At Locavesting, we’ve always thought the best use of Regulation Crowdfunding was helping individuals invest in local businesses. Rather than buying stock (or SAFEs) in speculative tech startups, we believed that lending money to established small businesses would become a mainstream option. Lately, that’s looking more likely, as new funding platforms emerge that cater to local businesses and use some form of debt financing. The latest: SMBX. The Bay Area funding portal offers “small business bonds” in $10 increments. It’s tagline is “Be the bank.”
SMBX was founded by Benjamin Lozano, a PhD and former finance professor and CEO of SBMX (pictured above, second from left); Gabrielle Katsnelson, an accountant and financial manager and SMBX COO (at center); Bhavish Balhotra a banking technologist and SMBX CTO (second from right); and Jackie Chan, a former investment banker and SMBX CRO (far left). All were “fintech” enthusiasts who saw the potential of the JOBS Act to usher in “a new model of finance where people can earn a steady rate of return, fund the businesses they choose, and be the bank they want to see,” as the SMBX web site explains. We spoke with SMBX as they prepared to launch (the SMBX app will be available on the Apple app store).
What led you to start SMBX?
Ben: I was imprinted by two events in my life: first, growing up watching my dad’s boutique accounting firm in Santa Ana walk small businesses struggling through the SBA loan process, and second, teaching disaffected millennials finance for 10 years. We know that the money used to fund these SBA loans comes from our bank deposits. And the millennials I taught who were previously broke college kids now increasingly had investable wealth, but cared more about where their money was being invested than generations before them. I realized that a small business capital marketplace was the best mechanism to connect these high quality SBA small business owners and the millennials who would rather invest in them than fund their banks.
In 2012, the JOBS Act was passed. I waited and watched for a few years to see how the rules would be written for Title III (Regulation Crowdfunding). When it was finally published in 2015, we had the green light to start building this capital marketplace. We thought, “What the hell – it’s not every day you get the opportunity to build a small business capital marketplace from scratch. Let’s do it.” Fortunately for us, we were naïve enough to not realize how hard this can be.
What differentiates your platform?
Gabrielle: We are a FINRA licensed Reg CF platform focused on small business debt, specifically the SBA loan market. Most platforms focus on equity of startups. Some are introducing revenue sharing of Main Street businesses, and more recently a few are starting to market term loans. However, we are unique in that we standardized small business debt by engineering a new asset class: The Small Business Bond. The Small Business Bond is a fixed debt instrument issued at a $10 par value yielding principal + interest monthly.
Ben: In addition to engineering a new asset class, we introduced dynamic pricing into our offerings by way of a kind of auction method called a Modified Dutch Auction (MDA). It’s the way Treasuries get auctioned, and the way Google did its IPO. What this looks like is, we underwrite businesses based on objective criteria to assign them a risk profile that’s defined by a range of interest rates, a 200 basis point spread, say between 6% to 8%. Investors can reserve bids at the lowest yield, or if they are yield sensitive they can choose to bid at the higher end. It allows for gamification by way of market price discovery.
What are the benefits of that approach?
Ben: Auctions have proven to be the best method of discovering how much demand there is relative to supply. In the case of the Small Business Bond™, that means that investors in these bonds should get the correct yield on their bonds relative to the true risk in the investment, and that the small business owner who’s issuing the Bonds should pay the correct interest payments relative to their true risk profile. In other words, the MDA is the best known method for achieving fairness for both parties to the transaction—it’s a win-win for both.
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