[Startup companies are an essential part of the U.S. economy stimulating economic development by providing job creation, business innovation and wealth creation potential through appreciation of equity value and operating profits. Unfortunately, investing in these young companies has been traditionally limited to private market funds such as venture capital that has only been available to wealthy individuals and institutions under strict accreditation rules due to their high risk/reward nature and liquidity concerns. This has resulted in the vast majority of U.S. households being restricted from investing in these opportunities.
For that reason, a recent decision by the SEC brings great news of an innovative investment vehicle in the form of a new 40 Act fund structure that can now offer venture capital investing to all U.S. citizens 18 and older with a minimum investment of $1,000. This new fund fundamentally changes and democratizes who can invest in venture capital and early-stage startup companies.
To learn more, we reached out to Will Zell, founder and CEO of Zell Capital—a Columbus, Ohio-based investment company that is launching the first ever “Access Fund” that opens venture capital to all investors. We wanted to understand the thinking and the structure behind the novel investment solution with particular emphasis on learning how Zell Capital created this innovation.]
Bill Hortz: What exactly is an Access Fund? How is it different from a typical mutual fund?
Will Zell: The Access Fund is a closed-end fund registered under the Investment Company Act of 1940, specifically designed to open private market fund investing, such as venture capital, to all investors. It is designed to function as a way for non-accredited investors to have access to these investment opportunities. The Access Fund structure has all the disclosure and reporting requirements that are part of a 40 Act Fund, while enabling fund managers to execute investment strategies in private, illiquid markets.
Hortz: How exactly did you work with the SEC to create and achieve effectiveness for this new investment vehicle?
Zell: The 40 Act does not preclude registered funds from investing in private securities. To create a structure that accommodates venture capital investment strategies however, there are many operational and mechanical issues to work through. With the help of incredible legal counsel, we submitted a N2 registration statement to the SEC in April 2020 presenting this novel structure and spent 13 months in the registration process. At the end of that process, we were able to solve the operational and mechanical issues that allow us to invest in venture capital.
I believe that developing ways to open private market access has been a priority within the SEC for some time given the JOBS Act that enabled equity crowdfunding. I am grateful that we were able to complete the registration process and the fund is now effective without the need to create new legislation or pass rule changes, but rather innovating within the rules that exist.
Hortz: What was your motivation and value proposition behind creating this fund to invest in startup companies?
Zell: I have long held the belief that every investor should have access to private markets. There is a world of investment opportunity in private markets, such as private equity and venture capital, that has traditionally been accessible only to wealthy individuals and institutions, also known as accredited investors. There are risks in private market investing that must be considered and understood by investors, including a lack of liquidity, very long holding periods, and accreditation rules have been an appropriate method for the SEC to mitigate risks investors could face due to a lack of understanding.
However, we are living in a new time. Access to information and content to learn about private market investing is readily available online. Any investor can easily learn about private asset classes and understand the risks. So, there is no reason a non-accredited investor should not be able to invest a small percentage of their portfolio into private markets, similarly, to accredited investors.
Also, fund-based strategies can be ideal for investors. Rather than building an active portfolio, investors in Access Funds can rely on a professional team that deeply understands the asset class and focuses on the investment strategy every day.
Hortz: Can you give us a brief overview of the venture capital marketplace this fund will be accessing?
Zell: Startup companies backed by venture capital investors generally raise capital and are described by the progress they have made:
Pre-seed—an idea on a napkin or a little more,
Seed - something (product/app/technology) has been built but there is no proven revenue model and possibly no revenue at all,
Series A—the product/app/technology has been proven more in the market, generally demonstrated by revenue growth,
Series C, D, E and so on—are considered growth rounds in companies that have proven a successful business and continue to raise investor capital to accelerate growth faster than they can through their own cash flows.
Zell Capital invests in Seed and Series A rounds where we can purchase equity when a company has a low valuation (generally between $5 and $50 million). While there is always the risk of loss of your investment, I believe that founding and early equity ownership have the potential to be a great tool for wealth creation. It is the stage of startups I have focused on for the last decade and where I am qualified to lead an investment strategy. We also will provide debt and debt-like investments, such as revenue-based financing, to companies in the Series A stage of development where we expect a rate of return higher than lending to more established companies.