By: Scott Coyle, CEO
There’s been plenty of chatter about Loyal3 shutting down operations and transitioning users off its platform. There’s been quite a bit of vitriol as well, so we thought we’d comment on this news. You see, Loyal3 was not successful with their particular model of fee-free brokerage, but they did prove something, and they were, at least in part, trying to solve an important problem in the public markets.
Specifically, Loyal3 showed that IPOs could be offered to everyday investors, and helped pave the way for ClickIPO to bring the entire asset class of public offerings to mainstreet investors in a way and scale that hasn’t been seen before.
Here’s what Loyal3 (and their loyal users) accomplished:
- Validated that everyday investors want IPO access
- Validated that these investors are willing to buy and hold shares
- Validated that issuers want better retail distribution for their offerings
Of course, Loyal3 made some mistakes along the way, but every startup deals with the risk of calculated decisions. Let’s unpack this a bit:
Loyal3 Validated Investor Interest
At ClickIPO, we are asked all the time, “will individual investors want access to IPOs and Secondary Offerings?” If you are an active, self-directed investor in the U.S., or if you run a brokerage with retail operations, then you already know the answer to that is a deafening “yes!” Loyal3 proved it by consistently selling out of allocation for the deals it listed. Of course, these were consumer-branded issuers in all cases.
So, here’s what we now need to prove: that retail investors are interested in all IPOs and Secondaries — not because they are chasing only well-recognized brands, but because good investors are picking the best holdings for their portfolio. To illustrate, the best performing IPO so far this year wasn’t Snapchat, but Impinj, Inc. Who, you ask? Yes, a maker of wireless components that, as of the time of this writing, is trading 230% over its IPO price [Sources: IPOBoutique.com, Yahoo Finance]. In fact, Snap isn’t even in the top quartile for aftermarket performance.
Loyal3 Validated Investor Behavior
It’s one thing to validate investor interest in public offerings, but another thing to show that those same investors are willing to buy-and-hold shares, just like the larger institutions. Loyal3 built a brand on that promise and seemed to have been able to prove it. The fact is, most mainstreet investors in the U.S. are naturally buy-and-hold investors. Just ask The Motley Fool. And it’s that buy-and-hold behavior that makes retail investors valuable to the issuer.
More shareholders means more liquidity for the founders, employees, and early investors. It means more employees, friends, family, and customers becoming shareholders.
Loyal3 Validated Issuers’ Desire for Retail Distribution
It’s possible to get deals done without retail investors. In fact, until platforms like Loyal3 — and now ClickIPO — it’s been much easier for underwriters to do offerings without any retail distribution at all. It’s also safer, since IPO flippers are so entrenched in the established retail channels. But remember that issuers actually find retail distribution, and therefore greater wealth distribution, appealing. More shareholders means more liquidity for the founders, employees, and early investors. It means more employees, friends, family, and customers becoming shareholders.
We know now that solving for IPOs is its own niche. Loyal3 wanted to be the brokerage, the clearing firm and the IPO pipeline. Those are three very different and expensive businesses to build and compete on. Robinhood has dominated the fee-free brokerage game, while companies like Apex are showing what modern technology can do for modern clearing operations. AccessIPOs.com speculated on some of the other lessons learned with the Loyal3 model.
ClickIPO believes that solving the IPO problem starts with focus: creating an industry utility to optimize retail distribution for public offerings. Building a utility means creating data hooks and feeds for any brokerage, any clearing firm, any issuer and any underwriter to leverage retail distribution at scale. It means publishing the entire asset class of IPOs and Secondary Offerings in a way that’s timely and easy for everyone involved, regardless of the technological or compliance complexities.
If we can all work to bring mainstreet retail back to the table, we can help create a renaissance of the public markets once again in the U.S. and abroad. This means more capital, more data, more long-term holders and more offerings.
Yes, Loyal3 made some mistakes along the way. But they were solving the right problem, and they moved the game forward. We are sorry to see a great company go away, but we applaud everyone involved — especially Loyal3 users — for the effort.
Risk of Investing in Initial Public Offerings (“IPOs”)
There are specific risks in investing in an Initial Public Offering (“IPO”). Among other things, the stock has not been subject to market valuation. Those risks are described at length in the prospectus, and we urge you to read the prospectus carefully to understand those risks before investing. An IPO is the first sale of stock by a private company to the public and may not be suitable for all investors. IPOs are often issued by smaller, younger companies seeking the capital to expand, but can also be done by large privately owned companies looking to become publicly traded. IPOs are a risky investment. For even experienced investors, it can be difficult to predict what the stock will do on its initial day of trading and in the near future because there is often little historical data with which to analyze the company. Also, most IPOs are of companies going through a transitory growth period, which are subject to additional uncertainty regarding their future values. Read more information regarding the significant risks associated with investing in IPOs.
The author, Scott Coyle is CEO of Click IPO Securities, LLC, a member of FINRA and SIPC.