Oscar Jofre  00:26

Okay, well good afternoon everyone. And once again, welcome to KoreConX Kore Summit webinar series 2021. My name is Oscar Jofre. Today we are going to have a great conversation. Following up. We’re only four days away from the big day to march the 15th, where companies can raise up to 75 million under reg A. 5 million in reg CF. So lots of excitement, lots to discuss. But today’s discussion is one that it’s even more exciting because it’s the final step that we’ve been talking about or waiting to say, for the last three, four years. It’s something that’s real. We’re going to learn about it today, and we have some great panelists that are going to share their insights into that. First of all, ladies first, Linda, please if you can take a moment to introduce yourself to the crowd.

Linda Lerner  01:19

Good afternoon, everyone. My name is Linda Lerner. I’m an attorney and a partner in the law firm of Halloran, Farkas and Kittler. And I focus much of my practice on the offering and trading of digital assets, securities or security tokens, or whatever you’d like to call them. And I am the chair of an American Bar Association committee devoted toward devoted to looking at the issues that arise with digital assets securities.

Oscar Jofre  01:56

That’s great, we finally got somebody that knows what they’re doing. And Joel your turn

Joel Steinmetz  02:02

Joel Steinmetz I’m COO and one of the co founders of Rialto Markets. Rialto is a broker dealer and registered ATS as well, that specializes in private securities, both in traditional and digital form. And we are offering the capabilities of as Oscar saying, of finding ways to deal in the secondary markets for all those private securities.

Oscar Jofre  02:32

And that is the topic of the day today, secondary market trading for reg A, Reg D, and Reg CF, and we put it there. And Joel you’re gonna like this surprise. So this surprises we are really going to talk about Rialto is this conversation will only be about how we out the works. Not in general. I we made a decision without letting you know, isn’t that great? Yeah. We felt that is we’ve gone through the education already. What atsr It’s important now to help them see every give different ATS and what the impact is on the whole market. Right on that. But before we get started, let’s let’s unravel again, just you know, I’m the type of person that always goes by the person that’s listening doesn’t know what the secondary market and he is. And in fact, I have a question for you, Linda, I often get confused between the two terms. I think I got it now. Which ones which one comes first? I think I do. But I’d love to hear the legal opinion or not opinion. You know the difference between ATS and secondary market because they come interchangeably and want to make sure that people use them correctly, please.

Linda Lerner  03:48

Okay. So when securities are first offered to investors, that’s called a primary offering. Then people own those securities, and they’d like to sell them and buy the next good looking thing. And that’s called secondary trading. An alternative trading system, an ATS is a venue on which this secondary trading can occur. An alternative trading system is a type of exchange. There are two kinds of exchanges registered exchanges like the New York Stock Exchange or NASDAQ, and unregistered exchanges, like Rialto, though, like any ATS, and there are different rules that apply to registered exchanges versus unregistered exchanges. So Rialto though, is an unregistered exchange, but it has its own set of rules. And it has some things that it’s required to do by the Securities and Exchange Commission. That answer your question Oscar

Oscar Jofre  04:57

Simple, actually, you know, I know it’s gonna sound funny. But sometimes, the way people put them in words together, which one comes first, and now you’re writing it, because some people forget that. Yes, we it’s secondary market. But where are you going to trade that second on an ATS and what’s an ATS? It’s a registered entity within FINRA, I do this. 

Linda Lerner  05:23

An alternative trading system has to send a form ATS to the SEC, but it is not registered like a crowdfunding portal is actually registered with FINRA. The funny thing about an ATS is it’s not registered. It’s just permitted to operate but not because somebody says So you send in the form ATS and 20 days go by. And if they don’t complain about anything that you put on your form, ATS, you’re good to go. That’s how it happens.

Joel Steinmetz  05:58

So it’s a regulated entity? Not a registered entity.

Linda Lerner  06:04

Good. Thank you, Joel. That was good.

Oscar Jofre  06:06

So you mean I can become an ATS? Okay, I wasn’t, you know, it is funny, everybody’s I’m gonna run my own secondary market. I obviously, I was joking about that. But thank you for that clarity. And I think it’s important for, you know, we’re gonna need to do this again, and again, and again. Because there’s such a large audience out there that hasn’t heard of this has never been exposed to it or been even allowed to participate in it. So it makes it very challenging for everyone around. So thank you for that first step, because it, it allows us to go in, and as I said, this discussion is really going to be around Rialto. Who Rialto Markets is, so I’m going to put it on you Joel now. So walk us through what Rialto is it’s a it’s an ATS. Provide us the the components with that your your oversight is to FINRA share that with us.

Linda Lerner  07:07

Can I just say one thing before, before Joel gets started? There are 40 some odd ATS, most of them trade exchange traded securities, and some of them trade government issued securities. What’s unique about Rialto and a few other ATS is, is that they are trading securities that have not been that are not registered, and are not listed on an exchange. These are securities that came that were issued under an exemption from registration, except that when you get to reg A, the reg A securities are freely tradable. It’s kind of unique situation with reg A securities. But it’s important to understand the very few of the ATS are trading unregistered securities that were issued under one of these exemptions from full blown registration. I’m sorry, Joel. But I just wanted to get that in the beginning.

Oscar Jofre  08:12

No, that was a good point. And we did have one of those previously. That’s why I want people to start seeing what each one is like what securities they can handle what the because a lot of people have misconceptions, so please Joel.

Joel Steinmetz  08:25

So we’ll focus for this session on Rialto as the ATS e alternative trading system, and specifically how it deals within secondary marketplace. And what Linda had said earlier about, if you want to be an ATS, you file something with the with FINRA. And then you deal with 20 days and they come back. But what FINRA is really looking to do is to figure out whether this can operate as a successful exchange alternative. That’s alternative trading system. And in order for it to operate as a successful exchange alternative, it needs several factors. The first of course, is is in essence, a matching engine, what you want is to be able to buyers and sellers come into the secondary market and match. Meet each other, bid, offer, negotiate if you want whatever it is, but for them to be able to match those trades. But that’s not where the ATS ends. That’s actually where it begins, though. That’s the first step if you will, is making sure that it’s got the tech now to the technology to ensure those matches actually occur. Beyond that, there has to be the entirety of what is necessary to assure that a transfer of ownership actually happens. The match is not the transfer of ownership. An example I would use is if you go to a standard exchange if you were trading IBM on the New York Stock Exchange you In a buyer and seller met, that was not the transfer, there’s what is termed th clearing and settlement. And until this trade settles, the ownership has not really transferred within the private market space and in an ATS those rails to assure that the transfer of ownership the discussions with the transfer agent, the discussions with the banks to make sure that money has been transferred from the buyer to the seller, and that securities have been transferred from the seller to the buyer, are all component parts to assure that proper transfer of ownership of securities has occurred from start to finish. That’s where the rubber meets the road. When you go to the regulators, and you say, Well, I want to I’m filling out form ATS, the regulators are going to spend a lot of time asking you all the questions of how the matching works, how the security works. And when I’m saying security, I mean, cybersecurity, if you’re doing it that way, how the what they term, maybe clearing and settlement works, maybe even our custody works. And I’ll let Linda touch on that much more in more depth. But how all these components parts work, so that the totality of the execution and the transfer of the ownership can actually occur. That’s what an ATS does. It’s what Rialto does.

Oscar Jofre  11:31

I was gonna say, that is how Rialto does. And I just want to keep it to that because it’s sometimes if you go, that’s an ATS, people then take the assumption, oh, it works like this on that one, it doesn’t, they have a different and everybody’s got a different component to it. And that’s a great overview of and we’re gonna get to the custody side. And like any ATS, and I hope I get this correctly, there are two sides to it. There’s the seller, and then there’s the buyer. So what I want to do is split that into those parts. And then let’s talk about the journey of the company. You know, Linda touched on it. We have three regulations. And they don’t all treat the investor the same way. But we’ll get to that part. So let’s talk about the regulation first, and then we’ll jump into the part that Joel. So Linda, I know you and I’ve had a conversation regarding obviously the regulators fall short and few things but what we have to get is what we have. So we touched on reg A. Reg A is, if we could just touch on the after the primary raise, the three different regulations and what can happen and not happen how an ATS like Rialto can assist those investors?

Linda Lerner  12:49

Well, there are restrictions on transfers of stock, depending on the exemption under which they were offered in the first place. So a reg a stock is freely tradable, once it’s issued. And if it if it gets to having us a certain value, or gets more than 2000 shareholders, it has to register and file reports with the SEC. But let’s assume that hasn’t happened yet. Reg D stock, which is the traditional private placement, whether it was done by an offering memo, or in a general solicitation on the internet. Those securities have to be held for at least a year to prove that the original investor had investment intent. And you might have read about kik and telegram and how they got into a lot of regulatory difficulties. And what they were accused of doing was promoting a scheme whereby the original investors were immediately flipping out these tokens and therefore they were being treated like securities. And the there was no holding period. And the SEC goes on and on and its briefs about how bad that was. Reg CF, which is crowdfunding portal has a completely different scheme. Accredited investors can flip their securities after 90 days on accredited investors have to hold on to them for a year. So when the ATS is looking at transferring securities because somebody has put in a sell order, one of the many things that has to do is check with the transfer agent about whether the securities actually are free for transfer. There are other problems a security issued under reg D may have imposed by its issuer. The issuers own set of restrictions, that the issuer may have a right of first refusal to buy the securities. There are all kinds of, of restrictions that have been placed, especially by some of the big unicorn, Silicon Valley issuers, because they want control over who owns their stock. So it’s tricky, and it takes a sophisticated group of helpers for the ATS to ensure that the stock that is sought to be transferred, in fact, can be transferred. Does that answer your question? I think probably more than you asked for

Oscar Jofre  15:59

No, no, no, listen, you know what? You know, it’s funny. Sometimes I get asked to teach a class, which I’m not a scholar in any way, please. But I do get asked to teach a class about certain things about raising capital. And professors go can you just go over the high level stuff and sugar coated, and it goes, so when do you think they’re gonna want to learn the real stuff? Like raising capital? You got to go through due diligence? Yeah, but that’s the boring stuff. No, that’s the stuff that’s actually going to get them to the finish line.

Linda Lerner  16:30

That’s the investor protections. Yeah. So

Oscar Jofre  16:34

So no, I think that was well said, I mean, look, there are three different regulation, I’m coming to you, Joel with it. Three different regulations, which that’s one of the things that makes Rialto, I’m going to call it unique. You have been granted I hope, I saved correctly, the ability to allow investors, individual investors to trade, their reg D Reg, CF and reg A. But to Linda’s point, you there is a with one regulation, it’s pretty safe. With the others, you obviously need, you need to do a lot of work before you can even proceed. So if you could touch on that. But the more important part, I think, is just to let everybody know what, who Rialto can represent them to what grade right.

Joel Steinmetz  17:19

Yeah, and yeah, that’s, that’s a key component to it. So it doesn’t matter what kind of investor you are, we are going to put you through the standard anti money laundering and know your customer procedures as a broker dealer to make sure that you’re you’re a viable candidate to be able to invest in these securities. But once you’ve registered and gone through that procedure, you can be credited, you can be non accredited, you can be a retail investor, you can be an institutional investor, all of those have the capability, the key component of it is what happens on the back end, so to speak. And that’s what Linda was describing the fact that you want to come in and buy, we have to assure we have to go back to the transfer agent, and make sure that the transfer agent is okay with allowing these securities to be transferred. Because there are restrictions depending on whether you’re a reg A customer of reg A, security, Reg, D, Reg, CF, and within those what type of investor you are. So all of those things need to be checked in an automated fashion before facilitating any of the transactions. What Rialto does is Rialto goes into those transfer agents and the banks on the other side as well, to make sure that the securities are free and tradable. And that the money is available as well, on the banking side. And once that’s secured, we can then lock that up, so to speak, and assure that the trade actually will happen. Ultimately, when that transaction happens, then we can go to make sure funds are transferred securities or transfer. Now with go ahead Linda.

Linda Lerner  19:09

No, I was just gonna say Don’t forget about vetting the issuers as well.

Joel Steinmetz  19:14

So absolutely. And the two more points that I want to touch on and Linda’s a good that’s a good segue. Thank you. The vetting process or the onboarding process, as we call it, to make sure issuers are legitimate companies and investors are also file and pass through the AML KYC requirements. Those are processes processes that we put we have them in house, etc. But to Linda’s point. In order to be successful at this, we need to get people who really understand what this market is all about. Just walking into it and saying, Hey, reg A is really hot placement right now. It’s going up to 75 million next week. Everything’s great I’m in is really going to be wrought with tremendous difficulties. You need to have the right attorneys to make sure that they can walk you through and navigate the waters necessary. You need to have transfer agents who actually understand what has to be done. And sure that each of those requirements, the ones Linda pointed out, are adhered to. There are lots of different component parts to make sure all of that works. And remember, this is a very different type of investment world, than Microsoft and Intel are trading it. It used to be when those companies first came out, the stock market, New York Stock Exchange, NASDAQ were investment markets, not trading markets, they were people went there to invest. Now, those are trading markets, high frequency traders dominate the the volume that’s there, things are traded and pennies and back and forth. These markets, the private securities markets are investment markets, they’re looking for investors, proper investors, we’re making sure that all of those rules and regulations that protect investors of all kinds, retail, institutional, everything in between, of all kinds are assured by making sure that there’s legal oversight, compliance, oversight, transfer, Agent oversight, banking, oversight, all of that is done within the Rialto system.

Linda Lerner  21:34

Its complicated. Is the point. Yes. You use, you might think, Oh, this is easy. I can I can do this, right. It’s complicated, working out the relationship between the ATS, the transfer agent and the bank so that everything moves in sync, so that you don’t have money flowing without the securities going, and vice versa. Takes a lot of work. It’s doable, but it takes a lot of work.

Joel Steinmetz  22:08

And a lot of guidance.

Oscar Jofre  22:11

One thing that I I want to I don’t I want to make sure it’s really clear to this audience because as I said, a there’s a lot of talk on ATS and as Linda alluded to, there’s over 40 And I’m sure there’s probably even more than that. Applying every day, getting licenses is the distinction that Rialto has in the marketplace. So I’ve gone through another ATS where it described itself Yes, it goes to retail. But in order for the retail investor go through this particular ATS, it needs to go through a broker dealer. This is something very different distinctively different for Rialto. Am I correct?

Joel Steinmetz  22:52

Yes. So you know, Rialto, is is different in what we’ve achieved or what we’ve gotten. And we are we’ve gotten the words I’m choosing my words carefully. I’m sure Linda will correct me and my compliance officer who always corrects me when I do this wrong, is unfortunately on a call. But basically what Rialto is, is recognized by the SEC and FINRA, to operate an alternative trading system in ATS for private securities in both traditional and digital form that’s unique. Dealing in the digital form and private securities specially in the digital form is unique. The SEC, FINRA, the regulators in general, are working very hard, they really are working very hard at trying to understand digital securities and the digital marketplace in general. And we spent years Linda spent even more than that. I think she’s been you know, aeons trying to educate regulators. And the regulators have been remarkably, really remarkably engaged in getting educated and getting up to speed. But there are a bridging the gap between what traditional markets have and what traditional markets are, is challenging. And so we’ve by being able to do this in the private securities market in digital and traditional form, and focused on private securities is something unique and it took a lot of work and innovation in order to assure that the boxes that need to be checked by regulators are actually checked.

Linda Lerner  24:43

It truly was very complicated. The initial resistance was from the SEC was that they wanted to make sure that the money and securities flowed simultaneously. But because they were afraid, the the regulators were afraid that money would go whoosh in the night.

Joel Steinmetz  25:16

The technical term, 

Linda Lerner  25:18

The technical term that the SEC uses to describe that. And so I developed a noncustodial solution, which took about two years, till we worked out with the regulators. What that would mean, and what it would mean, for a broker dealer to do certain things, but not exercise control over client funds or securities, because that’s what the SEC was having so much trouble with. And it’s continues to this day, to have trouble with it, no one’s really proven yet to the SEC, that they can successfully custody and control digital assets. And the SEC has opened the door recently and said, Yeah, come prove it to us. But that’s kind of what they’ve been saying for a couple of years. So this noncustodial solution was developed where the bank’s controlling the money, the transfer agent is controlling uncertificated securities, there is no equivalent of clearance and settlement like there isn’t the normal securities world clearance and settlement just doesn’t happen. That way, whether the securities are digital or they’re not, you have a bank doing one thing, and a transfer agent doing the rest of it. And the ATS merely serving as the matching engine. This was almost excruciating to work out. But we got there.

Joel Steinmetz  26:58

And I think I just want to go on that point, as well. The one of the things that we one of the approaches, we took it Rialto, was not just looking at standard terms that are used in the marketplace, and saying how do we do those, but rather the results that were required in the marketplace? And how do we get there. So clearance and settlement is actually a term. Ultimately, there’s a result, that clearance and settlement facilitates what we’ve done working with Linda on this, what we’ve done is figure out a way to accomplish the goal without necessarily going through the standard terms and standard procedures. But we’ve accomplished a goal. We’ve done that at Rialto, actually in the trading system as well on certain things. And that’s the approach we take. We look at it and say, what’s the goal? What do we want to end up with? Both from a regulatory perspective from a business perspective as well? What do we want to end the endgame to be? And then how do we get there, and if we have to get there in an innovative way, let’s see if we can get there in an innovative way, that still stays clearly squarely within the regulatory framework that’s necessary.

Oscar Jofre  28:20

Okay, so I’ll sum it up in simple words, because I love simple words. So at the end of the day, Rialto is able to onboard individual investors, obviously, there’s a whole structure you’ve created for it, to allow them to go directly to Rialto, you’ll still have to go through a KYC determination about granted, but the investor is coming to you. This is a a clear distinction, that just right now that that is the differentiator, and you may not it, the the the other process investors need to go through is they need to go through an intermediary, they must go through another broker dealer. So I think you need to over more emphasize that more. That is it. Sorry, it’s it, you know, so like if you were the only blockchain company, we’re blockchain, what are you? So

Joel Steinmetz  29:16

That’s correct. You come directly to us, no matter what kind of investor you are, and we take care of all the things for you that that whole complexity that we were just describing you, you go to, let’s say an issuer’s website, you come directly to Rialto’s website website in our system, and you hit a button that says trade now, or I want to trade or whatever the button says. And then it launches you into just putting in your order. You have control of that you see what’s going on. You can follow the markets. You can see the bids and offers that might come in. You see all of that and you can make your own decisions. all the complexities that we just described, are taking care of under the hood behind the scenes. Yeah,

Oscar Jofre  30:07

Exactly. It’s the You bet. It’s a secret sauce that made you who you are. But at the end of the day for the market, for them, what they want to know is, who do I need to go to now, you still do work with broker dealers. This is not to say you don’t, but it does allow the issuer to come directly. So let’s talk a little bit about how you would work with a broker dealer community on that. And obviously, I’ll got to you Linda as well, because you’re representing both sides. Height is that ultimately, it’s to bring a better relationship, both with the secondary market and the broker dealer, or your Joel, okay,

Joel Steinmetz  30:45

I’ll start on that and really cover the the business side of it. As far as the broker dealer is coming to us with a group of customers, it’s, it’s just like any customer coming. That’s not a problem at all. We’ve worked when we built our management team has, this is now our ninth ATS that we built and managed. So we’re quite familiar with dealing with every kind of investor you can think of actually, in just about every asset class, you can think of whether it’s equities, options, futures, fixed income FX, we’ve dealt with all of them, and we built ATS for all of them. Having a broker dealer coming to us, and having their end users have as the customer. As far as we’re concerned, the broker dealer comes to us and that’s the broker dealer customer that we have. broker dealers have their own set of rules. And they have to deal with their customers with those rules. So now it’s, in essence, two sets of rules that have to be implemented. One is between Rialto and the broker, dealer customer. And the other is with the broker, dealer customer and their end user customers, whoever those are, we will coordinate very much with the broker dealers very often will share a lot of the AML and KYC, the anti money laundering information we get to make sure we’re comfortable with it. But the customers that come to us in any form can come to us in whatever form they are, we will implement the required compliance and regulatory regime for that particular user.

Linda Lerner  32:27

The point is to make it seamless and and as non duplicative as possible.

Oscar Jofre  32:37

She cut out again.

Linda Lerner  32:40

Yeah, I’m gonna move acutally.

Oscar Jofre  32:43

Oh, it’s okay. It’s okay. It’s okay. 

Linda Lerner  32:45

I’m going closer to my router so that I don’t have unstable internet.

Joel Steinmetz  32:52

While Linda’s moving where the idea is not is exactly that not to be duplicative, Rialto was built is built to scale, we’ve done two things in mind when we built the system. Number one is for it to be institutional strength. And number two is to be retail scale. Institutional strength requires a whole lot of operational, and integration capabilities, in order for an institution to feel comfortable place coming directly onto Rialto and knowing that we’re integrated with order management systems, and EMS is in all different kinds of  risk management systems, and all those things are available. But in addition, we’re able to deal with scale so that if we need to onboard hundreds of 1000s of users, we can do that in scale. So it’s institutional strength, and retail scale, to assure that that can happen. And to Linda’s point, we don’t want it to be duplicative. Therefore, if we have a broker dealer coming on, we want to make sure that the onboarding procedure doesn’t duplicate necessarily the onboarding procedure of all their underlying customers.

Oscar Jofre  34:20

Perfect, so. Yeah. Are you back on? Yes. Oh, good. Good. Okay. Excellent. Excellent. So

Linda Lerner  34:28

My computer likes being next to my router more than likes me being in the living room. I went there for because the sun flows in.

Oscar Jofre  34:37

WE’ll pretty soon you’ll have satellite and you’ll be moving your computer around like this. Oh, there it is. There it is. No, it’s not. It’s important. For everyone out there, those who have ATS licenses, they’re trying to have them out there. These models are very important. It’ll be interesting to see how it plays out. Given that on the primary, we’re giving the power to the investor like in reg CF and reg A in particular, with the investors making their own decision, nobody’s telling them what to do. And this is, I see it as a journey for them, right? They buy a security on their own, whether it’s $100 500,000, whatever the amount that they’ve spent, and that journey should continue. I have nothing against platforms, or ATS that operate with the, with the intermediary in part of it. But this is very unique in the sense that the investor can come directly. So we know now the investor. And now let’s talk about the issuer, part of the onboarding process, because there’s some issues here that are starting to arise that people are getting really bad advice. I mean, they’re getting advice that hey, I don’t need to worry about blue sky, if there’s no ATS out there. So yeah, build an intranet and trade. So I’m going to come to you on this one, Linda, cuz this is this is one that’s really dear to us as Sherry And I’ve been having a lot of discussions around this. And not people have North capital and a few others, that we’re all greatly concerned about. There’s what is, you know, that people have created? Do I need blue sky? In order? Do I need to register in the securities manual? And what’s the implication if I don’t

Linda Lerner  36:27

Blue sky is a [uncertain], as the Brits would say. You have 54 jurisdictions, I mean, there are states and then there are territories, and there’s DC, and everybody’s got their own set of rules. And, for instance, let’s let’s look at crowd regulation, crowdfunding reg CF. So that regulation preempted the states from being able to interfere with the offering. But what they forgot, when they wrote reg CF, and all of that flurry of activity around the jobs act was to provide for the secondary trading. So while the initial offering is exempt, you still have to make sure that you have Remember, these are unregistered securities, if they were registered securities, you could trade them in every state, but they’re not. They’re unregistered securities. So each state has its own rules about what you have to do in that state to avoid registration. And fortunately, there is one exemption that covers a lot of states. And it’s got to do with whether there’s a a, let’s call it a review book, it happens to be run by Moody’s, the one that used mostly. And that that provides that many states except that but then some states sort of accepted only partly, and then you have all the rest of the states. And so if you only do a couple of transactions in that state, during an entire year, maybe you’re okay. And it’s it’s a mess, it really is a mess. And that is that’s a difficulty for everyone. Reg D is really the same. It’s it’s reg D the states were preempted from getting involved with the offering but that doesn’t mean that they’re preempted from getting involved in the secondary trading. Reg A you’re okay because it’s freely tradable stock, it’s as if it were registered. So you need very skillful vendors to help you in sorting through not only why you can trade this under federal securities law, but how you can do the trade under state law.

Joel Steinmetz  39:13

Can I jump in Linda just please do it I’m actually not I’m gonna just go back to you asking a question if you can also describe the difference or the need for blue sky not only in the secondary markets, but the difference between reg A reg D reg CF in the primary markets. What are the blue sky requirements there?

Linda Lerner  39:37

It’s it’s complicated. Um, reg A is split into two parts. It’s called reg A plus, actually. And there are their different financial levels for the two parts is called tier one and tier two. And the states have more authority over the smaller offerings than they do over the larger offerings. We’re trying to keep this simple. Reg D, on the offering you have total preemption that’s due under an old act called [uncertain]. Pa, which dates back to the 1990s. And, and that really helped a lot with the with the offerings. Reg CF, as I said earlier, on the primary offerings, the states are preempted from interfering. The states for their part, would, if they were on this panel, say, listen, we’re here to protect investors. So we don’t want people just coming into our states and selling junk to our investors. And, and some states have taken a very strong stand, there is a state which I won’t identify, which has a lot of concerns about issuers that that are, have anything to do with Blockchain, they think is dangerous for investor that state thinks is dangerous for investors. In the old days, we called this merit review, right, the states would make up their mind about what they like, and what they didn’t like. And this kind of security is never going to trade in my state would be the attitude of some securities commissioners, and still is. And it’s very difficult to get the states to give up on investor protection, if you if you mentioned the word preemption. They they bristle and I understand that. But when you get to having to worry about different rules, and every single jurisdiction, it becomes almost impossible. And we we have to remember, what this is about. This is about helping the American economy, and helping American businesses raise the capital they need. It’s an inducement for these businesses, to know to be able to say to potential investors, and you can trade this on the secondary market. So the mess that’s been created by the welter of blue sky rules, I understand the motivation about investor protection. But we’re in the middle of a pandemic. And we have businesses closing left and right. And we especially have huge numbers of businesses in much greater proportion, owned by black and brown entrepreneurs that have closed. The Federal Reserve Bank did a very interesting study about this, and said that the differential for black owned businesses closing during the pandemic was 40%. That’s a lot. That’s really a lot. So I think that if we’re going to recover, as everyone wants us to do, then we’ve got to think about how we can help, still protecting investors, but how can we help people raise capital? It’s critical, if our economy’s really gonna come around, but it’s not enough. The Wall Street came roaring back, these businesses have to get back into business, and they don’t have the capital. And the banks are reluctant to loan it to them. I was very clear to read the other day that banks are embarking on a much more smaller banks are embarking and given federal money to embark on a much more aggressive lending program. But but raising capital in traditional ways, is something we need to think hard about how we’re going to encourage that in a in a more in a better way without losing investor protection.

Oscar Jofre  44:16

It I guess the my comment to this or question is that even understandably that the regulators could always done enough. I mean, I believe Rialto you partner with a law firm who provides a a, a booklet or the requirement in order to make this thing happen. It’s it’s an additional cost. I obviously none of us would want that. But that’s the reality there. There is a pathway to bring the company to the secondary market, ATS at Rialto and trade check being the report that it covers all 50 states it covers blue Scott. So with that, then the company You can do it. But if a company doesn’t, that’s where the dangers come in. Correct. That’s really where the dangers are coming in people who are pushing us and playing Russian roulette with that. I mean, I’ve had clients say, My lawyer told me, I don’t need to do this. And I go, Well, you need a lawyer, who knows what they’re talking about. Right. So I think the other thing is, nobody knew about these trade check reports. Right. I mean, that’s, that’s the other thing. We’re unraveling the industry. Thank goodness for this report that came out. Because up until then, it actually was nobody heard of it three years ago, nobody. So it would have been as difficult as you pointed out right now, Linda. I mean, as an entrepreneur, at least now I know, okay, I’m gonna do a reg A, I want to offer a secondary, I want to plan for that. The law firm is can I can get now the trade check that will include all my requirements, like I’ve met all my requirements in all 50 states. I don’t need to worry about this paperwork can be done. Don’t get, you know that. That still needs to get done. But the point is, it can be done. And regrettably, part of it is manual, and part of it is not by it. Did I nail it there for you, y’all? I mean, that is?

Joel Steinmetz  46:15

So yeah, I think I think that’s a you know, it’s a key key position when you’re looking at as an issuer. And it’s hard, it’s hard to raise capital, it’s, it’s hard. It’s hard to get people to write those checks, it’s hard to move money, it’s hard to sell your company, there are a lot of difficult things to make sure that you can raise capital to have to worry about how is this going to be, I’m going to be able to do all the trade checks stuff, how am I going to make sure that the attorneys are correct, and I got all the paperwork necessary and go through my blue sky requirements, and get secondary trading and make sure things can settle properly. And all those bits and pieces, if you have to work worried about that, you’ve taken your eye off the ball, which is raising capital and running your business. And you know, what we started with is saying two points. Number one, don’t we don’t try to do it all. At Rialto, we don’t try to do it all we are a secondary market in the head ATS we are broker dealer, we are secondary market, we look for help and guidance from all the other people and all the other component parts within that area. That’s point number one. Point number two, when when it comes to these types of I’m going to give an example just because you’re an ATS doesn’t mean you can do the you know what to do in private securities. Just because you’re an accountant, doesn’t mean you know what to do for a doctor’s transactions. Just because you’re a lawyer doesn’t mean you know that all the rules and regulations about private securities, all of those pieces. Just because you’re a transfer agent doesn’t mean you know how to deal with reg A and REG D securities and all the requirements there. If you’re an issuer, do your homework, and make sure that you’ve gone to people who know what they’re doing and can guide you to others who know what they’re doing. Because this process, if you blow it, if you make a mistake, somewhere there is pain that will come your way. And that’s the thing we want to avoid, as Linda said before that investor protection is paramount. How do we make sure that that is protected? Because if it’s not, regulators are going to come down.

Oscar Jofre  48:43

Yeah, it’s a good point, you know, the, at the top of this, it’s all about investor protection. And one of the things that I like to look at it, I’m glad to have people like David Weild, and many others who have the strength and drive to try to get regulators to make a change. I know it’s not easy, I get that. I look at it this way. I’m more practical. I have to live the world today. I could sit back there, it’s never gonna work, or we find a way to solve that problem. And today, I think we come to, to to a way where we’re going to be able to allow a person to create $100. I mean, if that isn’t patting ourselves on the back, I’m not I’m not suggesting the regulators couldn’t do more than make it better. 100%. Were there. By doing that all they’re going to do is reduce the costs, which is that’s the important thing, would you would you agree with that Joel? I mean, it’s just cost reduction at that point.

Joel Steinmetz  49:42

Yes. And I’m going to go even further. We’ve come so far we deal with issuers that you can invest $10 That’s how far we’ve come as you can invest $10 In order to get to that point where you can invest $10 You need scale and cost efficiency. You have to drive the costs down significantly that it’s worth it. And you need to have scale because let’s be honest, if you’re trying to raise $2 million in $10 lots, that’s a lot of people. So you’re not going to be able to do that so easily. Those two component parts are where we’ve gotten to, that’s we should be patting ourselves on the back. That’s a long way from where it used to be.

Linda Lerner  50:24

We had to educate regulators, transfer agents, banks, let’s get everybody on the same page about how to how to do this. The the IT folks had to make this all happen seamlessly.

Joel Steinmetz  50:43

Yeah, we’ve overlooked them and we shouldn’t have in this. Yeah,

Oscar Jofre  50:47

well, and that’s what I was alluding to there. That’s it. That’s exactly what I’m saying. I, I look, I’m I’m 11 years in. And I’m sure Linda, you, David and others. You guys are counting in decades. I’m counting my first decade plus one. But you know, today I did a webinar 11 years. Yeah, I still got the same excitement as I did, then I I knew technology could remove a lot of the hurdles, if we could get everybody who understands how to fix the problem. But the issue that I see right now with the secondary market and ATS, it’s not so much that we haven’t done that we have in fact, it’s blown so much out of the water that people think it’s so easy, just go there ready to go. This is enlightening to them. Okay, there are some steps you got to take. But the the real issue now is we what’s happening behind the scenes will never be seen by the individual investor. And just the way it should be. In fact, I mean, think of it this way. Today, I described the private markets, if we really want what everybody desires, is that one day, you know, you go in here and you go KORE and you get KoreConX as a private company using an app. Just same way that when you put in Tesla, you get everything from Tesla regard went up there yet, but what is happening, these are the pipes that people don’t realize that’s that infrastructure to make data more fluid. Once data becomes fluid, we can transact as you pointed out your $10 Holy mackerel, I mean, all we ever hear about secondary market is term $50,000. Trades, million dollar trades one investor. Here, it’s different, right. And everybody wins, even though and that’s where we have you Linda [uncertain[ and David and others, that you will keep piling the regulator’s to, to demonstrate to them that we need to change things to make it more efficient to remove these additional hurdles. And understanding that because the infrastructure is already there, we’re already equipped to handle it in either way. That’s what’s exciting to me. Because this only makes it easier for regulators to say you know what? It is working. We don’t need to do that any further. We have, we have a way of managing and reviewing this and in and having a deep dive I’d be curious to hear your thoughts on that. Linda.

Linda Lerner  53:14

What I was thinking about as you were talking is, although the pandemic has been horrible, for so many, I think that one good thing that can come out of it is that it can provide an impetus towards ours, really focusing on how can we make the capital raising process much more efficient. If we’re, you know, I said this earlier, if we’re going to help businesses recover, survive and recover, then they have to have access to capital. And and we’re supposed to be helping them. See, you can’t get so hung up on investor protection that you can’t look at innovation and innovative ways to safeguard the investor while allowing this capital raising to go on and I’m very much about community investing. I think that when businesses are local, and local people who know the the entrepreneur or the business or who depend on the business can invest in it. That’s one of the best things we can do for the economic recovery of this country. I I know it sounds a little bit flagwaving, but critical right now.

Oscar Jofre  54:40

Actually, the way David always reminds me, Oscar, he says the key to economic growth in the United States is a small business growth. It’s always been a small business and the fact that investors are investing in these small businesses. That’s how we get ourselves out of debt. And people really need to understand So it took me a while. Look, I’m 11 years in and I still listen to, to His words, and I follow it because I, you know, as an entrepreneur, I always felt like oh my god, I’m raising capital, there’s no money out there. Until I met David. I was always having the impression that money wasn’t there. When he told me Oscar, there’s $36 trillion sitting there every day, it just sitting there waiting. I’m going, huh, this is interesting. So I understand that now. And I have a lot of a lot of respect for what everybody goes through the broker dealers, we have great broker dealers in our ecosystem, like Rialto, and Entoro, Dalmore, and these and many others, and I know the excruciating work that they do in order to bring companies their success, and understanding that that capital exists out there, I believe ATS secondary market is going to open that up, it’s going to make their jobs easier, because the investor is going to look at the security and say, you know, I may have to not that I’m planning to, I think this is the other thing I’ve learned about secondary markets, is that it’s not about liquidity as it is so much about, if the investor needs to monetize their investing, investment, they have a venue now to off ramp, and they can do it the same way they invested. I think that is a phenomenal story. Right? I

Linda Lerner  56:32

The other part of the story, Oscar is that the investor, the investment may be worth more, and the investor may wish to assist another business that the investor learns about, you know, go on to the to the next local entrepreneur, I keep, you know, I keep emphasizing that the most the the majority of new businesses are minority and women owned businesses, that’s who’s opening up businesses, and and getting them hooked up with capital is just so important. I feel like I’m sounding like a broken record. But

Joel Steinmetz  57:13

Its true, we need to we need to, we need to help the capital markets and capital formation. And that’s what we’re trying to do. And it’s not just because of the times it’s because in private securities in private markets, they it is always been a little more difficult to do that in private markets. And the private markets are what’s the real growing market much more than the public ones. Secondary marketplaces, help investors feel comfortable, not only getting on the on ramp, but having an off ramp. When you invest your money, and you have no idea how you’re ever going to get it back, except you wait 27 years for an IPO? That’s painful. But if you have an off ramp, or at least a vision of an off ramp, at some time, in the near future, you are much more apt to put that initial investment, and that will help change the capital markets or I shouldn’t say change enhance the capital markets going forward.

Oscar Jofre  58:10

I like that doubt. That’s the that’s the key word. We’ve added another attribute to the private markets we did not have before. It’s an enhancement. It’s it’s an extra feature that a company has a broker dealer house when it’s presenting an opportunity. And this way the investor can get I’m sure a lot of them think, Yeah, I heard my buddy put in $5,000. And the company had to wait like 40 years not gonna happen with me. Right? This is, yeah, but I think it’s exciting, but just starting. And the key element that I wanted to get out today it we got derailed a little bit, but that’s okay. You know, that’s the exciting thing about these webinars, I learned so much in different ways. And it’s meant to be that way I don’t, I’m a very different, I wasn’t meant to be the host of this event, I forgot to tell everyone. Just our partner got really busy. He grew up really fast with his team, and they’re all over the world now. And I had to take on the role of becoming a host. And so I said to myself, how am I gonna? How can I do that? And I did it based on all the questions customers, or clients asked me all the time. And it’s funny the there’s a lot of ATS questions I cannot answer. But I have a really good framework. Now. When people ask me between one or the other, I can walk them through not to say all they’re not good a bit. No, no, no, it’s a good ATS. They see how they do it. This is how they do it. You need to decide what’s best for you and your shareholders how you want to approach that. And as well, that’s one part and then can they handle the regulation? You raised the money and it’s number two, and then three, this is the one that I get them on. What kind of investor base Do you have? Are they individuals or Have a institution. Because if it’s individuals, it changes the playground completely. Right. So we’re finally to that point. Like you have to understand to me, that’s a great thing. That’s a great thing. Because four years ago, three, four years ago, we have panels of secondary market. We’re all Yeah, you know, you’ll be able to create this, you’ll be able to trade that, yeah, you bet. You’ll be able to trade everything. And nothing ever happened. And nobody ever wonder why didn’t happen. I know, Linda was laughing in the audience saying, Oh, these guys don’t have a clue. But it’s true. They gave her in the audience’s and a few my clients got caught up in that they signed listing agreements with these secondary markets. And then, you know, a year would go by and they can’t list and, you know, it was, it was rather interesting, because as they were learning what kind of ATS they were, they were, you know, describing themselves as the all for everyone rather than this is our dinner. So this is part of that education part. And we’re going to have another one again, I really would like to have one. Yes, of course, of course.

Linda Lerner  1:01:08

I just want to say publicly how proud I am of Joel and Shari and everyone at Rialto. They have been, I worked with reality, as you, the audience might have guessed. They have been so nimble in their thinking, you really have to be creative when you put this together. So persistent and so diligent about getting everything to work properly, so that everyone is protected. It’s really been wonderful. And I’m so proud of all of you.

Joel Steinmetz  1:01:46

Thank you very much. On behalf of all of us, we appreciate it.

Oscar Jofre  1:01:49

Wow, look at that. I didn’t expect downtown bright. Oh,

Joel Steinmetz  1:01:53

That’s the real surprise, Oscar that was

Oscar Jofre  1:01:56

that was the real surprise. Okay. A great endorsement like that from Linda Lerner. That’s fantastic. Um, as always, look, I’d love to give each of you a minute. Give me your closing marks on secondary market. ATS? Joel I’ll start with you. And then Linda?

Joel Steinmetz  1:02:10

Yeah, so I’ll just say two, two points. The first one is, it is an essential element for capital formation. It’s not just about raising money, it’s finding a way to have your investors be able to monetize and secondary markets are essential to that. Having a robust secondary market that can fulfill the requirements necessary in private securities is extremely complicated and complex. We suggest that you if you’re getting involved, make sure you deal with someone who not only knows what they’re doing from the ATS perspective, but associates themselves and teams up with the proper support systems like the right attorneys, like the right transfer agents, like the right, banks, etc, in order to make sure that it’s a clean and smooth system.

Oscar Jofre  1:03:06

Linda,

Linda Lerner  1:03:08

so I don’t know what I could possibly add to that, except that I think that the future for secondary trading of private placement securities is huge. And I think that the regulators are getting used to it and getting less nervous about it. And again, I would say exactly what you said, Joel, if anybody’s thinking about entering into this line of business, please get the kind of help you need. It will make your life much easier.

Oscar Jofre  1:03:43

Perfect. As always, always rely on the professionals and I’m gonna thank both of you this afternoon for coming down. And for everyone else, like I said, we’re four days away. If you haven’t registered yet, on 15th of March, we have a great webinar, the state of the jobs act 2021 with the father of the Jobs Act, David weild. And Sara Hanks and host and moderator Vincent Molinari. It’s going to be a great kickoff to a phenomenal week. Thank you, Linda, Joel, and hopefully each other again soon. Take care. Have a great weekend.