the way our firms works is we on the broker dealer side is we don't work on retainers. We're not a retainer shop. We're a success shop. So we only get paid at the deal is successfully funded. So we say no more than we say, yes, we haven't been active in the, as I said, the, the public underwriting side of reggae, because we're just not seeing those opportunities where we move them more to the traditional [inaudible]. But I think as the COVID, um, I guess you want to say scenario for capital formation continues to unfold. I think it's a very exciting time, and this is why we're so excited about upstream of what we're building in the U S because changing the ability to raise a reg CF offering from 1 million to 5 million and bear in mind. As I'd mentioned earlier in Europe, they raised 4.7 billion last year, the minimum, or rather the maximum there's 8 million euros.

So there's just this great opportunity for Apple formation for early stage companies, to be able to tap the crowd, tap their fans, and be able to raise capital at an inexpensive yet compliant way. It's such a great thing, because I can tell you as a banker, I'm not going to take a small deal. It's just not worth it. But as those small deals are the ones that need the capital today to become the big deal that myself and my competitors and my partners would want to be able to fund later. So jobs act as a great split specifically title three, and title four is a great capital formation tool that will allow these new and exciting technologies that come out a COVID to get funded and to really see these entrepreneurs be successful. And more importantly, to allow the crowd to finally get a participation side by side, with what used to be the angel world, the VC world, the accredited world. Now they can participate.

JP Maroney:

You've mentioned several times with even CF, but also reggae. How valuable is to have a big following fans, or as you mentioned, some celebrity clients that have a big following or to have a big social media following as well. That was always my, when, when reggae first came out, that was always, my, my thought was that's the only people that could raise there's people that have a big following because you're going direct to consumer essentially, and bypassing a lot of the good old boys network and the institutionals and on and on and on. Where are you seeing companies that don't have that big following that are choosing reggae? Where are they getting the eyeballs on their offerings to be able to raise money successfully using reggae without having a preexisting gigantic following? That's got, uh, some sort of a buy in emotionally already for the bird.

Mark Elenowitz:

I think they're failing. I think they're not raising the capital. I think there's a lot of very upset CEOs and issuers that, um, thought that this was going to be a PA a very easy path to raise capital. We used to have a lot of life science, biotech companies that would come through and they would have this great or what appeared to be a great treatment for XYZ element. And the CEO would sit down and it would take them 30 minutes to explain to me why this was the greatest thing. And then the next new drug. And I said, that's great. You have 30 seconds to pitch a reggae deal. You have even less than that to do a video on Instagram or Facebook. So there's no way you're going to be able to convey that story. And without social meeting, social media, or already a built in fan base, it's just not going to happen.

And that's what was so difficult about my Elmo. They didn't have the fan base. We used a lot of creative marketing techniques. We had a, a good marketing firm that worked with us and helped build a story and build that social media following. But ultimately very little came from the crowd. It came more from the traditional, uh, network on wall street and, and, uh, using traditional techniques. So I think that these issuers are going to have to get creative. Then I think what ultimately ends up happening is that most of the capital that's raised are from friends and family that aren't accredited, but to have a relationship with the issuer or the management team. And now they can participate where in the past they weren't allowed to. And that's where these companies are raising capital, but they're certainly fallen short of their goals.

JP Maroney:

Very interesting. Mark Elana wits, um, from horizon fintechs, Paul Nicholina myself, JP Maroney. If you're watching this show, we want to thank you for joining us for this episode. If you are looking to get access to our previous episodes, maybe do a little binge listening or watching. You can do that@thedealflowshow.com. You can also pick us up on nearly every platform out there for podcasts or video. And if you think of a good guest, that makes good sense for the show or if maybe you think, Hmm, maybe I'd make a good guest that show reach out to us@thedealflowshow.com until next time. We'll see you. Another episode of the deal flow show.com take care of everybody. Thank you, Mark. Bye bye.

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