With the stock market hitting all time highs and equities getting more and more richly priced, I have once again started looking for alternatives to stocks. Bonds are often a good alternative, but with an extremely low federal funds rate set by the Federal Reserve to address the global pandemic, most bonds are just yielding too low of a rate and also too high of a price to really be considered a good investment. I did, however, learn from a fellow financial blogger about a relatively new small business bond market called the SMBX. Usually these type of alternative investments are limited to accredited investors, but the JOBS Act allowed funding portals for Regulation Crowdfunding for non-accredited investors (most of us) to participate in securities offerings by small- or medium-sized companies.
The SMBX offers small business bonds in $10 increments with fixed interest rates. The current rates being offered are between 7.5% and 8%. The companies selling bonds so far have sought to raise between $10,000 and $400,000 in capital. The bonds offered to date seem to mature in as little as 48 months or as much as 84 months (7 years). You can invest as little as $10, and there is no cost to investors. SMBX makes its money by charging a 3.5% service fee on the total capital the small-businesses raise through a success bond issuance, and they also charge a $100 annual maintenance fee to the bond issuers through maturity of their bonds. I liked the no-cost and small initial investment threshold, so I decided to dig into this investment option a bit more.
The first thing I checked on was whether SMBX was properly regulated. The company has submitted SEC filings for all their bonds. SMBX notes that it is mandated by SEC Reg CF to deny any company access to the platform if they have a reasonable basis to believe that the potential bond issuer or bond offer presents the potential for fraud or otherwise raises concerns about investor protections. To comply with the requirement, SMBX performs background checks and securities enforcement regulatory history checks on potential bond issuers and ensures to the best of their ability that bond issuers are in compliance with Reg CF disclosure and process requirements.
I also decided to look into the backgrounds of the founders. Benjamin Lozano, the CEO and co-founder of SMBX, has a Ph.D. from UC Santa Cruz in political economy, philosophy and finance where he was a professor for seven years. He was also Chief Product Officer at Robin Hood and is also a professor at San Francisco State University. Lazano definitely has the finance and fintech experience to head SMBX. Jackie Chan, the COO and a co-founder of SMBX, has an MBA from Cornell, experience at Merrill Lynch, Morgan Stanley, and was the executive director and chief administrative officer at Nomura. The CTO and co-founder, Bhavish Balhotra was a senior developer at RBC and TD before joining the SMBX team. You can check out a video on YouTube of these co-founder pitching SMBX to get to know them a bit better.
Regardless of how solid the founders and the regulatory oversight appear, there will still be risks involved in this type of bond investment. Basically, you are making a loan to a small business, and there is always a risk that the business will default on the loan or run into other issues. Some of these loans are backed by collateral, but others are not. You have to read the bond prospectus to get those details. Even with collateral, we don’t know how effective SMBX will be at securing and liquidating any collateral. I’m also not sure how effective the legal team at SMBX will be in dealing with bankruptcies and other issues. It will take a few years to build up this sort of track record.
For now, I was interested enough to up an account and put in a bit of money I’m willing to lose. I clicked the Sign Up button. Here’s what I saw:
I selected “Individual” and hit the continue button. Then I had to answer some simple questions about my whether or not I’m an accredited investor and the amount I invest in crowdfunding offerings.
Then it was time to read through the important disclosures.
Once you complete reviewing and acknowledging the disclosures, you get to the brand new empty portfolio page.
Then I added my bank account using Plaid. The Plaid account linking process is pretty easy. You find your bank in their list and then log into your bank account to make the connection. Alternatively, I believe you can also provide your account number and routing to them to make the link using two small transactions. Two other things to note. You must have a U.S. mailing address per FINRA to open an account and you must be a minimum of 13 years of age. I was actually surprised you could open an account that young. SMBX also provides a very slick iOS app that you can use instead to set up and manage your account. I prefer to use my old desktop computer to do any important investment reviews, so I stuck to the webpage. I think it took me less than 15 minutes to do all this.
Once I was set up, it was time to review the bond offerings. I found 17 bonds on their webpage. Thirteen were completed bond offerings, one was in settlement, and 3 were open to new investments. Of those three, I went with the one with full collateral, shortest duration (48 months), and highest yield (8.0%). It was a wings restaurant that was raising capital to acquire a food truck. They are trying to raise between $10,000 and $40,000 with their bond issuance, which seemed reasonable for their food truck. The business model seems simple enough and they seem to have a unique food offering for their area. I decided to go with a round $100 investment to make it easy to track. I’ll update you on how it goes when the offer closes in a few days.
My biggest issue so far is in the number of bonds that been offered and are currently available. I also noticed most of the bonds are for businesses based in California or the southwest. I’d really like to see some East Coast businesses on that list, since I’m based in the East Coast. It will be much more fun to visit a potential investment, learn about their product first hand, and maybe even meet the business owners. My hope is that SMBX can expand in the future and build up their track record to build confidence in their investment offering.
You can sign up and try out SMBX Small Business Bonds by following this link.