EP 15 – How to Invest in a Private Company Before They List on the Public Exchanges (pre-IPO)
Special Webinar Episode: Join Mat Sorensen and Aaron Halderman of Directed IRA along with Special Guest Chris Loeffler CEO and Co-Founder of Caliber as they discuss the different investment opportunities and stages of when a private company will offer stock to investors (including self-directed IRA investors) before the company goes public. From angel investor to VC seed funding rounds to crowdfunding rounds to Reg A offerings.
Mat Sorensen: Welcome, everyone, to the directed IRA podcast. This is a special episode of the directed IRA podcast, which comes from our first directed IRA educational webinar on how to invest in a pre-IPO company. We have a special guest on here. Hopefully you find it educational, informative, and please enjoy. Let me just get a started I’m to turn it over to Aaron. So welcome, everyone. This is the first Directed IRA webinar. You know, you may be familiar with the podcast or mainstream business podcast. Other things Mark and I do, but this is really meant to be geared towards educating people on certain self-directed investments, and when someone’s a self-directed investor, which is what we’re doing, of course, all day at directed IRA, what can I learn in certain asset classes? And we want to focus on private companies and pre-IPO stuff today. So now the question I just see these come in on the YouTube. If you go to Mat Sorensen just my YouTube channel, that’s where these actually get posted. They’re also shared on the directed IRA YouTube channel if you’re following either one of those. So. All right. Let me turn over to Aaron. Aaron manages all of our new accounts, business development, marketing, like a big piece of the business here at directed IRA. And then we’ll just get it kicked off. So, Aaron.
Aaron Halderman: Well, yeah. Thanks, everyone. I’m glad we could do this. We get asked all the time to to host these more educational type events on what’s in the marketplace for Self-direct IRA investors specifically. And so we’re excited to launch this webinar series that will have ongoing feature guest experts. And so Mat and I will be the ones hosting this. And we’re we’ll bring on some talented professionals to share their area of expertise and a little bit of their case studies and what’s been working for them. And so today we have joining us Chris Loeffler with the Caliber Wealth Development Company. So thanks, Chris, for being on with us. We appreciate it. Hey, how are you? Good, good. So Chris is all the way in Scottsdale, Arizona, about 20 minutes really far from our office.
Chris Loeffler: Yeah, it’s a it’s beautiful today, isn’t it, guys?
Mat Sorensen: Oh, my gosh. I feel bad for all the people in Texas and other places. I mean, it’s.
Chris Loeffler: I’ve got family in Texas and they’re there. We’re on a text chain and they’re talking about how they’ve got like a flashlight hanging from the top of the stove and using it to, like, make ramen noodles to try to survive right now. So it’s a it’s a crazy time in Texas.
Aaron Halderman: We’re excited to have you on. And we got a lot of great content to cover for those of you that are that are joining us here live, we will reserve some time at the end for some live questions and answers. We’re going to do this in a true webinar format. So we have a handful of slides today that we’ll go over and then we’re just going to have a real interactive discussion. And we’re excited to hear what Chris has been doing. And he’s been in the the real estate and space for many years and allowing IRA investors the opportunity to go and various things that he has going with this company. And they’re doing a lot a lot of cool strategies to share with everybody on how you can get started in various aspects of investing your IRA and privately held companies. And so this is one of the things that we’ve been heavily focused on as a company and working with with companies such as Caliber to bring on people to open up IRA accounts and directed IRA and then invest in private companies, private real estate, promissory notes. And so we’ve got a lot of great content. Mat’s added some slides in today as well. Again, we are recording this, so we will put this on our podcast page, our YouTube channel, and also on directed IRAs website under the webinars and events tabs as well. And so. Well Mat I know you’ve got some stuff prepared here Chris has prepared some good slides. And so why don’t you kick things off and we’ll start leading the discussion.
Mat Sorensen: Ok, so now Chris has some background in this, and I just want to say this is kind of my legal disclaimer. You know, Chris has funds. People can invest into their like, you know, they buy an apartment building thing or they buy hotels and, you know, and they’re an asset manager themselves, selling their own stock on a Reg A offering RegA plus, which we’ll talk about here in a second. But he’s really here is an expert. So I have no idea whether you should invest with Chris or not. Talk to your own financial advisers. I don’t that’s not the purpose of this. But but I just have Chris here is the expert. So that’s my little disclaimer. Well, one thing I was doing today, I just you know, we’re funding these deals every day for clients investing in private companies. And I just I like literally two hours ago, I just approved a wire for a client’s IRA, investing in a medical device company in a series a round that was raising 12 million dollars. OK, and this is a series A round, we’re going to talk about what the heck that is. And this person put in 50 grand, which is as many times the minimum 50 grand. And this is what’s called RegD offering. And it’s a medical device company that would eventually hope to go into a pre IPO or sorry, go into an IPO. So so that’s that’s that’s an easy example here. And then we’re going to talk about Chris, though. So, Chris. So, look, Caliber right now is doing a Reg A plus offering. And this is like the last step maybe you raise before an IPO.
Chris Loeffler: Yeah, yeah. It depends on the company. Some for us, for calibers, Reg A, it’s the last step for other companies it might be the first of maybe a series of these types of. Yeah. Or so it really depends. But for us, we are we are as close to being listed as you typically are before you get listed.
Mat Sorensen: Ok, so let’s take us back, if you will, into from the investor perspective, so if you can use your company as an example, but like when can an investor come in a pre-IPO company? So from an angel or these different seed rounds like walk us through that that story and where the investors can come in and invest at what stages?
Chris Loeffler: Yeah. So I’m I’m as you guys know, because we’ve known each other for a while, I have the heart of a teacher when it comes to this stuff. So as you said, you know, this is really an opportunity for us to teach everybody on the call what what at least what I know or we said what I am in the space. So I’m speaking to you from an experienced entrepreneur, having gone through this a couple of times. And and naturally, we’re also a customer of the process because of the fact that we have one in the market right now. But. You’ve got your kind of your you pre-seed angel round, so that’s usually sometimes they call it a friends and family round. Sometimes you call it a, you know, founders stock or whatever gets sold off. And that’s usually a couple hundred grand to start a company. And, you know, what’s the valuation of the company? People do one of those. Usually it’s a round five million bucks and it’s like five million. Why? I don’t know, because this founder is crazy enough to work hard to try to build a business. Right. And then the next stage comes and that’s where you’re like hiring employees and you’re starting to grow and you’re giving them all this equity in the business because it’s worth nothing. And you’re hoping that they’ll stick around long enough to build the business. And so that’s where you kind of see that employee layer of stock that goes in. And then you’ve got your seed round and your seed round is usually where you bring in angel what they call angel investors. If you go through a fixed angel process and you’re working with professional angel groups and professional angel investors, they actually will help teach you.They’ll teach you how to pitch your company. They’ll teach you how to don’t like give you serious input on your business model and help you refine maybe the path you’re taking in the market. So as you guys may or may not know, I’m also a co-founder in a local company that is venture-funded that is in a different, totally different business. But we did that. We raised 2.2 Million Dollars in an angel round and we went through the process with Desert Angels, which is at the time the fourth most prolific angel investment group in the country. It happens to be in Tucson, Arizona. And, you know,
Mat Sorensen: Let me stop you there, because I had a question come in before. I’ve already gotten a bunch of questions emailed to me before today. So I had a question come in from James who asked basically, how can I find out about pre-IPO companies like where do these angels and people who want to invest early, where are they going? And you mentioned one right there.
Chris Loeffler: Yeah. So Desert Angels is a great group in town. There’s another one in town called Canyon Angels. There’s the Arizona ones, but Arizona ones, Arizona and across the country. If you Google in your local area, you’ll probably find a prominent angel group like in San Diego Tech Coast Angels is one.
Mat Sorensen: We’ve worked with them and seen deals come through for through Tech Coast Angels. They’ve funded some deals. People’s IRAs come in over here. I’ve spoke there. Good group.
Chris Loeffler: Yeah. And at the end of the day, you are so far away from an IPO as an angel. You probably shouldn’t have that even in your mind, you know, because most companies that are funded by angels fail and the ones that don’t, they’re probably going to get acquired at some point in time. An IPO is the least likely exit for an angel funded company. And you know that as an investor, you’re looking at an angel round that maybe one out of ten or two out of ten companies are successful and you’re hoping to increase your investment by twenty times or something like that. So you’ve got a pretty high failure rate, but it’s fun and you can add your talent and your skill set into the process and help those angel fund companies in those founders get somewhere. Right. So you’ve got like you’re there’s a there’s a variety between the seed stage and then the series a, which is the big kind of jump from Angel to venture capital, where you’ll typically do these like post-seed or seed A seed B, where the company needs to keep trickling in some money to try to grow. Yeah. And and you’ll see valuations grow from like five million to eight million to 12 million to 20 million. That’s kind of that valuation range. So you keep investing at these bigger and bigger valuations. Caliber raised our first money at 18 million dollar valuation, which for us was eighty five cents a share in 2013. So it was, it was quite a long time ago and that would be kind of like your late seed round type investment. And then you’ve got your series A and this is like the entry into professional venture capital. So all of those big name companies you hear out there, Sequoia, Andreessen Horowitz, Lightspeed, et cetera, these guys are all these really well-renowned venture capital investors. And is it as an individual like everybody on this call with your IRA funds, are you going to be a LP and Andreesen’s next venture fund? No, I’m sorry. Unless you’re writing a ten million dollar check and you’ve known him for years, you’re not getting into that fund. And so the ability for an investor on a call like this typically to access VC is limited to their ability to find a quality venture capital firm to invest in that VC fund, they’ve typically got to be accredited more often than not, they have to be a qualified investor, so they have to have a five million dollar network instead of a million-dollar net worth. And even then, it’s very hard to find a VC you can invest with. So that’s that’s where you start to get boxed out. You can be an individual and be an angel. But when it comes to VC, which is really where the where the companies have been significantly D risked compared to the angel round your boxed out, yeah, so I’ll pause there I don’t know if that’s too much information, Mat what do you think?
Aaron Halderman: I have a question on like Mat and I talked about it a little bit earlier. So, you know, kind of the what is the due diligence involved? Because the these this IRA money that these are kind of like sacred funds, right? Pretax post-tax tax-free dollars, potentially if it’s the Roth. So they’re not really want to lose that money. Of course it could be. But like what kind of due diligence efforts go in and then what kind of like return or investment structure is typically seen kind of in these earlier rounds that that one could expect or what you’ve done and offer?
Chris Loeffler: Yeah. So like not a lot of diligence at the seed stage. You just kind of making bets and, you know, they’ll look at the company and make sure it’s their whole business and that kind of stuff. And if you’re in a good angel group, they’ll do all of that for you. But hard to tell. If you looked at Uber at the seed stage, would you have known that it was going to be Uber? No way. And so the strategy there is to be diversified and make a lot of bets. And that’s where you have problems as an individual investor, because if you’ve got one hundred thousand bucks and you’re self-directed IRA, and there’s $50,000 minimum, you’ve got two bets. Right. And if you only make two bets in the venture or an angel investing, the likelihood is you’re going to lose 100% of your money unless you are perfectly good. And what they’ve actually found as they study VC is that no matter how good your vetting process is, a great vetting process will kick out companies that end up being really successful because they they say, oh, because of this reason we’re not going to invest in you. And then the company ends up blowing the roof off because it’s just too hard to predict at an early stage. And so what would a better strategy is, is to place lots of bets, and that’s where this whole equity crowdfunding layer comes in.
Mat Sorensen: Ok, so let’s let’s pivot to that. So so we’ve got this kind of series A round there, these series rounds, which are more VC focused, like you may get a co-investor, but they may be taking some outside investors. But IRAs may be coming in more in seed round, which is high risk, but it could be high return or kind of these angel rounds. We certainly see clients IRAs coming in at these levels. But let’s talk about this. Equity crowdfunding. Crowdfunding something we’ve heard about more. And let me just share I think you actually had a slide on that. Some of these are my slides. Some of these are crest is just so so the ones you like, they’re mine. The ones you think sucker Chris’s. OK, this is this is Chris. Explain this equity crowdfunding because you’ve gone through that, too. So you’ve had kind of seed angel. You’ve had the series rounds with VC and and and now and you’ve done some equity crowdfunding like walk us through this next step from the investor side.
Chris Loeffler: So you’re now you’re looking at equity crowdfunding. What is that? That’s a layer. OK, you could be in the angel stage. You can preseed stage. You can be in the series A, Series B, series C, all it is, is an online layer of putting money into these different stages in a business. So it’s not to say that equity crowdfunding is part of that that that big stack, it actually could come in at different places at different times, depending on where the business is raising money. And the reason why equity crowdfunding actually derisks the process is is really two things in my mind. One, it lowers the minimum investment in most equity crowdfunding deals. The minimum investment, somewhere between five hundred bucks and five thousand bucks our round is two thousand dollars. And so now with my hundred grand, I could make 50 bets at two thousand dollars right. Instead of making two bets in addition to that. Because of the process of equity crowdfunding and the type of marketing you have to do to raise capital and the amount of sunlight you shine on yourself and your company, it’s actually harder to be a fraudster and do an equity crowdfunding round than it is to be a fraudster and put together a little Reg D offering and get a couple of people that do a really good salesman and get some people to buy into a company that’s never going to go anywhere. So if you’re really, like, not trying to build a business and you have to go through the vetting process necessary to get a crowdfunding platform and do all this marketing and convince a 1,000, 2,000, 5,000 people to invest in your company, it’s so much more work to do it that way than it is to just do a little Reg D the offering that it actually, in my opinion, Derisks the process for fraud necessarily mean that the companies are going to be better or worse. It just means that you’ve kind of taken a layer of that away.
Mat Sorensen: And now in one way, I think I’ve seen some companies do it this way where they’ve done kind of this VC round. And then after the VC round, they go to an equity crowdfunding platform and they’ll go on and they’ll say, hey, we’ve already had X, Y, Z, VC firm Bak us. So, you know, they’re not they know what they’re doing. They’re smart. They’re not going to just back anybody. They like their money, you know. And so it can add some credibility. You see that as a strategy. I mean, you guys, did you do that like.
Chris Loeffler: Yeah, it’s a great strategy. And we I mean, as you guys know, we’ve raised over four hundred million dollars from accredited investors in our real estate funds. And so we’re backed by quite a few more substantial people than just a couple of VC firms. But most companies that do that strategy, the reason they do it is. Yes, you’ve got a book that’s vetted the deal, so that makes every investor feel more comfortable. But there were VCs that vetted the Thernos deal and that could fly. But more importantly, VCs are writing one check for two million dollars in your company and they want a third of the business. If I’m coming now and I say, OK, I need another two million, but I don’t want to give up another third of my business, I can say if I give someone like Chris or Mat or Aaron the right to put 10 grand from their IRA into my company, maybe they may force me to give up 15 percent of my business instead of a third of my business, because the smaller check size and the lower risk profile allows me to justify maybe a higher valuation or getting more favorable terms from the capital because I don’t have a single check writer. So for one reason you get more favorable terms and that’s why people are doing it. And if you’re an investor on this call, and you’re saying, well, that means I have to pay a higher price than Andreessen. Yeah, you do. Yeah. But you also got to write a check for ten grand and you got to do it well in your PJs with a cup of coffee. And the reason why you’re making bets on these companies is not because you think they’re going to go from, you know, a 50 million dollar valuation to a 60 million dollar valuation that really matters. You think they’re going to go from a 50 million dollar valuation or five hundred million dollar valuation? So it’s kind of one of those things where it doesn’t really make a difference if you paid a little bit more than the VC did. And the other thing that people do it for is it’s called it’s a customer acquisition strategy. So for Calibers purposes, we had two hundred shareholders before we started this process. We’re hoping to land with five to ten thousand shareholders at the end of it. And of those five to ten thousand people, we’re betting that at least 20 to 30 percent of them are accredited investors and could become investors in our funds. So they might own ten thousand dollars worth of stock, but they might put a half a million into our real estate funds. And we’ve already seen that come to be successful. And so it’s a way to say, OK, I’m going to make you a co-owner of my business, but now let me show you our products. And of course, if you own my if you own some stock, you’re going to want to look at the products. Right. And so a lot of companies see that as a successful interest.
Mat Sorensen: Ok, let me go into some terms, I just wanted to point out a couple of things here in terms of like what language you should be looking for as an investor in the documents. All right. And we’ve got some questions coming in. We’ll take a moment here maybe in five or 10 minutes and field some questions. Then we’ll do a little more, come back for questions at the end. But let me just share a slide here on some terms I want to talk through. And Aaron or Chris, feel free to jump in on these. But sure, these are ones I think this is this is Mat, the lawyer, by the way. You know, I just want a couple of terms here. So one of the things to be aware of, these are some things you might see in a pre-IPO company, whether you’re an angel or coming in at these seed or whatever round are coming in. These might be some terms and things to know. One is what’s called a tagalong right. So this is a this is a good thing for you typically. So if the founders are going to sell their ownership, then you can force them to sell your shares too at the same price they sell yours. Right, because if you’re an investor, you don’t want the founder to sell out and go on to their next thing or go retire and you’re left in there with some new owner, you’re like, well, crap, I don’t know. This new company that acquired this is going to be worth anything. So you have the right to this tagalong right to sell when they sell at the same terms and price, which is good. On the other hand, there’s something called a drag along right, which the majority of the founders typically or the majority of the founders get diluted down, can say, hey, we’re going to sell like let’s say it’s not an IPO, it’s an acquisition which is probably more common actually than the IPO and someone’s going to acquire us. But so we’re can force all of you minority shareholders to sell with us, because with this people that wants to buy us, they want to buy the whole thing. So they’re going to buy our shares, but they’re also going to buy yours. And it’s going to be the same terms that’s called a dragalong it where they can drag you along and force you to sell. But again, they’re typically doing that if they think you’re going to make money. And one thing you may see in some of these shares is there may be a liquidation preference to on stocks. So you could invest if you had invested Angel or seed rounds or certain rounds, you might get a liquidation preference where you get your money back, plus a share of the profits. So you’re kind of this preferred stock that’s better than common and so but you’ll get your money paid back that you invested. Plus you’re selling your stock at the regular common price. So you’ve got to look at the some of those liquidation preferences when you’re when you’re buying. And the last thing I would note is the anti dilution, which is important because some companies will say, hey, if you want to maintain your ownership stake when we go offer more stock or units in the company and let’s say you own 5% and you want to maintain 5%, we’ll offer that to you. And you have the right to buy it to if we offer new units and you’re going to get diluted, but you’re going to pay the then price we’re offering at. And that’s not always out there, but it’s one depending on if you want to maintain a certain stake in the company for whatever reason, sometimes you’ll see Aaron or Chris, any comments on these three or any others you think might be good for people to know?
Aaron Halderman: Well, I think it would be good differentiating between common stock and preferred stock. I don’t know that everybody knows what those terms necessarily are because we hear it all the time. And these are indeed in in that adding in like different classes of shares, A, B, C. Kind of give people a little context of that.
Mat Sorensen: Yeah. So let me try that. And Chris, feel free to chime in too common is basically going to be like the regular stock and the founders typically are going to have common stock typically in a business and the investors may come in and have preferred stock. And you could call this different share classes, class A, class B, whatever or common preferred, it could be similar, meaning the same thing. But the preferred is usually like from the investor side, they’re saying, why don’t just own stock in this company like I own stock, but I also get my money back. I got a certain liquidation preference is what they’ll call it, so that, you know, like let’s say I own stock in X, Y, Z inc. Well, like, I can just sell my stock or whatever the stock price is. Right. If it’s worth fifty bucks a year, I can sell 50 bucks a share. But if I have preferred stock, I can sell my stock at 50 bucks a share. Plus I get whatever initial money I put back into the deal. If the company gets acquired, let’s say we get bought out, the PE firm comes and buys them, like I get my money back, plus I get to sell my shares. So it’s kind of a little cherry on top and sometimes you’ll get a one and a half times liquidation preference. There’s other things that can that can go, but that’s the basis on it. Chris, anything you want to add to that?
Chris Loeffler: Yeah, I would add to that that the terms get thrown around a lot, but the features of each class of shares, all that matters. So, like, you could have a preferred stock with a liquidation preference, which means if the company is goes into bankruptcy or sold off for parts and pieces and stuff, that you get the first round of money after the debt gets paid. Oh, great. But that’s kind of like rearranging the deck chairs in the Titanic. If the company’s going down, it’s unlikely that that’s worth anything to you at all. But a lot of investors, they want their liquidation preferences like, OK, well, it’s either going to be successful or it’s not. Where it gets interesting is you can start creating for investors. And we did this with our company through preferred stock, a dividend an income stream. And so maybe for the for the investors who have a Self-directed IRA that’s like a Roth and they’re in their maybe 40s and 50s are trying to grow their wealth. And, you know, that’s where you want to be in the common stock because you want to get the biggest pot for your money. You want to get the biggest upside, because if the company goes up 10 times, you pay no tax. It’s amazing. Right on the other side of the equation, if you’re in kind of a later stage in your investing career and you’re like and you’re older and you’re looking for more consistent income, you could still be an investor in private companies looking at some of these preferred stocks because you’re coming in in a more mature phase of the company, you’re getting a liquidation preference in a bunch of rights that will hopefully give you some protection that your money will be paid back to you and you’re getting typically a dividend. The way we structured our deal years ago was we sold three a unit, which was two shares of common one share of preferred. And the preferred stock had a 12% guaranteed dividend with a sinking they called a sinking fund. We’re actually fund the dividend up front. And so an investor who bought shares in our company got a combined yield of four percent a year on the stock. So they got four percent a year because a third of it was a 12 percent. The other two thirds was at zero. No dividend because it’s common. And once we, as the company had achieved, we sold that at a fifty million dollar valuation. Once we’d achieved one hundred million dollar valuation as as verified by a third party, the preferred converted to common. So we had an incentive to grow the value of our business to one hundred million to therefore take your two dollar stock to four dollars and double it. Right. And by doing that, we got rid of having to pay this dividend like a debt and it converted to common. And so you can really get interesting in some of these later stage share classes where you can get income, you can get protection, you can get kind of aligned interests with the founder if you if you have the right structure.
Mat Sorensen: So, all right, let’s hit some questions right now, I see some in the chat, I’ll feed Aaron if you want to grab one or two you like, and thanks for those dropping them in. This is Calvin’s question, using an IRA to get into pre-IPO company. One key concern is what if the company fails to go IPO? What’s the next investment unless the company trading on private or secondary market investor has any other way to get out of the investment? Yeah, what do you think on that Chris? Of I have some thoughts, too, but yeah.
Chris Loeffler: So totally the biggest concern typically, if you’re investing pre-IPO and a company that says that it wants to go public is do they are they really going to go through with it or are they going to get acquired or something like that? Is there going to be a liquid liquidity event? And that’s where this whole RegA plus thing comes into play. Because if you buy private stock through a typical private offering as an accredited investor in a company that says it wants to go public, you’re going to be buying in a stage where the company is likely hasn’t completed a single PCAOB audit, doesn’t have any internal company infrastructure to be a public company like Financial Reporting and Investor Community Visibility Program and all the other stuff that you’ll need to be able to create and has aspirations to be listed on the Nasdaq because they think it’s cool and they want to ring the bell. But they’ve got they probably have no clue what it takes to get from point A to point B and to give you a football metaphor, it’s like receiving the football of the 20 yard line and you’re going to go try to run down the field and score a touchdown. Now, you may think that this management team is the most amazing management team in the world and the founders committed and they do what they say they’re going to do. And everything they say to you at that moment in time could be true. And yet when you start running down that football field and facts and circumstances change on every single yard that you hit, you’re going to realize, just like I did as a founder, that, gee, maybe it’s not the right time to go public. Maybe there’s another thing here. Maybe we need to go down this way. And ultimately, the founder’s job is to protect you as a shareholder first and foremost, and not lose your money, which means they might take the company down a totally different path. With a Reg A company for better, for worse, and there are early stage reggae companies in late stage Reg A companies, but for better or for worse, they have already received the football run down the field and they have committed SEC process to file a document that’s very similar to what you have to file to complete an IPO. The SEC goes through a comment period. FINRA reviews that, the SEC reviews it. You go through a full kind of typical vetting process. And when you get done with that whole process, that’s when you can raise money. And when you start raising money, you now have to report publicly twice a year. You file a one K at the end of the year. That’s just like a 10K, but it’s called a one K and it looks like the same document. And so you get into the reps of doing public filings and then normally you would file three quarterly reports as a listed company, as a RegA company. You only have to file one of those at the middle of the year. So you file your end and you file a midyear report and you start training your team on what it’s like to be a reporting company, how we have to get into the cycle of that, how to be on time, how to hire the right people. It really builds an entire internal infrastructure with the company. So using that same football metaphor, it’s like saying, OK, I’m going to invest in this company. But they’re already in the red zone and they are they’re already committed to go public because they’re already spending money and they already have to deal with all the gobbledygook that comes with being a public company. And now they just want the listing because as soon as they get the listing, they get all the benefits of being a public company without the listing. They’re doing all the work with none of the benefits. So D risks the idea of investing pre-IPO and getting stuck. It doesn’t guarantee you that the company is going to list, but it probably gives you a much takes you much further down the road.
Mat Sorensen: Yeah, and I think to get Stacey had a question about kind of how to avoid fraud and I think like you into your metaphor, the closer you get to the red zone, the less risk there is because you do have an audit. You know, like you’re going to have audited financials. You’re not going to have some financial projection that some pie in the sky executive business plan, some someone threw out to raise money off of, you know, so you’ve got like real financials audited by a third party, CPA firm. And, you know, and you can look at the professionals people used too. That’s the one thing I think once you get to RegA two and where you’re in this red zone, so to speak, Chris’s, there’s a lot more professionals involved. Like I know you guys used Deloitte that does your your audit. And and there’s a lot more people involved. And so you can look at who’s on their board, you know, and all that and who’s part of the management team. And let’s look at their financials that are actually audited. They’ve been in business now. They have a track history. It’s not just an idea and a concept. But I’d be honest, Stacey, there is a little bit of fraud in this. You know, that’s there’s there is a risk in these pre-IPO companies and there’s reward, too. So you’ve got to weigh that and try to do your due diligence. Look, the companies up that they say they’re are registered corporation somewhere, go look them up. You can look them up in any state. I mean, you know, and I do stuff as an attorney that we can do due diligence too, you know, directed IRA is like we’re going invest in what you tell us to do. So if you’re like invest in this company, I’m I’m not going to second guess you that as long as the documents look right and you want us to do it, we’re going to do it right. We’re not going to say, no, you can’t do that. Or did you think about this? Did you think about that? Did you think about this that it’s not our role at directed IRA, but you could get other professionals that could maybe help evaluate some deals or terms, you know, the documents to see is this a good deal or not? Or am I just getting a totally a crappy deal? Yeah.
Chris Loeffler: Oh, I just want to add one thing that Mat the the market is still forming. This type of investing is only about five, six years old right now. So I know of a company that’s trying to become like the Moodies of reggae companies so they could rent. This reggae offering is high rated. This one’s low rated because this one used Deloitte and Mat like ours did to to launch their offering with a top tier group. This one used ABC CPA firm in Kansas City, the no one’s ever heard of. And they did they did the required minimum, but that maybe didn’t produce the same results. So, you know, there’s not yet that rating agency. There’s not yet that market hasn’t formed yet, but it’s coming. And as it’s coming, I think some one thing to consider for most investors is unless you have a 20, 30, 40, 50 million dollar net worth and you’re in the private banking groups of some of these banks, the likelihood that you have the option to invest pre IPO in anything is is close to zero except through these new methods of investing. So the whole purpose of creating these methods was to start democratizing the ability to build wealth with these types of investments. But just like in the early days of eBay, you’re going to have people who are selling stuff that doesn’t exist. And there’s risk there. There, so make string out your bets and make lots of lots of little bets, and then as you get comfort, then you can grow those bets.
Aaron Halderman: Roger has a good question about how warrants play into IPOs. Chris, you want to take that one?
Chris Loeffler: Yeah. So in a lot of the the early stage rounds, we offered warrants a couple of times and some of our early rounds. We like ourselves. We sold stock at eighty-five cents a share. We offered to Warrant at a dollar seventy, then we sold stock at a dollar thirty-five a share and offered a Warrant to 50 or something like that. And what it is, is, hey, you buy my stock and maybe if you buy a thousand shares, I’m going to give you two hundred and fifty additional warrants that you have two years to decide if you want to buy these warrants and it fixes the price of the stock for you in the future. So it’s sort of like a kind of gives you an upside play. So in the instance of us selling stock at eighty five cents a share, you know, when we went resold stock at two dollars a share, the folks who had warrants at a dollar 70 said, yeah, I want to buy my warrants because they’re selling it to and I can buy a dollar 70 now. It’s a it’s a way to enhance your return as an investor. And it’s sort of like they’re saying like an option. But on the other side of the fence and in terms of due diligence, if there’s like all these outstanding warrants that you’re not aware of and you’re not seeing when it’s going to do, you could think you’re buying the company at one hundred million our valuation. And you can see that valuation you cut in half with all these dilutions from all these warrants and all this other gobbledygook that’s out there. So you’ve got to be do your due diligence and make sure that you’re not getting your valuations stripped away.
Mat Sorensen: Yeah, that’s a good tip to know when if you’re investing kind of late stage, you know, which does I can I go back to the football? You’re kind of in the red zone, but there could be some baggage there. And that’s a good tip to look at is how many outstanding warrants are there that could be exercised and and dilute you that you know, that are there exercising at half the value you just bought at. OK. Are any other questions you want to field there? Aaron, I just had one more item I want to cover with Chris and then we’ll come back to the other questions.
Aaron Halderman: Yeah, so I will save this one towards the end. But I’m curious on this. Are there any ETFs that specifically invest in, you know, come in and invest in Angel Round or series A or series B round?
Chris Loeffler: I don’t know. I don’t either, actually. I never heard of that. I mean, there’s there’s an ETF called IPO that invests in every IPO that comes out. So if you just want to bet the IPO market, you can you can just buy shares of IPO. The unfortunately for whatever it is, what it is and not making a political statement here, but the way that our governmental system is set up, the government wants to protect the investor from themselves. And and and because of that, unless you have, like I said, a net worth over five million dollars and you qualify as a qualified investor, the likelihood that you will be able to invest in any of this stuff in any manner at all is very low, except for these new crowdfunding options, which is all designed to try to create a new way to invest in these deals. It doesn’t necessarily like why do it? Why does an accredited investor Mat does someone buy into that early stage medical device company? Probably because they knew somebody who was starting that company. And that’s the only real way that you would get access in the past unless you happen to be in one of these angel groups. And so now a lot of those companies are putting their offerings online. And the rub is that the VCs hate it. So all the voices that are high brow because, you know, Andreessen, et cetera, they all look at, oh, you did a crowdfunding round and there must be something wrong with your company. Why couldn’t you get real VC capital? And maybe there’s not.
Mat Sorensen: They want you to go get the money from them first and then go do a crowdfunding round at a higher valuation.
Chris Loeffler: They don’t even want you to do that because they have this like, oh, if you did crowdfunding, you’re just you’re just not like a real company because, you know, if you if you really were that exciting, a VC would have invested in you. And they think very highly of themselves. They may be right. But I think the reality is that maybe the founder just doesn’t want to get their valuation beat to death, or maybe they saw a value in bringing in a wider shareholder base at an earlier stage. That’s entirely possible. So there’s a big kind of rub right now between the true the regular VCs, they call themselves true VCs and the online crowdfunding market. That’s just like forget you guys, we’re moving off, you know,
Aaron Halderman: So Mat before you go into your last item and it’ll take some more questions. There is one that they came up about, a SPAC, so a special purpose acquisition company. Chris as you were doing your due diligence and decided the of doing the RegA offering. Did you do any research on it on a SPAC and what were your thoughts are and process on on that. Yeah. Your experience.
Chris Loeffler: Thanks for teeing me up perfectly here. I’ve got a little visual for you guys. OK, so before I go to the visual, I don’t want to distract you. a SPAC is a shell company that’s been listed on the New York Stock Exchange or the Nasdaq that a bunch of investors invest cash into and it trades in the market. So it’s trading. It’s just a pile of cash.
Mat Sorensen: It’s a shell. It has nothing.
Chris Loeffler: There’s nothing in it. It’s just a big pile of cash and the trades of the ticker symbol. And there’s a group called the sponsor, and the sponsor gets 20 percent of its back for putting no money in the deal. And they come in typically 20 percent. They come in with their expertise, their board and their big names and their CEO and their management team. And they say we’re going to go buy a private company and take it public. And because of the arbitrage between how a private company is valued and a public company’s value, we’re going to make the shareholders a whole bunch of money. And all the smart people in our sponsorship group are going to help the company grow. That’s that’s the concept. Just so we’re all on the same page. That’s what they’re trying to do. And what if if if you look back at kind of that stack that Mat had, that visual of all the different stacks, what they’re trying to do is say rather than wait till the series C or D or E or F has happened and the voices in the private equity groups have stripped all the value of the company, then to then take it public, let’s take a public company and let’s buy it the series B? Yeah, let’s buy much earlier and let’s get all the value for all the public shareholders. So it’s sort of like a again, it’s a push pull between the private equity in DC world and the public equities world. So what has happened to SPACs in the last twelve months? This is a visual from Wall Street Journal, I’m happy to post this little address in here so you guys can take a look at it in the chat. But this is 2019 April 2019. And this is the gray box. Here is the traditional EPOs. A big circle is 10 billion, a middle circles five billion, a smaller circles, a billion dollars. OK, and these are specs and these are all the specs that were started and launched or IPOs that were started launched. As you can see, the gray is really what’s happening. Most of the time you’re doing all these traditional IPOs and you hit 2020, you go to April 2020, and then in July you’re like, what in the hell is going on? All of a sudden the SPACs go bananas and so do the IPOs. But look at this. You get into October. You get into year-end and look at January 131, SPACs have gone public so far this year in a month. That’s insane, and so all these public companies have all this cash and now what are they trying to do? They’re trying to buy private companies. So do you want to invest in public companies right now or do you want to invest in private companies that are going through an FCC process that could be a good target for the SPACs to buy? Because it’s why they’re trying to buy them is they need something to buy, because if they don’t buy something within 24 months, they have to close the company.
Aaron Halderman: And so they’re really looking for good operators. That’s yeah.
Chris Loeffler: And that’s the I mean, that’s what private equity funds do. They say, OK, we can buy this company at a multiple of six times its earnings. And if I took it public in the public markets today, it would be worth 12 times its earnings. So I doubled the value of the company by taking it public just because the public pays a higher multiple for those earnings. And that’s what that’s what the SPACs are trying to accomplish. It’s a it’s a financial arbitrage engine. And it’s a great question because historically speaking, there’s been more SPAC capital raise in the last year than all of the history of the SPAC vehicle combined.
Mat Sorensen: Yeah, well, that’s good for the pre-IPO, for lack of a better word company. Right. There’s there’s there’s more potential suitors out there. That’s right. That that can make those investors coming in, get a good return because they’re obviously going have to buy at a premium if they negotiate a purchase of a private company. OK, well, let me I think there are some other questions in here, let’s do that.
Chris Loeffler: It’s also a feather in the cap for the RegA company because your private company worth five hundred million bucks and you’re a RegA company worth five hundred ninety bucks of SPAC buying the private company that hasn’t gone to any of the process necessary to become a public company doesn’t have any audits. It’s a very painful transaction for them. A SPAC backed by a company that’s already public reporting and already has the infrastructure necessary to be successful, highly, much higher likelihood to be a successful public company. So it actually gives that a lot of credence to the idea of if I’m later stage my company and I do want to end up in the public markets, maybe I do a RegA round, maybe I raise some capital that gives me like a 12 to 24 month window to get listed and it gives me some shots on goal.
Aaron Halderman: That was really good. Mat you want to hit your item and then we’ll wrap up with last Q&A.
Mat Sorensen: Yep. Well this is just one of the Q&A items that was in there, which was where since the question was where can we buy pre-IPO companies before going public? I mean, there are some of the crowdfunding portals. I mean, what ones have you guys used or the ones you’d say people that go maybe check out kind of in the crowd funding model? Yeah, but what’s your thoughts there?
Chris Loeffler: So we’re listed on a portal called Seed Invest Seedinvest.com. But I mean, a lot of these portals are behind the times. They don’t even have structures set up for Self-directed IRAs to invest, which is so silly because it’s a private stock that’s illiquid, that doesn’t trade where you want to hold that? You want to hold that in your retirement account because you don’t need liquidity in your retirement account. That’s right. So we actually for for us, if you go to for our particular offering, if you go to a caliberpublicoffering.com Or just email us at the company, we have an offline process that we can help you guys. If you have a directed IRA to get invested in our stock that just doesn’t go through the online portal, basically. Or we can help you set up an account with directed IRA to invest in the stock. And other companies probably are doing that too. So if you go to the online portals, there’s, you know, seed invest and start engine and republic and our crowd, there’s a handful of them out there. And you find a company you like if you can invest online with your IRA, just get the company. The company can probably help you get it done because the company can take the money indirectly.
Mat Sorensen: Yeah. And there’s some we’ve linked to just so people know. There’s some that we’re on actually where IRAs can go. So hit us up if you’re looking for those. Some of the ones Chris mentioned are pretty popular. And I like the tool of, you know, find the company you like and then reach out to their investor relations or management team if you want to invest your IRA, because many of them are going to allow that. It just might be a little different process after clicking on the site. But you can still effectuate the same deal if you like the company and what they’re doing. That’s right. All right, Aaron, any questions you want to get out of the Q&A?
Aaron Halderman: Yeah just so Gary is asking the difference between receiving crowd notes versus shares?
Chris Loeffler: Yeah, so there’s crowdfunding for all different types of investments, so you’ve got notes where you can lend your money and you’ve got shares of a company where you own a piece of the company and the lender position, you’re getting a rate of return on your note and you’re hoping to get paid off. That’s about it. Maybe you might even get a little bit of equity kicker. If you you get a little piece of stock because you lent the company money in an equity position, you own your piece of the company. And if the company’s value goes up, hopefully you’ll be able to see a big return on your investment. There is no real difference from an equity crowdfunding. It’s just are you buying a piece of a note or you buying a piece of a company? The only thing that is kind of uncomfortable about equity crowdfunding for notes is who’s in charge. If there’s a default, if you lent a company one hundred thousand, you’re in charge. If you lent the company a thousand with one hundred other guys, who’s in charge, who’s going to fix it? If the if the note defaults, that’s always kind of a head scratcher for those those shared equity notes.
Aaron Halderman: That’s a great point. Closing the loop on the on the SPACs. You know, Steve’s asking a good question. You know, it looks like it’s become more and more saturated. You know, all these SPACs looking for these amazing companies to buy, then what are the chances they’re actually going to match with one that will be successful?
Chris Loeffler: Pretty well, it’s pretty low if you if you look at just that visualization, it actually might not be. And the reason why it might not be is it used to be that the sponsors would get this really big piece of the company and that sponsorship has gone down and down as being smaller and smaller. So now is a private company looking to go public? I’m like, yeah, I do a deal with this SPAC if the right noe came along versus before, you would give up so much of your company for nothing that it just made no sense. So the structure has fundamentally changed. And you’ve got to remember, the private equity business outpaced public company IPOs a long time ago. And now with the public, the SPACs are doing is they’re taking back market share from the private equity business. So it may not be as saturated as you think, but it’s also, again, a reason for you to be investing in the series A, Series B later stage rounds of the companies that are private. So you get to invest in the targets instead of just buying a bunch of SPAC shares and hoping you pick the one that’s actually going to convert because some convert, some won’t. And it’s very hard to pick and choose which ones are going to do it.
Mat Sorensen: Yeah, yeah. And I’ll come back to Calvin’s question on that, because it’s really it’s a piece of Calvin’s question about a key concern about if the company fails to do an IPO. Well, actually, that’s when you’re investing in what would be a pre IPO company. The IPO is not very likely to happen, right? Yes. There’s just not a lot of IPOs. Even if the company is successful, the IPO is not necessarily likely to occur. One thing that we’ve seen I’ve seen with other accounts, IRAs here is the company gets acquired that is probably the most likely some strategic partner acquires some private equity fund acquires them. And you all get bought out, you know, and so and that. And we’ve seen clients have great returns on those with IRAs. The favorable outcome is actually probably more likely, I think acquisition and this in this could even be the SPACs we’re talking about a firm or some strategic company in that industry that that let’s say this medical device company I mentioned earlier, some other medical device company may say we want to buy that and add that product to our suite of medical device products that we already sell.
Chris Loeffler: Yeah, and most companies following those exact that exact line of thinking Mat, like you said, are going to get acquired or they’re going IPO. The unfavorable outcome is neither one of those occurs. Now, the question on the risk side is, does that matter? So most companies in America today, funded by venture capital, are technology companies or medical companies or some sort of form of tech like fintech PopTech, a bunch of different tech. And the reason why it’s such a risk reward scenario is they’ve got to raise five million to go raise 15 million to raise 50 million to raise one 150 million in order to get to the point where they have a product that generates revenue and profit. So if you’re investing in one of those companies and they fail to get acquired or they fail to go public, the likelihood is that your property, your investment might be going to zero or maybe you’ll get cents in the dollar or something like that. If you’re investing in a company that is pre IPO like mine, that is profitable, does make money and doesn’t need to raise another round of capital to survive, like whether we ever did an IPO or not and raised any additional capital, we’re probably going to be a happy, profitable platform that will continue to grow. Then your worst case scenario might be you own a private stock in a company that you can’t sell, but you might be getting a dividend and maybe the company will buy the stock back from you at some point in time, if for some reason you can never sell it or whatever. So you’re in a totally different scenario and it just depends. Are you invested in a company that needs to get from the the Phase three trial to the phase two trial or the phase two trial, the phase three trial or whatever that is, or you investing in a company that’s just raising some capital? It’s two different scenarios.
Mat Sorensen: Awesome, Aaron anything on your end? I was just going to wrap up here, unless you’ve got anything else you want to hit.
Aaron Halderman: No, I think I think this has been great. I think there’s a lot of good information, of course. I always like the saying, like legit recognizes legit. And you can always tell when people are experts in their industry and they’re doing the business, they know the terminology. They’re they’re using the right vendors and companies to build their organization. And that that remains to be true with Chris and what he’s built the caliber. And so I think those are very key things to recognize from both a due diligence standpoint when you’re going to invest. And, you know, at the end of the day, sure, you’re investing in a company where you’re really investing and believing in the operators and those leaders and managers of the company. You know, even what we’re building at directed IRA. We just have amazing talent over here. You know, we love our clients and we love our staff that works with us. And that shows and our expertise shows and what Mat’s built and on the Self-directed space and all of his knowledge is is tremendous as well. And so you’re really getting some some great case study and some some profession from the professionals to go through. And of course, Mat put up the ways to get in touch with Chris over Caliber and his email office line and website there for the offering. So that’s all I’d like to say. And we appreciate you coming on, Chris and Mat, back to you.
Mat Sorensen: Ok, cool. Yeah, I was this is going to be lawyer Mat closing us out here with the Mat.
Chris Loeffler: Can I say one more thing before I go though, before Mat puts a damper on everything that I just want to let it linger for a little bit. Thank you guys both for this. This is a great opportunity to get in front of your audience, and we really enjoyed having you come in and teach our team about IRA investing and such. That’s been great. I want to wrap up just reminding people why thank you for learning about this, but why would you want to buy a private stock in a private company? Seems like a lot of work right and. And then if you’ve ever worked in a company that’s a large company, you might think, you know, gee, why would I want to buy a public stock in a big company? Because, you know, the soul died a long time ago. And that’s there’s there’s soul in private companies. You know, any company with less than 125 people is still operating. Is that like like closely knit, powerful tribe? And do you want to own a piece of that? Yeah, that’s the idea. The whole point of this is to be able to buy at that stage because it’s fun and it’s interesting. And you’re hopefully picking a company that’s going to become that next gigantic business or whatever, but you’re also being able to buy at a price that probably is much better than what you can buy in your your local stock. Yeah, right. So that’s why you do it. And it does take more time and effort. It does take, you know, directing your IRA and doing the work and doing some due diligence and stuff. But it can be really fun and that’s the whole reason why you do it. And if that doesn’t sound appealing to you, then I definitely would say don’t do it, because the whole part of the process is getting to know the companies themselves and enjoying that. So with that lawyer Mat.
Mat Sorensen: I like that this is before lawyer Mat comes on and says, I just want to say, here’s why we had Chris. I mean, he’s got a Reg A plus offering going right now, like they got reg D funds you can invest in us,
Chris Loeffler: Which closes in eight days, by the way.
Mat Sorensen: Ok, yeah. So you might want to start looking today because you got to give yourself some headway to learn on it. So but what I want to just say is that Chris is an expert in this and that’s why we want to come on. It’s just from the educational standpoint whether you should invest in stuff. I don’t frickin know. I have no idea. That’s for you to decide. But I also think our last directed IRA podcast episode that Mark and I did was on due diligence. And we did a ten-point due diligence checklist that turned into 15. And one of them was just a general concept. I’ll just say this is like kind of invest in what you know, which is kind of a general concept of self-directing, but also just take measured risks if you’re going into more aggressive investments and don’t care whether this is crypto, which could be very speculative, you know, maybe you’re buying a SPAC. I don’t know on the but you’re investing in a private company like Chris’s are already offering or I don’t know, like just take measured risk into that. Don’t go all in on one thing, you know, that could be very risky. So but, you know, seek out your professionals. I hope you guys learned something today. Chris is contact info is there. This is recorded. So we’ll put it up, will rip the audio into the directed IRA podcast. We have the video, of course, on my YouTube channel. And thanks again, Chris, for coming on. And thanks everyone for the questions and participating in the first of many. We’ll be doing these at least monthly directed IRA educational webinars. Thanks on.