What's a Mini-IPO?

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A mini-initial public offering (IPO), a provision of the 2012 JOBS Act, may make it possible for investors to own a small piece of Eminem's future royalties. On this episode of Industry Focus: Technology, host Dylan Lewis is joined by Motley Fool contributing writer Daniel Kline to discuss alternative investments and Royalty Flow, the company proposing to sell part of the revenue from Eminem's catalog.

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The two talk about how mini-IPOs work and what equity crowdfunding is. They also talk about all of the risks associated with buying into a company that doesn't have the same reporting requirements as one going through a traditional IPO. It's a process that creates opportunity for investors and also comes with huge risk.

A full transcript follows the video.

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This video was recorded on Sept. 29, 2017.

Dylan Lewis: We are talking about something that's kind of interesting. It got a lot of splashy headlines earlier this week. Some cool news from the music industry that has crossed over into the investment industry.

Dan Kline: Yeah, it's a really bizarre but exciting opportunity. Really full of pitfalls, though.

Lewis: Investors may soon have the opportunity to invest in rapper Eminem's music catalog. We're going to do a deep dive into some of the specifics that are available at this point with the filing. But before we get too far into that, I think it's probably worth going into how this type of opportunity came to be. This is a topic that we've touched on a little bit on the show before.

Kline: Yeah. It's really an alternate way to invest. It's somewhat like crowdsourcing, but you actually do end up with shares of the company, except for the fact that there's not all the financial due diligence you see during a traditional IPO or other investment opportunity.

Lewis: This really traces back to the JOBS Act, which was passed in 2012, as part of the Obama administration. Like I said, it's something we talked about in past shows a little bit, but really, this legislation was aimed at making raising capital a little bit easier for small businesses, and making the path to going public a little easier for small businesses. One of the things that it's probably best known for, it has a lot of different components, is enabling equity crowdfunding, basically allowing companies to raise capital from average individuals in a way similar to how they would on Kickstarter or Indiegogo, like you talked about, Dan. But instead of giving $200 and getting a T-shirt or a book or a DVD or something like that, you're instead getting an equity stake in this private business. Before, only deep-pocketed accredited investors, basically high-net-worth individuals, had the ability to do that.

Kline: The problem is, these could be great investments, but they're also risky investments. They don't have all the financial due diligence that a traditional IPO would have. They also don't have people like us, the analyst and writers at The Motley Fool and other financial entities, checking into them. To look at one that's out there now, it's Fatburger, the burger chain -- it's on its way toward an IPO. If you like Fatburger, that may seem like a great idea. But if you don't really know everything they're going to do with the proceeds, how you might cash out, what the benefit is, it becomes riskier than a traditional share of stock.

Lewis: I believe Fatburger is going through the mini-IPO process. Is that right, Dan?

Kline: They are. The mini-IPO means you're raising under $50 million. It basically gives you five years, or when you reach $1 billion in revenue, before you have to meet the full reporting standards. Once again, if you truly believe in a company, this is a way to own a piece of it that you previously couldn't have. But in many ways, it's novelty investing. You don't have all the tools to decide. Fatburger is using some of this money to buy another chain -- is that a good investment? There's not a lot of details out there about that the way there would be if this was a traditional IPO.

Lewis: And proponents of this have said this is this way to democratize access to these early-stage companies. You look at this landscape of the tech unicorns, these high-growth companies that get all this press. And people are saying, as an investor, I'm locked out of this. I can't get into the equity rounds that these venture capitalists and angel investors can. And there's this kind of classism in the investment industry. So this legislation is kind of aimed at saying, "OK, average investors, you can participate." Of course, that doesn't mean that these investments behave totally differently, and we will hopefully outline some of the ways that that's the case here. Similar to the Fatburger thing that you talked about, this mini-IPO provision is something that the Eminem deal will likely be going through with Royalty Exchange.

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