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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