Buy-Side Technology: Post-JOBS Act, New Energy Builds Behind Private Investment Platforms

Jim Dowd, Founder of North Capital and 99Funding

Jim Dowd, Founder of North Capital and 99Funding

By Timothy Bourgaize Murray | Buy-Side Technology

North Capital Investment Technology (NCIT) today announced the launch of its 99Funding marketplace, a platform for broker-vetted, syndicated private offerings. Tim Bourgaize Murray spoke to founder James Dowd about what he envisions for the space, both in the present and long-term.

 

Among the victims of JPMorgan's 2008 rescue of Bear Stearns was a small technology project that James Dowd was fond of.

Then heading up Bear's Hedge Fund Advisory and Fund of Funds Team on the asset management side, Dowd was hashing out a platform for funds to access private placements, building the technology to list deal offerings, and collect investor information that would be exposed to the firm's brokerage and correspondent network.

 

"What changed everything was the JOBS Act passing in 2012 and being implemented in 2013," he says. "All of the sudden a private marketplace that was mostly 'by appointment' became open to all qualified investors. These deals are now moving out of private clubs and into the public forum."

-- James Dowd

 

"We got about halfway there, and always wanted to go the last mile, adding payments and settlement on top. We just ran out of time," he tells Buy-Side Technology.

But eventually he and his team at North Capital did just that, with a push from—of all places—the US Securities and Exchange Commission (SEC).

"What changed everything was the JOBS Act passing in 2012 and being implemented in 2013," he says. "All of the sudden a private marketplace that was mostly 'by appointment' became open to all qualified investors. These deals are now moving out of private clubs and into the public forum."

Crowdfunding

The result is a platform called 99Funding, where all posted deals are examined by an experienced team of investment professionals and offered through North Capital Private Securities (NCPS), a registered broker-dealer focused on the origination and distribution of private placements and a wholly-owned subsidiary of NCIT.

Running on a core technology codebase called TransactAPI (TAPI), the venue is designed specifically to aggregate private offerings from niche platforms such as crowdfunding giant SeedInvest, Boston-based ProHatch, Texas-based MassCatalyst and USC's exclusive GenYrator—all current partners focusing on early-stage investment—as well as allow North Capital to list its own deals.

"One thing has happened with startups addressing various segments—they tend to be very narrow and siloed," Dowd explains. "You'll see some that devour a particular segment—Seedinvest did a great job, for example. But no one from the financial services side has taken a step back yet, and addressed the underlying tech issues that apply to the whole private securities space, whether funds, placements, startups, or otherwise." 

Institutional Crossover

For now, given its emphasis on early-stage investment, Dowd sees the platform primarily catering to the high-net-worth market segment and to family offices, but the long-term objective for the technology is quite different.

"We expect investors to eventually use TAPI in other ways," he says. "The biggest opportunity for the underlying technology is actually private funds that are continuously in the market: hedge funds marketing to the public; serial fund managers doing a second, third or 'n-th' fundraising round; or firms constantly trying to engage with limited partners (LPs). And post-JOBS Act, almost no one is doing that through general solicitation yet."

Likewise, in addition to the tech-based platforms North Capital is partnering with, he envisions new, more significant broker-dealers (BDs) tapping the API as well. Just as in public markets, investor interest will beget new sell-side opportunities.

"We have selling agreements with a half dozen BDs who focus on the early-stage space, so that's the priority now, but we think there will be expansion on both sides," Dowd says. "As platforms gain credibility and market participants get comfortable with the technology, we'll expand the range of expected investors. Smaller endowments and foundations, for example, are already on the platform or showing interest, so we're crossing over now into institutions, which, in turn, pulls in other private asset classes. Right now our strongest capabilities are in dealflow, early-stage financing and real estate, but this will be client-driven. Opportunities change, and we'll respond to them."

Cracking Tech Nuts

To that end, North Capital has done a great deal of institutional-grade tech work ahead of time.

Determining what was best to outsource was one question. For example, its anti-money laundering, OFAC, and other know-your-client (KYC) functions are being handled by a provider called Idology, while the platform's accredited investor verification—a requirement of the JOBS Act—is homegrown.

More importantly, TAPI also features a unified framework for directing subscriptions to the various participating platforms and BDs, each of which settles them slightly differently.

"That was a nut we worked on at Bear for 18 months, and couldn't crack until now," Dowd says. But he and North Capital are hoping it was well-worth the wait.

"Immediately after it passed, it was too early in the game to know how Regulation D and the additional requirements in the JOBS Act would play out," he says. "This is like the early stages of the derivatives market, though. And soon, I think we'll see tectonic shifts."