Investing in the stock market has long been seen as purely a game of numbers. Profits and losses have historically been defined by only dollars and cents, and as a result, investors have been conditioned to measure the potential impact of their capital within those specific parameters. But as we’ve witnessed with the remarkable popularity of crowdfunding, there is real demand to allocate money to good causes and great ideas, particularly those that don’t fit within the traditional framework of the financial markets.
More than ever, there is a growing faction of the investment community that wants more from the companies they invest in. More corporate responsibility in areas that go beyond financials, whether that’s improving their impact environmentally, socially, or in other areas. What they lack are clear metrics to define an acceptable rate of return.
Vince Molinari of Gate Global Impact has been a leading figure in advocating for a stronger shift toward impact investing. As part of this process, he’s pushed for more innovative technology, wider financial education, and more clearly defined regulations to protect investors.
equities.com had the opportunity to speak with Molinari to learn more about how the market is evolving, the role of the JOBS Act, and the future of capital formation.
EQ: Can you give us a brief background of Gate Global Impact the platform and kind of go through its history and evolution?
Molinari: Gate Global Impact was established by my partner Joe Latona, President and COO and I, with a vision of facilitating capital formation, primarily around private sector companies and projects that not only had the potential to offer a real financial rate of return, but that could also deliver a level of societal and environmental-related good. It was about really moving the ability to effectuate change and positive investing in a standardized format. A lot of people, when they think about impact investing or socially responsible investing, they think donation-based models or philanthropy. Our mission was to the help the marketplace view impact investing as another asset class, a portfolio allocation model to traditional investment portfolios, resulting in the ability to access much greater pools of capital in the traditional sense to be investible into companies and projects that are also delivering good. That was the original genesis of the company.
EQ: The concept of impact investing isn’t necessarily a new one but it has certainly become much more prominent today when you talk about the evolution of the financial markets. How has Gate been at the forefront of this and how do you see this affecting the economic, environmental and social realms going forward?
Molinari: I think there's a number of what I would call monumental changes in regards to behavioral, demographic and regulatory changes that are converging at the same point in time. Really, when we look at our financial markets over the next five to 10 years, the landscape is going to be very different. When I refer to that I talk about the awareness and the intersection of social media and financial services. It’s the millennial investors and the massive transferrance of wealth that is now globally moving to Gen 2 and Gen 3 and those investors that are looking for more than just the traditional rate of return on their investments.
They're looking to things around more specific metrics like those that we’ve built at Gate Global Impact. They’re not just saying that you should feel good about this investment because it's delivered clean water or created education or reduced carbon footprint, but actually being able to quantify it and show it in a metric format. Metrics like how much clean water in gallons or how much improvement in education, and I think that bundles into what will be the new rate of return and how new profit is defined.
I think when you add the passage of the JOBS Act with particular emphasis on Title II–which is the removal of the general solicitation ban, simply put, the ability to distribute securities using advertising–inclusive of social media, print, radio and television-then combine that with Web 3.0 and relationships with financial education platforms like equities.com and Investview ,Inc. (INVU) , it is going to transform the way investment is done, particularly around the desire to deliver good alongside that investment. We strongly believe that investment decisions will evolve to a media delivery format that will largely involve video distribution of data, content. and Offering Memorandums via the web versus the traditional paper based private placement and supporting documents model largely deployed today. The retention and absorbtion rate of video driven content is signification higher than a read only format. Video delivery models will directly increase knowledge base, efficiency, and Investor protection- all leading to healthier and more robust evolving markerplaces.
EQ: There are several provisions on the JOBS Act I’d like to get your thoughts on. You mentioned Title II. In December, you and Gate joined the Investview family. What does this acquisition mean for both firms and for investors moving forward?
Molinari: I think there's multiple aspects to it. The ability to advertise a security, whether that is through social media, radio, television, print opens up access and furthers the democratization of capital formation. So when we talk about Investview and being part of the Investview family, what’s paramount to Gate Global Impact is a term we coined years ago: actionable knowledge.
Actionable knowledge for us means the more information and knowledge you can have on a system, the better educated the investor will be. That allows them to take action with it whether that action is buy, sell or do nothing. Paramount to our belief system is capital formation versus capital raising. Capital raising being just the act of raising capital, where as capital formation being the act of raising capital with accurate data, information, and content speaks which directly to investor protection.
So everything that we do and innovate around, has been the platform of not only the front-end, but matching that with the clearance, the settlement, the depository, the secondary trading, and the ability to have secondary trading for liquidity all in a regulatory framework of a broker-dealer. I think that is very significant because that creates a level of standardization and best practices that doesn’t exist on a lot of other models.
The Investview appeal is really how they iterated into an innovative financial services company by leveraging synergistic acquisitions that have consumated as part of the vision of its CEO Joe Louro. We were also very attracted to their history of being an education company. For us, that really will allow us to build out our content with the ability to create new data and information around these emerging asset classes of impact investing globally, and then to be able to create the private company research, and the ability to better educate investors. Whether that is part of webinars, Investview’s 1000-plus hours of content, their TRUST models or except knowledge in ETFs and IUTs. What have you, it really became a very symbiotic relationship of integrating next-level education and distribution of securities in a regulatory framework in one package. This just might be the the new Wall Street for the Millenials
EQ: You were a leading voice in establishing the JOBS Act in 2012. Title III and Crowdfunding for equity was viewed as a major milestone achievement in terms of the hype around that provision. Where do we currently stand with that today?
Molinari:For Title III, we still have quite a bit of inaction that is going to continue and probably is going to take a legislative correction to really make it usable. Pursuant to Title II, it’s not true democratization of capital formation yet because right now it’s only for accredited investors and up. We've a had tremendous disconnect between the legislative intent and the rule-making phase. I think that has left a window open where we're going to see quite a bit of intrastate crowdfunding taking hold.
But I’ll refer back to my Congressional testimony in 2011. My belief system then and still is, is that crowdfunding is really a private placement of a security and could be handled well under broker-dealer provisions and making some modification to those. I was one of the founders and the first co-chair of the Crowdfund Intermediary Regulatory Advocates (CFIRA) and the Crowdfunding Professional Association (CfPA). I am therefore not anti-Title III. I am a huge advocate of it but also for having levels of controls for investor protection alongside it.
It’s a very difficult process. We're in the first inning of really integrating social media advertising and the consumerization of the web into financial services. And although we may pre-empt state law in certain instances and under the provisions of Title III, you still have a body of the Securities Act of 1933 and 1934 Act that has to be complied with. This is an essential point that has to be understood by this emerging investment practice.
EQ: What would you say is the most significant obstacle for Title III right now?
Molinari: It’s the technology world trying to understand regulation and the regulatory world trying to understand technology. I think that the provision of having FINRA as the self-regulatory organization for the sector, which is healthy, has created this uncertainty of how you implement, regulate and balance investor protection while trying to democratize capital formation of $1 million and below offerings.
When you have some of the provisions that make it less attractive from an economic standpoint, such as perhaps an audit requirement for a startup with no business, to raise $500,000 and above and it costs $20,000 for the audit, it makes it unrealistic to implement that. I’m not optimistic on the timeframe for Title III to be enacted currently. If you go back to 2011, state administrators were putting forth their own unified rules for intrastate crowdfunding, but that was put on the shelf with the passage of the JOBS Act and Title III.
I think what we're seeing now is a recognition that crowdfunding can be a wonderful tool to facilitate access capital and create a conduit to invesntment opportunites for investors to potentially create wealth, and because of the stagnation at the federal level with the rulemaking phase, individual states are embracing crowdfunding on an intrastate basis. I think that’s very healthy. It's demonstrating action and the movement of capital, and we're getting away from the argument because we have real data now that this is not a fraudulent marketplace. It could be effective.
Again, my personal view is if you could insert a broker-deal or regulatory framework on that, it becomes a way to move crowdfunding today while this whole Title III phase continues to evolve.
EQ: If there’s a lot of activity on the state level, is it beneficial for federal regulators to take a wait-and-see approach to observe how different states handle it before they decide make their decisions?
Molinari:Part of the challenge is we have a very frustrated Title III marketplace from many established crowdfunding portals that have raised money and built technology that can not be utilized at the moment. I think we've gone through a SEC rulemaking that has been challenging but well thought out. The SEC and Finra have been very engaging and thoughful with many market participants during this Rulemaking phase. Although very protrected, we are cutting new ground and I’d rather come out with rules that work and are well thought out than something rushed and becomes even clumsier and not actionable. Of course, FINRA still has to put out their funding portal requirements and approval process that is parallel to the SEC provisions for Title III.
What I long wanted to see happen was almost kind of beta test. People talk about zero fraud, which I think is perhaps unrealistic. Meanwhile, other people say this will be the Wild West. But both sides are speaking with a lack of real actionable data here in the United States. I always longed for a bit of a beta test to get some information and data that both sides can look at. I think that's really what the state initiatives have really become. They’re a demonstration of how this can work, what could be modified, what could be loosened and maybe that becomes the prototype for a revised Title III at the federal level. Perhaps there becomes a workable solution that is intrastate, and Title III as we once thought about it maybe doesn’t even get revisited or it expands and unifies upon what is working on a State level. I’m not being the negative person but these are kind of things that are in cycle. I think you may see more of a focus on Reg A+ at a federal level in some of the arguments that are going on currently. But personally, I still think the biggest game changer to capital formation is Title II.
EQ: You've talked a lot about the democratization of capital, and that's what the JOBS Act really was intended to do. The traditional means of the financial markets and the flow of capital in the US markets has been highly concentrated at the top, and the majority of the companies—whether they’re mom-and-pop startups or small-caps valued in the several-million or low-billion dollar range–they’re not getting enough capital support to sufficiently grow. Collectively, what’s being done to address this problem? Is there more being done since the JOBS Act has been passed?
Molinari: It's a great point and this goes back to our original formation and viewpoint. If you look at the IPO process, we've been talking about all the statistics going back to 2008, 2009 when we went from 500 IPOs a year down to 110. Whether people want to blame that on decimalization or Sarbanes–Oxley, decimalization, Order Handling Rules, Regulation NMS or a combination of that, the cold hard reality is we lost our middle market financing. In our opinion, we lost the connectivity to what it meant to be an investor in these companies versus trading the stock. I think we lost the realization that our private sector and our emerging industries are by far the biggest job creators in the country. As you say, the IPOs that we're getting are at the much larger end of the marketplace.
What has become very healthy part of the JOBS Act is a recognition that there is connectivity to capital for small, emerging and even established companies that just may not want to be public or those that need greater access to capital to grow. That is healthy for our economy. The JOBS Act has brought that visibility. Certainly there's going to be a JOBS Act 2.0, and I think we've opened the window here to a paradigm shift in understanding that technology, the convergence of Web 3.0, social media and advertising can be regulated, and can be managed in the capital formation process in a responsible way. We will need more standardization, best practice, and technologies that will help surveil and protect investors, while creating these new distribution models for securities. It becomes somewhat of a real question to me that if there is a paradigm shift of power coming in the future, who will control the vast majority of users that will be the next strand of capital formation? Is it social media companies? Is it Wall Street? Who is going to reinvent themselves and utilize these new distribution technologies to facilitate that? Or will it be some combination of alliances with social media and financial services firms that will define the future of capital formation?
EQ: When it comes down to it, all these are means for investors to achieve what they're looking to achieve, whatever their goals may be. So I want to get back to the point of impact investing. The attitude towards big corporations have been shifting for quite some time now, at least at the social and investor level. Are you seeing more momentum in terms of investors favoring companies that are more socially responsible and do make an impact on human lives versus just seeking pure profit potential?
Molinari: I think there is a tremendous movement where you're seeing consumers becoming stakeholders in companies and stakeholders becoming consumers. The loyalty to brands are going to be defined by their corporate responsibility, their transparency and supply chain. I don’t think CSR is window dressing anymore. I think brands are beginning to be valued by their corporate responsibility, and they're going to see market capitalizations impacted positively or negatively by it. We’re seeing the cost of capital being affected by the responsibility in the marketplace, particularly as millennial investors are much more aware and willing to reward brands, both as investments and as consumers who are true to the planet, people and responsible behavior.
EQ: Vince, you're a very busy man. You’ve testified in front of Congress, were very instrumental as part of the JOBS Act, and you’ve facilitated the partnership of Gate with the United Nation Global Compact (UNGC). You're doing a lot of things. What are you focused on right now in terms of advocating for this industry?
Molinari: I think the biggest push here is to continue to have leadership and responsibly grow these asset classes and markets. We want to educate the world, frankly, that you can invest for profit and also deliver good. They’re not mutually exclusive and, in fact, you don’t have to compromise your profit. Everything that we're looking at has a for-profit model first, and that's what has to be met for these assets to be treated as a true investment class by foundations, family offices, and funds.
Our mantra is really to create an information layer of awareness and to have a quality, investible product on the platform that offers secondary liquidity. We’ll continue to advocate legislatively and try to have to a leadership position around things that we're doing with the UNGC, Microsoft 4Afika and frankly, some other very significant announcements we will talk about in the future that I think will bring great awareness to this sector.
EQ: Anything we missed that you want to make sure we hit on for our readers?
Molinari: I want to emphasize that we can treat impact investing as part of a portfolio allocation of investible pools of capital that goes well beyond donations or philanthropies. Of course, not that there's anything wrong with that either. There’s just not enough philanthropy-based dollars to cure the challenges that we have globally, and profit creates sustainability. If we can create companies that are impactful and profitable, you don’t have to then go back every year or every quarter looking to raise more money. If these businesses can continue to deliver goods and drive profit, that profit drives sustainability.
DISCLOSURE: The views and opinions expressed in this article are those of the authors, and do not represent the views of equities.com. Readers should not consider statements made by the author as formal recommendations and should consult their financial advisor before making any investment decisions. To read our full disclosure, please go to: http://www.equities.com/disclaimer