What are SBHCs
SBHCs are a special type of public holding company created to facilitate the financing and support of small businesses. SBHCs are intended to be public companies and, somewhat like a mutual fund, can serve as a collective investment vehicle to invest in other companies. However, while mutual funds have to invest at least 85% of their assets in publicly traded securities (stocks and bonds by companies listed on the stock market), an SBHC invests in and owns a large number of small, private (not public) businesses. Think of them as a public venture capital company or mutual fund for small businesses. This allows the average person, not just wealthy investors, to invest in something that resembles a VC fund. Public SBHC investors can freely sell their shares, just as with any other public company.
Thus, SBHCs stand in between the investment community and the small businesses they are interested in nurturing. This provides benefits not only to the small businesses, but changes the fundamental paradigm for investors interested in supporting small businesses. Normally such investments are very risky and . SBHCs eliminate those problems for investors. As a public company, the shares of SBHCs would be freely tradable on a stock exchange or other trading platforms like token exchanges (the means by which we intend to list our SBHCs and CCCs), giving their shareholders 24/7 liquidity, something nearly impossible with direct investments in small, private companies.
At the same time, SBHCs can actually support a much wider spectrum of small businesses than are usually done individually by Angel funds, venture capital funds, private equity funds, family offices, hedge funds, foundations, pension funds, mutual funds, BDCs (business development companies) and others. That means they can support everything from raw startups to growth companies to companies that are even decades old. No other single investment vehicle would normally simultaneously provide these benefits to such a broad spectrum of small businesses.
Thus, SBHCs provide the “how” for addressing the needs of small businesses and their stakeholders. What about the “soul” of these organizations? That is the “why” question related to their underlying purpose.
Inherent Public Benefit
To answer that, we direct our attention to the topic of benefit corporations, whose meta purpose is to serve society and the planet. SBHCs provide the means to fulfilling the broader purpose inherent in benefit corporations. In fact, we consider that an SBHC inherently fulfills a public benefit and therefore is intrinsically aligned with the purpose of benefit corporations.
Small businesses are the backbone of local economies in the United States and around the world. They create more jobs than all other sectors combined (big business, government, non-profit, etc.) and yet often struggle to survive due to lack of capital, expertise and other resources that are commonly available to large businesses. SBHCs are designed to solve that problem by bringing the resources available to public companies down to local small businesses. By providing those resources to small businesses, SBHCs are helping them to survive, grow, create more jobs and in general better serve their communities. Thus SBHCs inherently provide a broad public benefit by their very existence and efforts.
Sustainability and Triple Bottom Line
An SBHC can go even further by incorporating the concepts of sustainability and triple bottom line, i.e., making sure the whole enterprise is not only financially successful, but socially and environmentally as well.
The push to make businesses more socially and environmentally responsible is gaining traction worldwide. In the U.S., we see two overt expressions of this. The first are those companies that become certified as B Corporations (over 1,700 worldwide as of Aug 2016) and the second is a new form of statutorily defined corporation called a benefit corporation. As of Aug 2016, more than 3,000 such corporations have been formed in the nearly 30 states in the U.S. that have adopted such corporate statutes. B Corporations and benefit corporations represent a natural constituency for an SBHC that wishes to incorporate sustainability throughout its enterprise.
An SBHC that fully embraces sustainability will be helping to not only foster small businesses in general, but will be moving them as a group towards a more inclusive form of capitalism that will better serve all stakeholders – employees, managers, owners, customers, suppliers, the community in general and the world we live in.
How SBHCs Work
SBHCs gather small and mid-size companies together into an entity large enough to be a public company. So instead of investing in an individual small company, investors invest in the public SBHC, which then invests in many small businesses at one time. It spreads the risk, provides liquidity, and facilitates recouping the original investment plus a healthy return.
SBHCs Are Flexible
They can provide access to funding for a wide spectrum of companies including startup, growth and even mature small and mid-size companies. Investments can be individualized for each company. SBHCs can mimic crowdfunding, yet also act like a investment fund, a holding company and a commercial lender rolled into one.
SBHCs represent a whole new set of options for funding small businesses, whether by a crowdfunding portal (only recently approved by the SEC) or other means. In fact, they may be better than the most idealized version of crowdfunding, and almost certainly better than what was left after the SEC completed its rulemaking on Title III. The same is true for conventional VC funds, angel funds, etc. SBHCs are better, their rules are already in place and they can be used today.
Benefits of SBHCs
|> Provide capital (and perhaps credit) to small and mid-sized startups, growth and mature companies.
> Built-in exit for investors, therefore easier to raise money.
> Investors have benefit of owning shares in a large public company, yet can direct their investment to an individual private company.
> Allow investors in existing funds to divest from companies too small to go public or sell at a profit.
> Flexible structuring: businesses can be wholly or partially owned subsidiaries, incubated companies, joint ventures, etc.
> Public companies are typically valued far higher, i.e., a greater multiple of earnings, than private companies, giving investors a higher return.
|> Can “incubate” future SBHCs around industry sectors or other criteria.
> Businesses can choose their optimum size and not be pressured to grow merely to satisfy investors. They may remain under the umbrella of the SBHC forever, without being forced out or forced to be acquired by another company (a typical condition for VC-funded companies).
> Will offer mentoring at all stages of the business cycle, thereby enhancing survivability and growth of subsidiary companies.
> Natural network for businesses within the SBHC.
> Can provide shared services at better prices, e.g., payroll, insurance, accounting, IT and more.
> Can cross market with other subsidiaries under the SBHC, thereby increasing sales for all.
> But probably the most inclusive benefit that an SBHC can provide to small businesses is to inculcate them with the broad concepts of sustainability. When triple bottom line philosophy and practice become core values, they bring a rigour and discipline to every facet of the business, making them not only better businesses, but better corporate citizens. There is substantial evidence that companies that embrace these principals are more successful, financially and otherwise, than conventional competitors.
Examples of Other Public Holding Companies
Conglomerates and Diversified Holding Companies: Large-Cap Stocks ($5/10 billion and above market cap)
3M Company (MMM) (Consumer Products, electronic devices, telecommunication networks, healthcare products, industrial products, safety and security products)
Berkshire Hathaway Inc. (BRK.B) (Insurance, railroads, utilities, energy, aviation training, jewelry stores, building products, news services, retail)
General Electric Company (GE) (Appliances and lighting, aviation products, energy management, financial services, healthcare products, oil & gas equipment, power generation, railroad equipment, water products)
Orix Corp Ads (IX) (Japan: lending, life insurance, banking, automotive, real estate, environmental, energy-related businesses)
Textron Inc. (TXT) (Aircraft, defense, financial services, industrial products, tools, vehicles)
Conglomerates and Diversified Holding Companies: Mid-Cap Stocks ($2 billion to $5/10 billion market cap)
Graham Holdings Company (GHC) (Education (Kaplan); broadcasting and media assets; marketing and advertising businesses)
HRG Group, Inc. (HRG) (Life insurance and annuity products; branded consumer products; asset-backed loans; energy assets)
Icahn Enterprises L.P. (IEP) (Automotive, energy, food packaging, gaming, home fashion, investment, metals, railcar, real estate)
Leucadia National Corporation (LUK) (Asset management, investment banking, capital markets, beef processing, manufacturing and real estate)
Ultrapar Participacoes S.A. (UGP) (Brazil: specialized distribution and retail, specialty chemicals, storage for liquid bulk)
Conglomerates and Diversified Holding Companies: Small-Cap Stocks ($250/300 million to $2 billion market cap)
Kenon Holdings Ltd. (KEN) (Singapore: Power generation, automotive, container shipping, renewable energy)
Steel Partners Holdings L.P. (SPLP) (Banking, energy, food products, industrial products, logistics, oilfield services, sports)
Conglomerates and Diversified Holding Companies: Micro-Cap Stocks ($50 million to $250/300 million market cap)
ALJ Regional Holdings, Inc. (ALJJ) (Business process outsourcing, retail floor covering, printing)
Aoxin Tianli Group, Inc. (ABAC) (China: hog farming, valve manufacturing, optical fiber sensor systems)
HC2 Holdings, Inc. (HCHC) (Telecom, infrastructure, construction, energy, life sciences)
MGT Capital Investments Inc. (MGT) (Online gaming among other investments)
Real Industry, Inc. (RELY) (Diversified investment company: aluminum recycling and personal care products)
Security National Financial Corporation (SNFCA) (Insurance, mortgages, funeral services)