Crowdfunding: The SEC’s Big Push for the Little Guy

By Moshe Silver


The SEC finally issued the Crowdfunding rules required under the 2012 JOBS Act (“Jumpstart Our Business Startups.”  Who knew Congress could be so cute, so inventive…?)  Release 2015-49 says the new Rules “provide investors with more investment choices.”  The new rule updates and expands the old Regulation A, which permits public equity sales of up to only $5 million.  It raises that cap to $50 million and cuts lots of additional red tape.  Showing they are every bit as witty as Congress, the SEC calls the expanded Reg A “Reg A+,” and it’s already scoring high with the Crowdfunding community.


Crowdfunding: The SEC’s Big Push for the Little Guy - 23


This tenfold expansion of the public offering rule could be seen as long overdue – the $5 million cap has been in place for a long time.  The radical part of Reg A+ is something Congress didn’t mandate, but that the Commission threw in themselves.


Under Reg A+, issuers will no longer have to register their offering in every state in which investors reside.  These procedures are called the “Blue Sky” laws, made famous in a 1917 Supreme Court opinion describing flim-flam artists offering “speculative schemes which have no more basis than so many feet of blue sky.”  The blue sky laws are one of the state securities regulators’ main sources of leverage, giving them the ability to prevent a security from being sold to residents of their state.


Under the old rules, a company wishing to raise up to $5 million in ten states had to go through eleven registrations: one for the SEC, and one in each state.  This is obviously incredibly time consuming and runs up attorney fees.  And while it has prevented serious frauds, there are famous cases of offerings that didn’t make it through the blue sky process.  For example, Apple Computer’s IPO was not permitted to trade in Massachusetts because regulators thought it too risky, while Salomon Bros had to re-do the first-ever offering of asset-backed securities at the last minute over blue sky issues.  Under Reg A+, anyone can invest, and the stock will be registered and transferrable immediately.  Unlike now, issuers will be able to advertise, and it appears that the old restriction on numbers of shareholders will be lifted.


Thus, it looks like small companies could advertise their offerings online direct to investors and raise $50 million in $100 increments.


Among the obvious pitfalls of these offerings are the likelihood of illiquid investments, and the apparent lack of investor protections when suitability requirements are relaxed and issuers are free to flog their wares with far less oversight that what is required of the average mutual fund offering. 


There remain significant moving parts to work out, but chair White’s announcement really gets the Crowdfunding ball rolling.  Two years ago, former SEC chair Arthur Levitt called for caution, warning that without strong SEC oversight, Crowdfunding could become a mechanism for fleecing the average investor.  Needless to say, state regulators are up in arms over a central-government power grab that, they claim, makes it impossible for them to prudently protect their citizens. 


Some thoughts:


  • Arthur Levitt is one of our heroes – the man who made the investment markets safe for the Little Guy.  His words should be heeded, and heeded carefully, and we’re eager to hear his thoughts now. 
  • State regulators tend to stay in their jobs for the long haul, unlike the SEC where a larger percentage move on to jobs in the private sector.  When they are good, state regulators have a fingertip-fine sense of what goes on on their watch.  And unlike the SEC, if you don’t like your state regulator, you can move to another state. 
  • From a States-versus-Washington point of view, it strikes us as odd that folks screaming bloody murder that we’re being “nanny-stated” to death by programs such as universal healthcare that try to share some of the toys evenly, are only too happy to see the state’s own nanny – in the imposing person of Mary Jo White – wade into the nursery and take the toys away.


One thing is for certain: this will unleash a massive wave of creativity as Wall Street and the entrepreneurial community come up with new ways to raise money, distribute securities and, by creating new forms of exchanges, provide liquidity for their investors.  There will be tremendous opportunities for both companies and private investors, and this new initiative could come close to actually achieving its public policy objective of providing real benefit for the economy and for the markets.  Fortunes will be made and –for sure – lost, and there will also be excesses, dumb mistakes and a few serious frauds.


It’s a brave new crowded world.  Keep your wits about you.


Moshe Silver is a Managing Director at Hedgeye Risk Management and author of Fixing a Broken Wall Street.

Back to Business for #StrongDollar

Client Talking Points


They tested the patience of the crowded Euro and Yen short positions, but all lines of @Hedgeye resistance for those majors in the Currency War held as the U.S. Dollar Index held all lines of support – no support for the Euro to 1.05 and Yen 121.61 vs USD.


Oil doesn’t like #StrongDollar, but we like shorting Oil and levered E&P equity schemes on that – WTI failed at the top-end of yesterday’s risk range and has no real support to $41.93 – that’s not a typo.


No typos in the terrible Japanese economic data either (which is perversely the catalyst to be long the Nikkei) – Household Spending and Retail Sales are down -2.9% year-over-year and -1.8% year-over-year, respectively, in FEB with 0.0% year-over-year inflation (ex-Tax) – they’re going to need moarrr central planning #cowbell.

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No typos in the terrible Japanese economic data either (which is perversely the catalyst to be long Nikkei) – Household Spending and Retail Sales are down -2.9% year-over-year and -1.8% year-over-year, respectively, in FEB with 0.0% year-over-year inflation (ex-Tax) – they’re going to need moarrr central planning #cowbell.


iShares U.S. Home Construction ETF (ITB) is a great way to play our long housing call, U.S. #HousingAccelerating remains 1 of the Top 3 Global Macro Themes in the Hedgeye Institutional Themes deck right now. Builder Confidence retreated for a 3rd consecutive month in March and New Home Starts in February saw their biggest month-over-month decline since January 2007.  We think the underlying reality is more sanguine with the preponderance of the weakness in the reported February data largely attributable to weather.


While labor supply constraints may serve as a drag to builder confidence, presumably it is rising demand trends that are driving tighter conditions in the resi employment market.  All else equal, we’d view improving demand as a net positive.  On the New Construction side, while the sharp drop in Housing Starts captured most of the headlines, we believe the real story was in the 3% gain in permits. We'd expect to see a big rebound in the next two months in housing starts as the data plays catch-up to the thaw.


Low-volatility Long Bonds (TLT) have plenty of room to run. Late-Cycle Economic Indicators are still deteriorating on a TRENDING Basis (Manufacturing, CapEX, inflation) while consumption driven numbers have improved. Most of the #Deflation trades bounced to something less-than-terrible (both absolute and relative) for 2015, whereas the real alpha trending in macro markets continues to play to the lower-rates-for-longer camp’s advantage.

Three for the Road


Spent all night vetting and revetting $RH. Bottom line...math doesn't lie. This name has a tremendous setup for FY 2015.



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-Andrew Miller


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The Short Happy Life

“You know, I’d like to try another lion.”



That was a Hemingway metaphor for married-middle-aged-men conquering their fears in a short story called “The Short Happy Life of Francis Macomber.” It’s a story about a man and his adulterous wife on a safari hunt in Africa.


Right before she kills him, Macomber says: “I’m really not afraid of them now. After all, what can they do to you?


Well, evidently, she (and/or a lion) can do a lot to you! And it made me think about the confidence I am building in risk managing this macro tape. Buying US Dollars, Stocks, and Bonds on dips – Shorting Commodities on rips. Feels like a short happy life, for now…


The Short Happy Life - 56


Back to the Global Macro Grind


But, as any battle tested hunter of the Alpha knows, what we “feel” about markets doesn’t matter. In fact, fading our most immediate-term fears tends to be where we make the best short-term-happy buy/sell decisions.


Whether I’ll prove to be right on this or not for more than today is the ultimate Global Macro question right now (it’s been the same question for 6 months), but this morning it’s back to business with what I think is the best way to be positioned right now:


  1. Long US Dollars (UUP)
  2. Long long-term Treasuries (TLT)
  3. Long US Housing (ITB)
  4. Long US Consumption and Healthcare stocks (XLY and XLV)
  5. Short Commodities and their related stocks/bonds (OIL and XOP)


Ultimately this is the long and short of being positioned for our top Global Macro Theme in Q1 of 2015, Global #Deflation (yes, there are plenty of ways to be uber LONG of the bearish theme – because it’s only bearish for those who are long inflation expectations).


Not to be confused with Global #GrowthAccelerating, #Deflation is Mr. Macro Market’s message when:


  1. The World’s Reserve Currency (Cash) is in high demand vs. other countries who are burning theirs
  2. Both US and Global Interest Rates are falling


Anyone who has studied economic and market history knows that interest rates don’t fall unless the rate of change in GROWTH is slowing. When the rate of change in GROWTH was accelerating (USA in 2013), both the US currency and US rates rose, in tandem.


#StrongDollar and #RatesRising was the macro center-piece of the 1 real US economic consumption expansion (sub $20 Oil) too. Unfortunately, today is not the 1990s (perma growth bulls note this week’s capex cycle chart, which is slowing, faster, now).


What could change my mind on this?


That’s easy – reversing everything that’s been priced into macro markets for the last 6 months, for more than a 2-3 day trade.


What do I mean by that? For intermediate-term risk managers, here’s a list of 10 TREND levels to watch:


  1. UST 10yr Yield = 2.39% resistance
  2. US Dollar Index = 93.20 support
  3. EUR/USD = $1.16 resistance
  4. YEN (vs USD) = 117.09 resistance
  5. CRB Commodities Index = 235 resistance
  6. WTI Oil = $57.79 resistance
  7. Copper = $2.99 resistance
  8. Housing (ITB) = $25.01 support
  9. Healthcare (XLV) = $70.05 support
  10. Oil & Gas Stocks (XOP) = $54.39 resistance


In other words, my short happy life of the last 6 months is all one macro view. It’s by no means a permanent macro view. As most of you who have followed me for a long time know, I have no problem reversing the entire thing and doing the opposite.


But, as promiscuous as I can be with macro trends, is as wedded I am to my process.


And for now, you know, the #process is telling me to try another lion.


Our immediate-term Global Macro Risk Ranges are now as follows (with our intermediate-term TREND views in brackets):


UST 10yr Yield 1.83-2.02% (bearish)
SPX 2049-2080 (bullish)

RUT 1 (bullish)
DAX 110 (bullish)
EUR/USD 1.05-1.10 (bearish)
YEN 118.62-121.69 (bearish)
Oil (WTI) 41.93-51.96 (bearish)
Natural Gas 2.63-2.79 (bearish)
Gold 1140-1208 (bearish)
Copper 2.56-2.85 (bearish)


Best of luck to our Bulldogs in Blue this afternoon at the NCAA Hockey Tournament vs. Boston University,




Keith R. McCullough
Chief Executive Officer


The Short Happy Life - 03.27.15 chart

Project Olaf

This note was originally published at 8am on March 13, 2015 for Hedgeye subscribers.

“Do you want to build a snowman?”



If you haven’t seen Disney’s Frozen, you should. I have two daughters and a son. They love that movie. And, I must admit, I think I know all of the words to Anna and Elsa’s songs too!


Back to the Global Macro Grind


I’m in my favorite fairy-tale place on earth this morning (Washington DC) so I’ll keep this brief as I need to run over to the Fed’s office to have breakfast with all of my buddies over there. We’re going to hammer out how we keep ice cubes from melting.


In the spirit of centrally planning things like economic gravity (and Disney’s announced sequel), we’ve named our latest idea Project Olaf. This was inspired by the inflated hopes of Frozen’s first snowman, who thought the sun couldn’t deflate his expectations.


Admittedly, while we’re wicked “smart” Ivy League guys, I think this whole idea of ours has some headwinds (like heat for example). “So”, I’m thinking that instead of building a snowman, we should just build a billion dollar ice cube app.

Project Olaf - Fed forecast cartoon 03.02.2015


Moving along…


These meetings we do in Washington are funny. I think my defense partner, Daryl Jones, and I are the only two Canadian macro guys within 50 miles of this place who aren’t trying to get inside information on what the Fed is going to say next.


Notwithstanding the whole orange jump-suit risk part, we’re simply more comfortable reminding our audience that you don’t need that stuff to make and/or save money in macro – you simply need to front-run the predictable behavior of people who chase it.


“So”, before I have breakfast with my central planning boys, here’s what Mr. Macro Market is telling me to tell you across 10 Big Macro Risk Management Factors:


  1. US 10yr Yield signaled immediate-term TRADE oversold within its bearish intermediate-term TREND yesterday
  2. SP500 bounced right off @Hedgeye TRADE support and now needs to close > 2080 to keep the snowman from melting
  3. Russell 2000 (IWM) ramped +1.7% post our immediate-term buy signal (lower) on red; next resistance = all-time highs
  4. Weimar Nikkei up another +1.4% overnight to +10.4% YTD (vs. SPX +0.3%) signals immediate-term overbought
  5. Germany’s DAX has immediate-term downside to 11,506 after signaling overbought yesterday at +21% YTD
  6. US Equity Volatility (VIX) signaled overbought where I signaled SELL VXX on Wednesday; risk range = 13.03-17.36
  7. US Dollar Index signaled immediate-term TRADE overbought at 99.99 yesterday; bullish TRADE support = 97.46
  8. Burning Euros are straight back down this morning after their 1-day bounce; bearish TREND call remains
  9. Gold is bouncing (small) as the USD stops going up, but remains bearish TREND with a risk range of 1137-1179
  10. Oil (WTI) is probing the low-end of its immediate-term range this a.m., but has no intermediate-term support to $36.35


In other words, Global #Deflation remains a much more practical intermediate-term TREND investment outlook than building a snowman of inflation expectations in March.


Nope, sorry Olaf. It’s not different this time.


For those of you who are new to my average at best sense of humor and risk management lingo, the aforementioned dump of macro signals are meant to contextualize multiple durations:


    1. Immediate-term TRADE and “risk range” commentary deals with the very immediate-term
    2. Intermediate-term TREND themes and signals consider a duration of 3 months or more
    3. And if I go all “long-term” TAIL on you, I’m considering the next 3 years or less


Yep, more or less. Those are two critical words in risk management as market history will teach you that it’s a lot easier to have:


A)     A “longer-term” outlook (more days in your holding period) if volatility is trending lower, and…

B)       less days (more risk managing of your core investments, hedges, etc.) as implied volatility is tending higher


If that investing style rhymes with what you’ve realized using real ammo in this game of expectations, good. I’ll lose my boys at the Fed as soon as I start talking about anything that’s non-linear (like volatility). They think they can build an app to “smooth” that too…


Our immediate-term Global Macro Risk Ranges (with intermediate-term TREND view in brackets) are now:


UST 10yr Yield 2.01-2.24% (bearish)

SPX 2030-2080 (bullish)

RUT 1205-1248 (bullish)

DAX 11506-11866 (bullish)

VIX 13.03-17.36 (bullish)
USD 97.46-100.31 (bullish)
EUR/USD 1.04-1.107 (bearish)

YEN 119.45-122.01 (bearish)
Oil (WTI) 46.35-49.64 (bearish)

Gold 1137-1179 (bearish)


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Project Olaf - 03.13.15 chart

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