Alt Investing Made Easy

Roland Wiederaenders (00:00.51)
EM:
Once you are public, you'll probably spend another million dollars that first year, just getting everything set up. And then your ongoing costs are about another million dollars a year.

INTRO:Welcome to Alt Invest and Made Easy, where we explore the complex world of alternative assets. I'm Rowan, a securities attorney, investment advisor, and your co-host. And I'm Sarah, an investment advisor and corporate attorney and your other co-host.
We'll guide you through real estate, private equity, and more, making complex topics accessible. Tune in for insights that empower your financial journey. Let's make Alt Investing easy, one episode at a time.

RW:
Welcome everybody to this episode of Alt Investing Made Easy. I'm so excited about this episode because I've got one of our law partners here, Eddie Martin.And he practices in the same area that Sarah and I practice in - securities law. But he has a special expertise with public securities. And we've had a prior episode that talks about the distinction between private securities and public securities. And so whenever a public issue with a public company or a registration of a security with the SEC comes up, Eddie is my man. I just have such a huge admiration for him, not only for the knowledge and his intellect, but he's just a good guy. He's been a great friend to me. So welcome, Eddie, to Alt Investing Made Easy.

EM:
Thank you. I think we should probably stop. I don't want to say anything that would dissuade you from all those nice things.

SF:
So, Eddie, it's really great to have you here. Would you like to tell our viewers a little bit about yourself so they can understand your background?

EM:Sure. So I've been practicing law for just about 30 years now, I guess.

SF:So from the last century, is what I'm going to say. I'm younger than that.

EM:
I started practicing law before there was email.

SF:
That puts it in perspective. Absolutely.

EM:
Started out in a large firm practicing corporate and securities, so &A transactions and then public securities and public securities offerings. Did that for a number of years, then worked in...
Roland Wiederaenders (02:18.456)
private sector and some private businesses, and then came back into joining Grable Martin right about, I guess, four years ago now.

SF:
Okay. Similar to when you (Roland) joined, I think.

RW:
Yeah, yeah. Well, it was a little before, but, and you're not only an attorney, but you're also a real estate investor.

SF:
Correct. So I have for about 10 years now with a couple other partners, developed commercial real estate. So I,

I get the satisfaction of practicing securities law and then the frustration of being a real estate investor. it's...

RW:
Well those deals are perfect examples of what we've been talking about, it's a private sale of securities to raise money for a real estate investment deal. And you're an expert in that, not only from the legal perspective, but from putting the deal together and then going out and getting the financing.

EM:
Yep. Absolutely. That's what we do. We probably develop.Five to six to seven deals a year.

RW:
Okay. That's really exciting Eddie and the next 506C deal that you have, please come back. You don't have one now. We didn't talk about that ahead of time.

EM:
No, right now we're finishing up a couple of projects. have two fairly nice sized 10 acre development with the sprouts grocery unit that we're developing up in Weatherford, a Market Street grocery we're doing up in Princeton near McKinney. And then a couple of projects on the horizon. I will be calling I promise.

RW:
Okay. Well, that's great. Well, you know, this is the public securities, publicly registered securities. We've talked about that before. And I think this is...a real area of fascination for people because if you have an awareness of the marketplace, you look at all the companies that get the press.
We hear about Elon Musk and he's the CEO of Tesla and Tesla is a public company whose shares of stock are publicly traded. Meta, X, that's related to Elon Musk or Microsoft. All these public companies are the ones that we hear about in the news all the time. If you watch the nightly news, Roland Wiederaenders (04:39.116) the Dow Jones or whatever, the S &P, big name companies. And I think what's important for our audience to realize is that there's a lot of glamor associated with being a public company. And you do get the benefit of liquidity. And we had a prior episode talking about the biggest risk with private securities is liquidity risk. Because a lot of times when you invest, you don't have any liquidity terms until the asset sells and that's when you get your money back. But with the public company stock, the one benefit is that I can buy it today, theoretically sell it minutes later. And that's a trading strategy that entities like hedge funds, high frequency trading engage in. Apart from that liquidity, the liquidity comes at a high cost. And this is why it's so important to have you on the team, because you have to be able to speak, or we have to be able to speak intelligibly when a client comes to us and says, well, hey, let's do an IPO. Well, they have to understand how expensive that really is and that there are options with private securities that have only increased. So let me stop talking and let me turn it over to you. Tell us what some of these costs are that are associated with being a public company.

EM:
Sure. Well, let's start with that process of going from private to public. So if you think about the process, most companies will spend anywhere from six months to a year and a half getting ready to go public. And it depends on the company, but you have to remember, you have to have audited financials and you can't just have it your...your local CPA who's done your tax return for the last 10 years to do it. Starting, I guess, going back to, well, actually after the whole Enron scandal with Sarbanes Oxley. So you have to have an accounting firm that is a member of the public company accounting oversight board regime. So there's only specified companies that are in there.Roland Wiederaenders (06:53.326) So you have to get everything ready. Then you go through your IPO process. That'll take six to nine months until you're public. And then you do have that big day where you get to be on CNBC in the morning and ring the bell. And that's probably the highlight of your process. Now, will tell you, so in that process, you'll probably spend, that year, year and a half, you're going to spend probably a million dollars getting ready.
On average, you're going to spend, and this is back, as I mentioned to you, there's a, Waterhouse has a study on IPOs. And so you'll on average spend about a million dollars getting ready. You'll spend about $4 million in the IPO process. And that's without giving the underwriting discounts to the underwriters who actually sell the stocks in the public. Once you are public, You'll probably spend another million dollars that first year just getting everything set up. And then your ongoing costs are about another million dollars a year. And that's both your audit fees, your increased legal fees you have, and then just all the people and systems that you have to have to be a public company. Well, this is an important point.
RW:
I just want to pause briefly because I gave some numbers for those costs, just kind of off the top of my head and based on some the prior conversations we've had, but what the ones that I gave previously were much lower go by Eddie's numbers because he has an actual study.

SF:
I actually want to make another point and that is you said it at the beginning and this goes to the discussion we've had about private securities versus public securities. Well, a public security starts off its life as a private security.

EM:
Right.

RW: So it graduates

SF: and it graduates. sometimes it flunks out too.

RW: Right. It's kind of like, you you graduate, you leave home and then sometimes you wish you could go back.

SF:
And that happens. And that's something we can talk about.

RW:
Yeah. Well, what's next? Should we talk about some of the other burdens of being a public company?

EM:
So let's, let's go back just real quick, to the regulatory framework. When you're public course and everybody sees you get your annual reports, your 10K. So you file that every year of course that takes, so for that process with our public company clients, we start that process typically in early December. So before the year is even out, you're already planning and you're getting ready for your 10K and all the work that has to come in. And that's just on our side. The auditors, of course, are in there all year long and they're doing their work and getting ready. So you have your 10K that's filed every year.

For your first, second and third fiscal quarters, you have to file a 10Q obviously, which again, put your financials out there. You have a periodic obligation called an 8K where any number of things that can happen in the life cycle of your company, you could buy something, you could sell something, you could hire a new senior executive, change a board member, any number of things. Those have to be reported on your 8K.

Of course you have your annual meeting of your shareholders and you have to file your proxy statement. A couple of areas that people don't think about, and actually goes back to your point about liquidity, so if you are an executive of a public company, you actually have very limited liquidity in your stock. So you're bound by the insider trading rules. One of the primary things that that catches people on is you can only trade in a certain window of time after the public company has released their quarterly financials. And then you'll have an open window to trade. And even then, even if the company, for example, has put out their financials, but there's a transaction in the works that you're aware of, you can't trade because you have material non-public information. And so, you know, one of the great benefits people think of being public, isI have a liquid market and that's true for you and I, if we go down to our, you know, get on e-trade and buy some stock and you really do. If you're an owner or executive of a company, you don't have that necessarily. You also have the optics of course of, you know, it looks bad to sell stock. You also have insider trading is a big deal and as you know, you and I were talking about, it's even being expanded now Roland Wiederaenders (11:27.278). Just recently, an executive of a public company was convicted of insider trading because he knew his company was in a transaction. He said, one of our competitors will do better and I'll buy their stock. And that was again, insider trading. So there's some real limitations there. You also have to be careful section 16, which is called the short, refers back to when if you buy stock, you can't buy and sell stock in your company within six months and make a profit, with some very limited exceptions. So there's a lot of pieces that jump in there. And again, going back to the said, the liquidity is not always there.

RW:
Well, maybe mention, Sarbanes-Oxley. That's another one that I think people have heard, probably heard about before, but maybe you don't know specifically what that requires.

EM:
Yeah. So there have been over the years, a number of rulemaking things that have come down the pipe. And generally, if you look back at the major regulations on public companies, they always come after there's been a real bad crisis. So, so Sarbanes-Oxley comes out of, people remember Enron and Worldcom and Tyco International, lot of accounting scandals. So out of that, Sarbanes-Oxley put in a whole raft of rules.That's where auditor independence comes in some of those. But if you're a CEO or CFO of public company, what that means is that every time you file a financial statement, you have to sign a statement that is filed with your public filings saying that you have reviewed the financial information, it's correct, and that you attest that you have proper systems in place to make sure your numbers are correct. And there's liability with that.

So that's a very important part of Sarbanes-Oxley that gets out and it's an issue for people.

SF:
And this is interesting, right? Because when we talk about the private investing world and say you're the CEO of a company that's offering private securities, there are different liabilities that come to you, but maybe in the fiduciary context or how you participate in the cap stack. But this is a whole different level of compliance.Roland Wiederaenders (13:47.918) that's required here. I also, always find it interesting talking to you Eddie, because you always put things in an historical perspective. I don't know if that's necessary to be a lawyer who specializes in dealing with public securities, but we've definitely had... Or you're a historian at heart.

RW:
Well, yeah, and this is the benefit of experience to having witnessed the market over a period of time and just observing how it's changed. And I think, you know, as we were preparing for the something that came up that was so interesting to me is, you know, all the private securities deals that we do, Sarah and I work on and Eddie, you know, they rely on regulation D rule 506. We talked about that. And then this is what was interesting. You know, I was like, when did reg D come about? It's been in place for my entire career. I think even though you're a little bit older than me, it's been in place for your entire career, and regulation D only came about in 1982. And this is what is so interesting to me and the perspective that you have, broader perspective generally, but what's happened since Reg D has, was enacted.

EM:
Yeah.So if you go back and so you go back to the early eighties and before, and so I think that's where, again, you know, so many public companies, that's your avenue to capital, to liquidity and a prestige, honestly, you those are, those are all things out there.

RW: What was the statistic that you said in, 1980, nine out of 10 IPOs were profitable. Profitable. 23, one out of five.

EM:
Correct. Correct. And that's just the change in the market and the change of companies that do go public.

SF:
But the other side of that is why is that? Because Reg D has supported the growth of
Private securities?

EM:
Well, it's a number of things that have really come into place. So if you go back to the early 80s, so you have Reg D that comes into place. You also had a belief in, in the early 80s as well. Congress had two very important pieces of legislation that had driven this. One, they took some of the restrictions off pension funds to…[Roland Wiederaenders (16:01.262)]
what they could invest in, which allowed them to invest in private equity for the first time. At the same time, the capital gains rules changed, making private equity more profitable. So if you actually go back the three of kind of the big premier names in private equity, Bang Capital and Blackstone and Carlisle Group all started in I think 1983, 84 and 85. And so you have those three companies come into play. And of course, and everybody followed after them. And so then you start having private equity money flowing into it. Private equity is making investments. And just as you continue over time, also with Reg D, have hedge funds come into play. And so you start generating all this wealth outside of the public market, which is just fueled. If you come up to the public, a number, you we were sharing, so 10 years ago, if people know the term unicorn, which was a private company, it was worth a billion dollars. So 10 years ago, there were, I believe, 39 unicorns. As of last year, it's about 1,200.

SF:
That's amazing. And that's the ones we know about.

EM:
Correct. Correct. And so you just think about all of that wealth that's been generated. And so the money's coming from...private equity funds, it's coming from sovereign wealth funds, wealthy individuals. mean, know, all this wealth, family office, all this wealth that's been created has created a huge amount of private capital. One of the other numbers I saw, you mentioned, you know, Tesla and Elon Musk, which is public. So SpaceX, is, which is, is his space venture private has always been, has always been private. And it's raised $9.4 billion of private capital. So if you go back in time, that's somebody who would have gone to the public markets.

SF:
You know what's interesting? Roland and I were talking about this the other day that Mary Elizabeth, who's a colleague that we had a panel discussion with recently, she was telling us about bankruptcy law and the bankruptcy code was revised extensively in the late seventies. Now we have Reg D in the early eighties, along with these other changes, big changes in the laws that happened in the early eighties. And so actually there was [Roland Wiederaenders (18:24.024)] quite a concerted effort, it sounds like, on the part of regulators and lawmakers to do some things that actually have borne fruit over time that we can see now in terms of our economy and terms of the growth of ,wealth growth for a lot of individuals. And it was just an interesting thing to think about it because today we don't always think about the history of all of that. How it might impact today what we're doing as lawyers or as investors or our clients or anyone.

RW:
And again, it's a regulatory regime that is designed to encourage innovation. you've told me about how difficult it is in some of the countries that you have experience in, that we can do things here in such a relatively easy way. mean, really, can. Some of the deals that we work on cost relatively... When you're talking about doing an IPO and it costs $4 million, a $9 billion private offering, it's going to be...really detailed, there's going to be a lot of work there, but that's what you can raise without going public. And so I guess it really raises the question, what are the benefits of being a public company,

EM:
So, traditionally, you would say the reasons somebody would go public would be to raise capital. As we've talked about, there are lots and lots of ways to raise capital without being public. Another reason people want public is to create liquidity. As you look now, you're seeing more more avenues where people are investing. They don't have to buy a whole company. They'll create liquidity, buy into a piece of it and let the founders take some money off the table and continue doing what they're doing. So that's again, an area that it's taken over. Acquisitions would be another, again, that's raising capital. Compensating employees, which can be more challenging. Although there's, you know, you don't have lots of creative ways that you can create that same benefit for employees to get that compensation without being public. And so it really brings you back down to if you want the prestige of it, if you really want to ring that bell, or I guess now you push the button. think I just come down to it. You know, but that's a, you know, there, there, there is that side. [Roland Wiederaenders (20:46.784)] And I think there are for mature companies, perhaps where you have management that doesn't have a large financial interest in the company, there can be reasons to be public then. I think for much of the traditional reasons of going public, which is to source capital, the private market provides it without a lot of the headaches and regulatory issues that are...in place now and are still continuing to come down.

RW:
Can I spring a question on you, Eddie? But this is something that another one of our clients really questioned, the ability that you can use now to use general solicitation in connection with the sale of private securities. It's 506C. And their assertion was that it's really not that beneficial because who's going to invest in a private deal that I just wander across on LinkedIn? The idea is that the ability to generally solicit for investors isn't that valuable. What do you think about that?

EM:
I believe that as time goes on, think that's a function, maybe of somebody that knows what it was like to have without email. I think it's just perhaps a generational that you sense that's not how business is done, but I think as you go forward and you realize how much, I don't want say younger people, but people of all ages are making use of the internet. In doing things that, I mean, my mother's 79 years old and the other day I went by and she had had coffee delivered, which just shocked me that she did. So I think as people become more more comfortable, I think that maybe a taboo that nobody would do, that's just gonna go away.

RW:
That's interesting. I always…[Roland Wiederaenders (22:50.912)] I think it's great. I think it's this new thing and it allows us to talk with people about how they can do business in new ways. But in the end, I haven't been in a position in the past to go out and actually try to sell securities. And that's one of the ideas that we're working with on this webcast is creating a platform like what I mentioned before, a platform where somebody like Eddie could come on and tell you about his 506C deal in a way that before 2013, you weren't allowed to do that.

EM:
Well, and I think what's great about it too is if you think about, like we talked about the history of private equity and hedge funds and all family offices and all this money, unfortunately, a lot of that money is very centralized. And I think the great thing about like a 501C example is it gives everybody that opportunity. And I think there is...tremendous opportunity and wealth to be created in private securities. And this is a way to make it democratic and give everybody that opportunity.
SF: and this goes back to our central theme, doesn't it? And that is we may not be comfortable or we may be more suspicious of an ad coming through on the internet, let's say, or on a social media source. And it is fair. You need to be careful about fraud. Everybody has to be educated about that now. But on the other hand, you're right, it makes investing opportunities available to people who don't go pay financial advisors, who don't go pay brokers. Now, what's the next step as we've emphasized that, you know, that's where the regulations kick in, which is to permit the general solicitation, but then to put some backstop requirements that are borne by the person making the offering to make sure that those people who come to them, you know, actually prove that they have a certain level of sophistication that is...defined in the definition for accredited investor. So in that context, maybe the system actually is pretty good. It seems fairly simple actually, but it kind of takes away that you already have to be wealthy to have an opportunity to become wealthy factor of it, isn't it?

EM:
I think the one thing I would say, maybe this is a benefit of the public markets, not necessarily to a company, but [Roland Wiederaenders (25:09.068)] you know, for example, to your point, if you want to go invest in Coca-Cola, well, you know, you can, you can log into your account and you can buy stock and you can, with some confidence say, okay, I know what I'm buying or at least I, at least I think I do. know, and so I think there is that kind of a good housekeeping seal of approval that the SEC would tell you that's with all this regulatory framework, that's what they provide. And I think that that's probably fair, but again, going back to your example, just because you see an ad that pops up on the internet, that doesn't mean you treat it the same way and go, great, I'm just going to give them my bank account and give them money. It's still incumbent upon you that yeah, you still have to do your homework and you have to do your research and you need to...you need to do your diligence to make sure you're comfortable with the investment.

SF:Another central theme.

EM: but then by doing that work, you have the opportunity to be rewarded.

RW:
Yeah, and I think that's the one thing that alternative assets, in investment management, there's a concept of beta, which is the return that you can get the expected return from an investment in the overall market, kind of agnostic as to specific. stocks, if you invested in ETF and you can measure what was my beta against the S &P 500. And then what we're talking about, I think, with alternative assets is alpha. It's the outsize returns that you can achieve by taking on additional risk. And in any asset allocation model, the portion of your portfolio that you dedicate to the risk assets, we can talk with you about that. But it's probably not going to be your entire portfolio, but it should be a portion of it. And I think that that's really what we're talking about here is trying to educate people in a way so that they can invest confidently in alternative assets, helping them manage the risk. And then if you can adequately manage that risk, then that's what allows you to achieve the alpha. And that's what we're wanting to help people achieve in this. Roland Wiederaenders (27:28.43).
EM:
You know what strikes me as interesting about you, Eddie, is that you're a specialist in public securities, yet you're also a specialist in private securities because of your real estate investing. So you actually really have this very interesting perspective. And also just to say separately, you may not be aware, but we have discussed in other episodes how the public markets are a great place to...start incrementally investing, even when you aren't maybe earning very much money, you can start there and you can build something there that then leads you in time to be able to start doing private investments. But I do find that separately interesting that you grew up on the public markets from the very detailed inside out, yet you still elected to specialize as a private investor.

EM: Well, and I think it goes back to what you said. It's it's. It's an allocation of risk. It's an allocation of your portfolio. For me, it's, guess, an allocation of my time. But it's the same. mean, you try to get a broad base and get returns from multiple asset classes or streams or places where you put in your time. do.

RW:
Well, is there anything else? I know one thing that we wanted to talk about was all the burdens of being a public company. I think we touched on most of them. You know, one thing I would want to bring up, we've talked a lot about investing in public securities and there is an alternative asset class that does invest in public securities and Eddie touched on it and it's hedge funds. And we've talked about this before. Most people probably understand what a hedge fund is, but...A hedge fund is a pool of money and there's a manager there that goes out and invests in public securities. And the hedging aspect of it is they invest not only in long positions, but also short positions. A short is where you can make money off of the decline in value of a security. When you invest long, you're hoping that the value increases over time, but…[Roland Wiederaenders (29:38.638)] That's one comment that I guess I would want to leave. And that's why, again, it's so essential for Eddie to be on our team. Because if we have a hedge fund client come in and they've got their trade, whatever their trading strategy is, I might call you up, Eddie, and say, what do you think? And this is what they're doing. And man, they're talking about using this information that they got from some source. Is that insider trading? The public company considerations are so important from an alternative asset standpoint. And that's why I'm just really grateful that you're on our team.

EM:
Absolutely. I love to. And I'm great to be here. And I would say too, I think it's helpful to understand public companies just for your private investing. Maybe it's not where you take your company, but we all have money in the public markets. And I think it's important to understand
Understand what is out there to protect you but also to understand the limitations right because they are the public markets are not a guarantee.

SF:
And it's interesting too because if you think about the public markets being regulated and then we have regulation that applies to the private markets But the oversight for public companies or public securities is a little more stringent really maybe more immediate or maybe that's more watched. I mean the SEC knows when you miss filing deadline, right? So this part I think is actually interesting because we read an article recently that was maybe could be perceived as a critique of the private wealth market in that there is less oversight and the overall purpose of the SEC and the regulations from 100 years ago was to protect investors as a whole. And so now we have this whole section of the economy, massive section of the global economy that's private. Now, I don't particularly think that's problematic or not, but it is kind of interesting that now it wasn't just prestige and all of these different reasons, access to capital that public made companies go public or want to be public. I think the regulators wanted that also because that's where there was a contained, very detailed, there was more oversight and protection for investors. But now we're using this, the private markets more and I don't know, it doesn't necessarily mean that there's, well, what do you have to say about that?Roland Wiederaenders (31:52.514)

RW:
Well, yeah, I I just think that it's important to understand that this is an area that's fraught with great risk and the regulators, you know, in allowing for greater democratization of capital availability about investment opportunities and marketplace, they have to balance that against the likelihood for fraud, you know, and if we take a light touch approach with regulation, then it only gives more opportunity for fraud to come about. But at the same time, if we clamp down too much, it stifles innovation. That's one of the things we... So it's a balancing act. But I think in all of this, I've just been... I don't know. I don't want to say that I'm more patriotic now, but I just appreciate what a difficult job the SEC and the regulators must have. This is another little bit of a curveball, but...what's been your experience with the regulators generally? All the regulators that you dealt with over the years? Could you make a general?

EM:
You know, I think like anything, think they, you know, most everybody at the SEC, they're in private practice. They've worked for the SEC. They come back out. So it's not like this great, you know, evil deep state at the SEC that, know, is perpetually there. so I think generally I have seen, they take their job very seriously, obviously, but they also have been in private practice, plan to go back to private practice. And so they understand the burdens and there is, you know, obviously a lot of the regulatory, as I said, a lot of regulations that come down are a function of scandals and things that have happened. so,

For example, there's regulations on climate disclosure, which have been in the works for, gosh, five, six years. The SEC finally passed it, very contentious. A district court immediately staved their implementation. Another set of rules on clawbacks of compensation if a company restates. Those were originally part of the Dodd-Frank [Roland Wiederaenders (34:09.87)]Reform Act from I guess what 2008, 2009, and they were just implemented a year ago. So, know, there are a lot of these things that are out there that are burdensome. They're thoughtful about it. I'm not saying people are happy about it. But for example, the climate regulations had over 2,500 comments that were submitted from various lawyers and academics and other people. And so it's an evolving process.
RW:
Well, Eddie, we're running up against a little timing deadline this afternoon. We just had too much fun talking with you, but we would like to extend an open invitation for you to come back as a guest at any time. And for sure, when you have a deal, if you want to talk about the deal, that's what we designed this to be, is a platform for people like you to tell investors about their deal. Please come back to be a guest again on AIM.

EM:
Terrific. I appreciate it.

RW:
Thank you for being here, Eddie.

SF:
Thanks so much, Eddie.

OUTRO:
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