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NEW VIDEO RELEASE: Allegiancy CEO Steve Sadler speaks about “The Next Step in Crowdfunding: the New Reg A” at the National Press Club

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NEW VIDEO RELEASE: Allegiancy CEO Steve Sadler speaks about “The Next Step in Crowdfunding: the New Reg A” at the National Press Club

By: Baker Lynn, Allegiancy

June 16, 2015

Allegiancy CEO Steve Sadler recently spoke about the potential that the new Reg A creates for businesses and investors at the Crowdfunding USA Forum at the National Press Club in Washington, D.C., in May.

Sadler speaks from personal experience, because his company Allegiancy is currently drafting materials for a $30 million Reg A offering expected to be available to the public in September.

Watch the complete video here.

Transcript of Video

Introduction

I’m the chief executive officer of Allegiancy. We are a real estate asset manager. In much the same way as a financial asset manager guides investments on your behalf, we guide commercial real estate investments on behalf of those owners. We’ve been in this business for 10 years or so.

Allegiancy’s Story

Last year, we looked at our business model and decided that acquisitions were an important opportunity for us, at which point we looked at how can we raise capital efficiently and effectively?

We were anticipating, being foolishly optimistic (as most entrepreneurs are) that Regulation A rules would be promulgated promptly. So as time ground down, we opted to go out for a $5 million raise under the old Reg A in anticipation that sooner or later, these guys would get around to writing the rules for A+, with a $50 million limit that would be available to us. So that’s what we did.

We found a broker-dealer, Moloney Securities, that was excited about the space, was building a secondary market trading platform, and was willing to commit some resources and some time to build that investment banking infrastructure around Regulation A+ securities offerings.

We went out and did the traditional roadshow and raised $5 million, and it was a lot of work. There was a lot of pain, but I would tell you from our perspective, that the pain was worth it – that there’s an awful lot to commend a public platform securities offering over a private placement securities offering.

In an affiliated company, we’ve raised probably $300 million of Regulation D money for direct real estate acquisitions. We’ve lived in the Reg D world for a long time and know a lot of guys that are in the Reg D world. But if you were to look at the demographic of independent broker-dealers, what you’re seeing is old people. They are all 50-plus — the guys that are really doing most of the fundraising in the Regulation D world. And most of those guys are moving out of the business. We think Reg A+ is going to do an awful lot to replace Regulation D, and there’s some good reasons that would take place.

Why do we think the new Regulation A matters?

Why do we think the new Regulation A matters? I think there’s an interesting dynamic: there’s a fundamental tension between sort of the old guard and the regulatory infrastructure that’s always seeking to tighten things down so it’s easier to regulate. It’s seeking to narrow the focus, shrink the pool, so they can control what’s going on.

And you see it with FINRA; FINRA has been actively squeezing smaller broker-dealers out of the market. Broker-dealers are, by and large, the entrepreneurial guys — they’re the cowboys. They end up causing trouble for the regulators, so the regulators are working diligently to shrink that pool and run those guys out of business. In banking, the same thing has been happening. A lot of community banks are under enormous pressure from the regulators.

So you’ve got this tension going on, and at the same time, the JOBS Act has opened up a whole new avenue for the entrepreneurial innovators to go out and raise capital and make interesting things happen, which will probably ultimately define the future for this country.

So we think it matters a great deal, that Reg A+ and its current iterations, titled “2, 3, and 4,” are going to make a big difference.

And there are a couple of things that you’ve probably all heard bandied about in the news that have been going on in the country for a long time.

Issues Addressed

Gallup did a poll recently talking about the entrepreneurial decline in America and how there are more business deaths each year than there are births. You have a shrinking population, or what I call “Japan-ization” of the entrepreneur. You’ve got more businesses dying than being born. The math looks bad.

Also simultaneously — and I guess not really a big surprise — we’re at a point in the United States where we have the lowest level of self-employment in the history of this country. You have sort of a pressure cooker that’s working against entrepreneurs, and part of that is capital fundraising.

Most of you probably know about the Millennials, who are the biggest generation since the Baby Boomers. Forty percent of Millennials have indicated an unwillingness to start a business or work for a start-up. Think about that: not just to start a business, but to work for a start-up. Forty percent have indicated that they are unwilling to do that because they think that funding and capital availability are going to be a problem. They can’t get a loan, and they can’t raise the equity. If you’ve got the biggest generation in the history of the country coming along, and 40 percent of them don’t want to own a start-up or work for a start-up, that’s a big deal. That’s a big problem.

I think the JOBS Act and all the hard work that’s being done by people in this room and people up on the Hill to try to make those changes, I think that it is a very big deal, and we should all get behind it. We should do what we can to help promote it. Because small and medium-sized businesses are 100-percent of the new net employment in this country.

You look at the so-called “recovery” we’re in right now, and it’s a jobless recovery. I mean the unemployment statistics are horrible, particularly if you measure them the way we used to measure unemployment back in the ‘80s. The employment is terrible, and part of the reason it’s terrible is because the new job engine – small- to medium-sized enterprises – are under so much pressure. They’re undercapitalized and over-regulated. But the JOBS Act and Reg A, I think, are driving change there. It is exciting stuff.

What the new Reg A means to our company

When we [Allegiancy] decided to go down the Reg A path, instead of Reg D, we were looking at the opportunity to raise capital from a broader selection of investors. We wanted to move out and away from just accredited investors, and be able to talk to non-accredited investors.

If you think about investor pool as a pyramid, the accredited guys are at the top, and there’s not that many of them. Then below that is an enormous group of people that we heretofore, had had to turn away and say to them: “I’m sorry — you don’t meet the standards. Even though it might be perfect, we can’t allow you to be a participant.”

Regulation A+ has reduced a lot of that regulatory barrier. It’s also, in our view, reducing a lot of risk. Because it’s a public security, it’s gone through SEC scrutiny. Regardless of whether you think it’s scrutiny enough, it has gone through that process, and we can now market that security broadly. We don’t have the accreditation standards and the validation of all that. As an issuer, we don’t have to worry about those things like we used to with Regulation D.

So part of what we looked at is a wider audience of investors that’s available to us now, and a reduction of ongoing risks as the issuer. With these securities, we have transparency in terms of financials, we have audits, and we lower the risk for us to get sued or have a securities issue because of the standards.

Those are all the things we were thinking about as we set out now. We expect to file somewhere between a $30 and $50 million offering, depending upon the structure of the security. We’ll file that with our friends at the SEC on June 19th. We figure it will take them 90 to 120 days to get through the process, and then we’ll be live in the market, hopefully in the fall — after everyone is back from summer break and we’re all focused on business again. We’ll get that thing done.

Our former Reg A offering was fully subscribed in 30 days, so we’re very excited. I think there is a lot of demand in the marketplace for new opportunities.   And not only is this important for companies who can then invest and grow – our company has doubled in size in the last year, we’ve added 10 employees.   And we’ll be doubling again at least, this year, even before we do the next offering.

What the new Reg A means to Investors

That kind of growth matters and it employs people, but it’s also important for the investors. Today, investors, have been under financial repression, as in artificially low interest rates, artificially low returns on fixed income securities, and for what?  How long have we been doing this? Five years? It’s longer than that, isn’t it? Seven years? That they’ve been under that financial repression, and in the new securities and Reg A+ world, will, I think, afford investors opportunities that heretofore have been limited to the accredited, the private equity funds, the venture capital guys, and the rich guys. And so I think the democratization of capital really goes both ways: it’s for issuers and for investors.

Thank you very much.

About Allegiancy

Steve Sadler’s company, Allegiancy, manages commercial properties that have outperformed their peers by 45 percent since 2006. Since 2014, the company has more than doubled its assets under management (AUM), delivering clients attractive returns and profitable, hassle-free investments in commercial real estate.

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