State of the JOBS Act 2021
CEO and Co-Founder
CEO and Co-Founder
Oscar is currently one of the Top 10 Global Thought Leaders in Equity Crowdfunding, a Top 5 Fintech Influencer, Top 10 Blockchain and a Top 50 InsureTech. He has published an eBook that has been downloaded in over 20 countries, and been distributed by partners worldwide. Oscar is a featured speaker on Fintech, regulated, equity crowdfunding, compliance, shareholder management, investor relations, and transparency in the USA, Australia, UK, Germany, France, Netherlands, Canada, Singapore, Indonesia and China. He speaks to audiences covering alternative finance, RegTech, insurance, banking, legal, and crowdfunding. Oscar also advises the world’s leading research, accounting, law firms and insurance companies on the impact Fintech, RegTech, LegalTech, InsurTech and OrgTech is having in their business.
David Weild IV
Father of the JOBS Act, Founder, Chairman & CEO
Weild & Co.
David Weild IV
Father of the JOBS Act, Founder, Chairman & CEO
David Weild IV is a stock market expert best known for his position as Vice Chairman of NASDAQ. He is currently the Founder, Chairman and CEO of Weild & Co. Inc., parent company of the investment banking firm Weild Capital, LLC (dba Weild & Co.) Weild is also known as the "father" of the JOBS Act, and has been involved in drafting legislation for the US Congress.
Sara Hanks, CEO of CrowdCheck and Managing Partner or CrowdCheck Law, is an attorney with over 30 years of experience in the corporate and securities field. CrowdCheck and CrowdCheck Law together provide a wide range of legal, compliance and diligence services for companies and intermediaries engaged in online capital formation, with a focus on offerings made under Regulations A, CF, D and S, whether of traditional or digitized securities. Sara’s prior position was General Counsel of the bipartisan Congressional Oversight Panel, the overseer of the Troubled Asset Relief Program (TARP). Prior to that, Sara spent many years as a partner of Clifford Chance, one of the world’s largest law firms. While at Clifford Chance, she advised on capital markets transactions and corporate matters for companies throughout the world. Sara began her career with the London law firm Norton Rose. She later joined the Securities and Exchange Commission and as Chief of the Office of International Corporate Finance led the team drafting regulations that put into place a new generation of rules governing the capital-raising process. Sara received her law degree from Oxford University and is a member of the New York and DC bars and a Solicitor of the Supreme Court of England and Wales. She serves on the SEC’s Small Business Capital Formation Advisory Committee. She holds a Series 65 securities license as a registered investment advisor. Sara is an aunt, Army wife, skier, cyclist, gardener and animal lover.
Founder & CEO
Molinari Media PBC
Founder & CEO
Nearly three decades of experience in the financial services industry. Throughout his career, Vince has founded and served as an executive and been instrumental in advancing market infrastructure, capital formation, impact investing, and the management and monetization of digital assets. Vince has participated in the development of blockchain patents, created and managed thought leading technology solutions, and now currently hosts his branded Digital Asset Report. Vince's experience, reputation, and belief that cutting edge information drives investments, and that technology closes the gap between traditional and emerging alternative markets has made him highly sought after speaker at the U.S. Chamber of Commerce, U.S. Department of State, and United Nations.
Oscar Jofre 00:29
Alright, here we go. Well, everyone Welcome. Wow, what a special day it is today, monumental in so many different ways as your stories today. I am so pleased that all of you are welcome here today at KoreConX KoreSummit webinar series. But this is a special one. This is the monumental day 15th Of March 2021, the day that the new version of the JOBS Act comes alive. And today we have three great individuals who have been there from the beginning. And I think they’re going to have a great discussion with you it’s going to be led by none other than Mr. Vincent Molinari from FinTech TV, Molinari Media. And of course, our special guests, Sara Hanks, and David Weild, I am going to pass it off to them. Thank you so much to all of you and to the many others who are watching today. Looking forward to a great discussion.
Vincent Molinari 01:23
Thanks Oscar. And truly thanks to KoreConX for organizing yet another amazing event. truly happy Monday to everybody and extra happy one. For me, I get a little bit of the easier seat with such esteemed guests as David and Sara, to sit back and ask the questions and they get to share all their wisdom. So, you know, I want to jump right in and frame this. I know we have a bit of time here. But there’s so much to talk about. It’s going to fly by so welcome to the state of the JOBS Act. Um, you know, and I’m going to introduce David first, David is the chairman and CEO of Weild and Company, which is a rapidly growing investment bank that serves the growth economy. And we’ll get more into that. Prior to that David was vice chairman and executive vice president of NASDAQ, and prior to that head of corporate finance at Prudential. So, a little bit of street cred that goes along with the great title of the father of the JOBS Act is equally as impressive. Sara Hanks, the CEO and founder of CrowdCheck, and CrowdCheck provides due diligence disclosure and compliance services for online capital formation. Full disclosure, I am a client of that service. Sara, a wonderful client. On a good day, right. Sara was also a general counsel of the congressional oversight panel. And prior to that a partner of the global law firm, Clifford Chance. And even a little bit prior to that she was part of the Office of International corporate finance at the Securities and Exchange Commission. So we couldn’t have two better guests with such a deep robust background on finance, innovation, capital markets, legislation, law, the whole package that really led to their advocacy, and I have to just jump in with one other thing. Most importantly, two dear friends of mine. So this is truly an extra fun session. As you know, we lived a large part of this pre JOBS Act, certainly JOBS Act and post jobs act, journey together. And you know what, I think we’ll talk about the good, the bad, the ugly, some of the scar tissue, through that process, the learnings. And really, I think what’s become a wonderful outcome of where we are today on this auspicious day, as Oscar pointed out early. So with all of that, maybe maybe I’ll just jump in. And Sara, and David, if you want to, you know, give a minute of background, any deeper. And then we’re gonna jump into kind of the lead up to the JOBS Act.
Sara Hanks 04:17
Any background from our own personal stories?
Vincent Molinari 04:23
I didn’t go deep enough on to set the stage or any particular aspect talk about CrowdCheck. And David the same want to give him an opportunity to talk about the great work at Weild and Co.
David Weild 04:37
Yeah, look, I mean, I would say about one of the ways that I first met Sara was she was on the SEC’s Advisory Committee on small and emerging companies and that one of those times that I testified there, you and I testified together, so you know, she’s got a long history, not just with her business, but you know, being interested. And I don’t know if it’s true, Sara or not. But I, I heard a rumor that you had a lot to do with regulation s as well. Is that true?
Sara Hanks 05:07
That is true. Although I always correct everybody. When they mentioned the fact that it was named after me. It was me and my deputy Sam there’s a very, very long and involved story that involves preparation H, that I will not go into. We can have a special regulation S session. But yeah, that was very much my baby at the time, it’s one of the several roles that I was involved in, at the SEC.
David Weild 05:40
So that really, what happened was I was not happy with what we went, I was vice chairman at NASDAQ and I was living, I was working there during what we call the, you know, affectionately, the bubble Rubble, when, when so many companies were getting delisted, and we worked with the SEC, the SEC was actually very responsive to try and change rules a little bit, or at least create a moratorium so that companies would not get delisted when they so called, broke the buck. Because there were a lot of companies at risk of being delisted at the time, and the economy was under pressure. And we were concerned that, you know, companies needed to focus on managing their businesses and not being under even further hardship, you know, because of, you know, trying to keep people employed, and so on and so forth. It was sort of the right thing to do. And the SEC certainly responded that way. But you know, on the executive committee, the operating committee of NASDAQ at that time, you know, I just brought up that out market structure, you know, had created an incredible delisting machine and, and it led me down a path of starting to write, I never expected to see an act pass. But the two things that we did that really got everybody’s attention is we looked at the drop off and small initial public offerings, they used to represent some $50 million IPOs represented 80% of all IPOs. And it went down to 20%. And never recovered, it still is recovering a little bit because of some of the things that are done, still hasn’t recovered because of the aftermarket structure. And then we looked at the number of publicly listed companies, which had been in secular decline have gone from over 9000 down to [uncertain] it relative to foreign markets in the United States was on the bottom. And so one of the times that I was called to testify at the house Subcommittee on Capital Markets, which is part of the House Financial Services Committee. I had a congressman say when he looked at that chart, you know, Mr. Weild, which country is at the top of the chart? And I said, Sir, it’s China, said Mr. Weild, which ones at the bottom of the chart? And he said, Sir, it’s the United States. And then he said, which one would you prefer to be? And I think that everybody got the message. And I think we’re still kind of clawing our way back. That these one size fits all markets that we created in this country that actually worked reasonably well, for large capitalization, innately liquid stocks don’t work for small cap stocks, and in the public markets. And if you can’t get small companies public, then that means that the gestation periods increased dramatically before they can get a public company liquidity event. And we’ve gone actually, if you look in the venture industry from about a gestation period of four years before IPO, to that 12 years, and that has really kind of catastrophic implications to the growth, economy and startup rates. And lo and behold, if you look at US Census Bureau data, you’ll find that, that startups have actually been, you know, startup rates in the United States have been cut in about half.
Vincent Molinari 08:58
David, if I could just pause you there for one second, because there, there’s so much there as a foundation. And clearly that became, I think, part of the inspiration and motivation for your journey. That became the JOBS Act and beyond. But I’ll tell you personally, that was the aha moment for me when I read your work. When I looked at, you know, this wonderful body of work when you began to realize 500 IPOs, on average, in the United States going down to 100, 110, 120. And the decrease of the small IPO where almost evaporation, the lack of liquidity, but I’d never really connected the dots until I looked at your work and really, the compounding effect of what that meant for the economy and job creation as our greatest growth phase companies were coming from that cycle. And once that was eliminated or reduced, it really became a real threat to global competitiveness for the United States
David Weild 09:54
Global competitiveness and also national security. I mean, it really deeply troubles me, you know, when I go down to watch. I put my red, white and blue epaulets on and I don’t think about how it’s going to impact us, I think that the entrepreneurial growth economy was the secret sauce of the United States. And I think that we went from having, you know, markets that really, really worked to drive innovation and breakthrough technology. And it was actually, you know, almost the United States his gift to the world, but it was the foundation on which ultimately, we funded and drove national security and technology leadership. And, and we compromise that. And so this is the kind of thing that I really fight to get back. Because I think it’s absolutely essential to get that infrastructure in general, which is the capital formation infrastructure to work again. So the kids of the next generation have an opportunity to be successful. And, and, and the United States doesn’t lose its pole position as the sort of the, you know, superpower. I mean, look, we’ve got bigger countries in terms of population. And, you know, we’re only 330 million, you know, population country. And so, you know, what we do with our allies, and how we finance, technology, leadership, you know, and all of that is absolutely essential to the long term well, being of everybody in North America, and I know, we got Canadians, but look, Canada and the United States are joined at the hip, I’m, I’m a quarter Canadian, my grandmother was Canadian, you know, so. So as much as we, we, you know, we [uncertain] is the state’s goes the direction of Canada. And, you know, so I think it behooves us, essentially, to really figure out how to get our acts together. Okay,
Vincent Molinari 11:44
Sara, let me jump over to you, if I may. So, CrowdCheck itself is a manifestation of your life’s work, your advocacy, what was the motivation, inspiration for you jumping into the JOBS Act advocacy in the early days, and even before the passage by President Obama in, I guess that was April 5 2012.
Sara Hanks 12:09
2012, yeah. So um, in 2011, the congressional oversight panel that I had retired from my law firm to serve on, I had stood down, and I spent a lot of 2011 trying to decide, am I just going to retire? Shall I look for a directorship? Shall we just mess around and started getting very interested, just from an intellectual point of view, on the various acts that were going through Congress, that became the JOBS Act, because it wasn’t just Regulation A, which was known as sort of the David inspired part. But there was the crowdfunding itself, the idea that, hey, this Kickstarter thing is taking off. What about if we could sell shares instead of T shirts. And then at the same time, there was this movement for arguing basically, that the prohibition on general solicitation for private placements in the securities law was in fact, against the First Amendment. I mean, that was one of the basic start starting points. And so all of this got gathered up. Various competing bills were going through in 2011. And literally, CrowdCheck was founded on the back of a cocktail napkin, where me and a couple of friends, one of whom had served with me on the oversight panel was starting to discuss well, and then some of these, these laws would permit inexperienced retail investors to buy shares from early stage companies over the internet. What could go wrong with that? We thought one of the basics is going to have to be some kind of trust layer, where somebody can say, yes, this company is actually legit. This company was founded by the people who say they did they’re doing what they’re doing. We’re not saying if it’s a good company or not, we’re just saying it’s legit. If you think this is a good idea, then risk your money on it. And that’s where CrowdCheck started. But then we quickly expanded in in a couple of different directions. Because the, because we were founded by securities lawyers, we kept being asked securities law questions and people would send us chocolate, which was lovely. But we thought, you know what, we could actually charge fiat currency for our advice as opposed to chocolate. We still do take chocolate if
Vincent Molinari 14:38
I love that. You have to define it as VR today.
Sara Hanks 14:40
Yeah. Exactly. Yeah, we don’t take the other stuff. So so we founded what eventually became CrowdCheck Law. And then the very interesting thing was that there was this great, we all remember this, right? There’s this sort of phony war period between April 2012 and the earliest of all of the bits that that is the foundation of online capital formation. Now, that didn’t happen until September of 2013. And then the order in which the various parts of the JOBS Act 2013, you’re allowed to generally solicit offerings to accredited investors. 2015 RegA goes into effect. 2016 reg CF goes into effect. And the interesting thing about all of this is if those last two pieces have been reversed, if crowd regulation CF had gone into effect before RegA, I think RegA would have taken on a very different aspect. Because at the time, I think we were looking at RegA and thinking, Well, you know, this is not really crowdfunding, and it doesn’t have to be done online, even though all of it is now. But because that was passed first, all of the companies who were really, really waiting to do reg CF offerings, all of the intermediaries like, we can use this. It’s you don’t have to do it online, but you can do it online. And so, Regulation A sort of started to be a more important part of our business, especially at CrowdCheck. And then reg CF came along as a little brother or sister later. It’s an interesting sequence of events.
David Weild 16:28
[uncertain] a challenge with reg CF. You know, when Jack Coffee was on a board of mine. He’s brilliant. He’s the professor of law at Columbia University, was probably the most I think he was the most frequently cited academic in corporate securities law and corporate governance. And he actually advised on the ouster of Carly Fiorina at Hewlett Packard, I mean, among other things, he’s just a.. Frequent people in the press called him the [uncertain]. But Jack got in into the senate testimony and you know, how he can paint a really scary picture got on the reg CF, which originally started out in the house at 5 million, went to 2 million got kicked over to the Senate. And then Jack said, imagine some character like Danny DeVito, holding court, in a smoke filled bar filled with widows and orphans, I think something to that effect. And of course, that set everybody off in the Senate and they cut it to a million dollars and then send it back to the back to the house. The whole JOBS Act, it was the only thing that they touched as far as I could tell, and send it back to that house for an up or down vote. And now, you know, we’re coming full circle, we’re getting back to the original idea that Patrick McHenry, congressman McHenry, was the one that originally sponsored the reg CF Bill, which was to cap it at $5 million. I mean, I personally feel, you know, for what it’s worth, that if you can restrict people to $5,000 investments, why do you care if it’s 1 million, 5 million, 10 million, 100 million, you know, you’ve limited the individual’s risk, which I think is the public policy objective of that, but we’ll see where that ends up going.
Sara Hanks 18:12
But I think the thing David is that you have only theoretically limited the risk, because I mean, the the rules are written such that the individual investor in reg CF is not supposed to invest more than 10% of their net, if they make more than a certain amount and no more than 10% of their net income or net worth on CF across the board. And then you’ve got competing, same sort of companies, they can invest 10% of income or net worth, in a RegA company, a specific RegA company. So you could in theory, they could actually go well, I’m going to take my entire network, and put 90% of it in RegA companies and 10% of it in reg CF companies and comply. But we know that they’re not actually quite, they just ticking the box. I mean, if there is no obligation on the issuers or the intermediaries, if they have no indication of to the contrary, there’s no obligation of them to go beyond the required taking the box and I’m not sure if people really are telling the truth. So in theory, yes, but in practice, remains to be seen. Luckily, I don’t think anybody is that stupid. I mean, you know, you do have to you have to rely on the fact that people are actually rational actors. And they are going to act to limit their own risk, but they’re going to set it where they see it. Not necessarily exactly where Congress set it,
David Weild 20:02
They do the same thing in public markets, right? I mean, how many investors during the.com bubble, which, you know, I work with Alan Greenspan called that, you know, the period of irrational exuberance, you know, put all of their money, eggs in the in the.com basket and started buying things like pets.com and, and you know, Sun Microsystems, which did stand the test of time, but the stock was inflated, etoys went bankrupt, I mean, you know, you there when it when they change markets so that you could do this self directed model, they really got rid of the major buffer, which was somebody on the end of the phone saying, you know, this is not diversification, if you put everything into .com stocks.
Sara Hanks 20:49
That’s a very important part of the online capital formation world is, in general, there is very rarely a broker or registered investment advisor. At the other end, checking to see whether there’s meets your, fits within your portfolio. And people are going to have to look after themselves. Is it, anybody’s business model to have somebody on, you know, on the phone talking to Mrs. Jones say, well, you’re investing $500 here. Are you sure that this is a suitable investment? It’s just not gonna happen.
Vincent Molinari 21:27
Yeah. And I think this dialogue is absolutely perfect. You know, when we look at innovation, we can talk about that technology wise, we can talk about capital markets, modernization of securities law, I always like to look at past, present and future. Right. And to your point, actually, both of you earlier, yeah. When we before it was the JOBS Act, and there was the individual titles, and I can remember this very clearly, David, yeah, we are having all these different conversations whether, you know, hey, what does it mean, to the removal of the ban on general solicitation when you have to look at revising 12 G from 500? And above, right? What’s the interplay of RegA changes to CF and really changing, really thought process and a securities law in 33 and 34. And, you know, I could remember very clearly sitting down with Congressman Schweikert, in his freshman year and going through this, as he would say, kind of the caboose system of a which comes first second to your point, Sara, what difference a versus CF? Then, you know, of course, Congressman McHenry, and I was wearing out the carpet. I think that Deena Ellis Raka. And who is at Tommy’s office, working so deeply on all of this comes out with, hey, the JOBS Act, the JOBS Act passes, and again, to the earlier point, this six months of implementation, or rulemaking phase that went on for in many instances, five years or so. So what was the inflection point? What what what was the, I guess, for each of you? Once we hit that point, when did you know it was going to take hold? And what do we take from what was the history to today, where we now celebrate increases, as you said, David, going, almost kind of back to where we started and getting to 5 million RegA going to 75 million. And what do we take? What are the positives? How do we balance this very conversation of access to capital, democratization of capital balancing investor protections, on this same scoop of innovation?
David Weild 23:28
Well, let me give you a different way to think about it. Right, which is that the real contribution the JOBS Act, is that it if we step back and sit and say, what were what the problem was, the problem was we collapse middle market investment banks, right, largely, because when we collapse trading spreads and commissions in the United States. And so the natural advocates for smaller companies basically were consolidated out of business. And so we the, you know, Washington works through advocacy, it works through people who, you know, get up, have an issue, see a problem, and they go down and advocate, it’s not just little David Weild doing it right. It’s this army of people out there. And I get credit because of the papers gave people a framework to start to have a discussion and it brought the discussion but but but what happened with the JOBS Act now as we’ve got a lot of people with businesses, you know, salaries and you know, and all the crowdfunding portals, the regulation, a plus sponsors in the United States KoreConX. And so now we have a legion of people who have an interest in actually making it better and improving it and they’re going to continue to come, you know, push the dialogue forward. And that community, if you will, that we’re all a part of didn’t really exist on April 5 2012, when the JOBS Act was signed into law. One of the great misconceptions is that when the SEC implements rules that suddenly you’re going to see a massive activity and remember what we did was we collapsed an infrastructure of people and businesses. And now we had to start very slow process of building it back. Meanwhile, securities attorneys are a little bit like, you know, they don’t want to see their client go first, you know, it’s a little bit like penguins at the edge of an ice flow, put another one in, because we want to see if he’s going to get gobbled up by sharks or not. And, and so there’s a real sort of reticence. And it’s not quite, you know, understood yet how the SEC is really going to, you know, deal with things, and usually with the pioneers, and I’m on the board of iron x, which is the first company to get a public securities token operating company passed through the SEC, it took us two and a half years and a fortune to get that done, right. And so, it, these things grind a bit at the beginning. But we’re now at a stage where I think that, you know, we can organize and be, you know, and be much more effective, because we have a community of people that have a common interest. And so one of the things I was just going to mention that, that, you know, that the JOBS Act got done, you know, within the House Financial Services Committee, right. And that at the time was won by a gentleman named he was a six year Chairman, Chairman, Jeb Hensarling, from Dallas. Okay, one of his best friends. And the gentleman who was the senior counsel to the House Financial Services Committee to Jeb, especially advisor to the chairman for capital formation centers, is, [uncertain] a lobbying group called the Jump Coalition. It’s a little bit of a play, we want, we want everybody’s support. It’s that appeal to try and drive this forward. That and he’s got a deck on it, we can get it out to people, but it stands for jobs, upward mobility and making markets perform. That’s the objective. And if we do all of those things together, where we should be well embraced down and it’s heavily bipartisan, those of you may not realize there was another bigger package and omnibus bill called, which Chairman Hensarling referred to as JOBS Act, 3.0. That should have gotten passed in the 2018 Congress, until President Trump shut down the government over the wall, and then it was that bill was going to get tacked on to the Senate appropriations bill. But it included a Venture Exchange, it was called the Mainstreet Growth Act. The name of this bill was the jobs and investor confidence act of 2018. And, you know, I’m a molecular geneticist by training. So what do I know about except by knocking on doors, how Washington works? Well, the sad part of that was when they when it got pushed into the next Congress into 2019, it had the effect of moving it. So even though that bill passed the House 406 to 4, he went back to square one, even though the Trump administration on the White House blog internet site endorsed the bill, even though the Senate was planning on tacking it on to the appropriations bill, that very important legislation didn’t get done. So you know, we’d love to get everybody rounded up to help contribute, you know, we need money, I mean, to get it going, and then to put a real effort together. But ultimately, for those of you that, you know, they care are you getting people investing in, in earlier stage companies, we got to get an aftermarket in this country that works for small cap companies. And if we do that, you know, America is going to be back cooking with gas North America will be, but it means that we have to have a public market structure that’s optimized for the needs of smaller capitalization companies. So we go back to the days of being able to take companies public after four to six years instead of 12 years. And if we do that, that means that all of these crowdfunding businesses will start to look a heck of a lot better because people will get public access, it’ll make all that 506 c generally solicited private placement stuff look better, it’ll make Regulation A plus look better, because right now, a lot of the A plus deals are not even trading because of concerns about aftermarket support models, right. So at any rate, I I’d appeal to everybody if you got questions about it, reach out to me reach out to Oscar, reach out to Sara but you know, connect up with us and, but we got to get something going and we got to get something going we know how to get Congress to, you know, to come together and do things in a bipartisan fashion. And, and, you know, and I think Ron’s one of the right people to kind of carry that water.
Sara Hanks 29:49
Hey, David, what do you think is still missing in the creation of an aftermarket because I will note that there are several ATSs standing up or haven’t
Vincent Molinari 29:59
Sara, you stole my next question.
Sara Hanks 30:03
Well, there you go, doing your work for you. Thank you. But you know, we’ve got Rialto standing up, we’ve got start engine already functional. We’ve got North Capital’s PPEX, I think it’s called standing up or soon. Now I know the one single thing I would like to change in federal law would be preemption of state securities laws with respect to secondary trading, but what else other than that what else is missing?
David Weild 30:38
Now, there’s just no money in the aftermarket support model. So most people on Wall Street go around, you know, saying that they’re supporting stocks. And that’s bullshit, Excuse My French. I mean, there’s, you know, I’m a guy that ran these businesses, right for a living. And so, you know, if you’re an academic, you’ll talk about symmetrical order book securities, which is large cap network effect, and they naturally are visible, and everybody knows them. Micro cap stocks, if you want to get professionals in them and institutions, they need to have professional liquidity support. So the typical asymmetrical order book security, you may have a big seller with a block of a million shares that go on a stock that’s trading 20,000 shares a day. So those ATSs don’t work for that, you know, that’s just that that’s the problem. And what happens is when they come out of that kind of size, even if they bleed it through the electronic woodchipper, it puts pressure on the stock. And the problem is that investors lose money. They’re not adequately supported. It’s particularly problematic for pre revenue companies in the life sciences and other areas. And so it creates massive amounts of dilution. And then what you see in the public markets is increasingly structured finance people who are structuring things that really dilute shareholders like the heads, I win tails, you lose kinds of investors, were they short this stock ahead of the deal, they asked for a discount plus warrants, and they just absolutely destroyed the cap structure. And so we need something where, you know, where people can get compensated for providing, you know, quality research where salespeople can get on the phone to distribute securities. And we used to have hundreds of 1000s of brokers that got on the phone and smiled and dialed in this country, and that part of the infrastructure has been completely destroyed. The notion that, you know, there’s, there’s a cliche, which is stocks are sold, they’re not bought, you have to, you have to, you have to be able to bring that into the aftermarket. And just because you create an ATS, and you can connect a buyer and a seller together doesn’t mean that you have a buyer to have set a large block of stock for a fundamentalist where you’re not going to get adverse trading consequences in shorting and get that stock nailed down so that the slippage takes, you know, you go up from a $10 share price down to seven on the exit. People don’t want the professional money doesn’t want to play in that area.
Sara Hanks 32:46
So is it a regulatory fix or statutory fix or a market fix that we could do ourselves?
David Weild 32:53
Well, it’s regulatorily, you need the regulatory you need to be liberated effectively from some of the market structure changes that dropped the bottom out of the market, right? And things like Reg NMS things like I mean, you know, we have now we took decimalisation, which was never intended to be [uncertain] synonymous with Penny tick sizes, and we turned it into Penny tick sizes, I mean, we, we have no way to hold a stock at $10 a share any longer when I got and when I have a million share seller, and then get on the other side and find 1000, 1000 share buyers to offset it and keep the stock at 10 like we did in the old days. And that was I was a high touch business because you were actually creating the buyers in the process to offset that seller, and then mark it up and put a quarter in it, sell it not to the client. So you made two and a half percent, the economics of doing that heavy lift of remarketing shares was completely destroyed. So the people that did the remarketing are gone. And that’s why the market fundamentally doesn’t work any longer is an aftermarket support problem. ATS’s to me are a little bit like pet monkeys. I mean, they’re you know, that you teach to do tricks. I mean, you know, they connect people together. And they but if you don’t support the price of the stock, you know, then people don’t want to buy stocks because the original ambassadors end up losing money in the aftermarket. And you don’t do anybody a favor.
Vincent Molinari 34:23
Oh, so I have to jump in there for a second David. So being an advocate of ATSs, and maybe a well trained pet monkey trying to learn some new tricks as we go. Look, if we look at the parallel to small cap, lack of liquidity, and let’s look at Reg NMS decimalisation and that evaporation of incentive if you want to call it that, therefore, those liquidity providers are out of business and no longer there. If we transition over to private market ATSs is trying to get it right. Right. Well, we have increased issuances quite dramatically of unregistered securities, and lack of exit or lack of liquidity. I’m curious of your view, do you think having at least the availability to post for liquidity is a vast improvement from having no access to liquidity on a private unregistered securities? And then if you are rebuilding, right, so I’m totally with you having owned trading firms in the past, right, you’re creating liquidity typically in the public market, whether that’s a hybrid model of having displayed some electronics but also phone brokered, right, you’re you’re picking up that phone to find the other side or portion.
David Weild 35:38
Sales traders making phone calls on these private market ATSs. I mean, that’s, you know, and a lot of instances, because they figured that, you know, that when there was something coming into the market to sell, you know, they needed to reach out to potential buyers and place those shares. So where it really works, even in private markets now. And by the way, you’re, you know, you’re largely absolved from a lot of the restrictions that you have in public markets, right. So you can design a market more, you know, if you will, with more with more in intelligence, you can also great create greater incentive in that market. But look, if I put up an ATS in the public market, right? I mean, I’m obligated to connect into other ATSs is right under regulation NMS national market system, that’s what it does. And so that means that anybody, even if I wanted to keep my tick size, you know, wide at 20 cents or something, right. And then people step in, and they undercut the price. And before you know it, it, you know, you end up losing your shirt if you’re trying to stabilize it. So the arguably like when we wrote a paper called a wake up call from America, and we had a list of private market and public market recommendations. That’s actually where 506 c came from, among other things, but you wish the repeal of the prohibition against general solicitation, but what you what, we weren’t smart enough to know what Congress would, would accept, and, but we were smart enough to know that you could, and there’s no magic about something being a public market, you can do a lot of what needed to be done in terms of accurate market incentives in private markets. And the likelihood is because it was an accredited investor equip market, that it would be less regulated. But you also have other challenges in private markets, which is like information standards, one of the beautiful things about public markets is that everybody’s reporting and, you know, and, and, and the information is generally reliable. And but in private markets, you know, it’s the hot hot hot idea, frankly, doesn’t there’s no requirement that when Facebook was a private company, it had to disclose a lot of inside information. And what needed to be really transparent. People just wanted to buy the name because it was so popular, LinkedIn, things like that. And if you go back to the days a second market, which then was Barry Silbert company that then he spun off the digital currency fund for but the second market, private market technology was sold to NASDAQ private markets. And what we started to discover is that issuers were very concerned about control over share price, they were, they were deathly afraid of stocks trading, you know, below, you know, their last round and what that would communicate about the company. And so, you know, increasingly at least with NASDAQ private markets and the second market platform, you started to go to a system which was more like organized tenders quarterly tenders, so that you created some employee liquidity on during this long term, gestation period before you take the company public, you know, that 12 year period I was referring to, because Luckily, there’s just a limit to how many years entrepreneurs can live on a futon eating Doritos, you know, their, their spouse gets a little angry says I want a house and, you know, the kids have to go to, you know, school and, and 12 years is just the, you know, is a lifetime for, for people. So, you know, we’ve improved and develop, you know, some substitutes, particularly in Silicon Valley. But, you know, but what happened is in Silicon Valley, these guys ran around with me, when we were doing the JOBS Act. I mean, this is why these, they were so educated, I spoke to the Silicon Valley’s advisory board, which was the, you know, the who’s who of the venture capital business, Kate Mitchell, you know, remember she ran the IPO Task Force, the first slide and there was one of the slides that was basically taken from the papers that we wrote showed the drop off in this small IPO. If you know, people at NEA one of our running buddies was very prominent was at the, at the US Treasury sort of Symposium on on on lending to small business and IT Yo yos, with Chuck Newhall who was a co founder of NEA the largest venture capital fund in the country. Scott Cooper, who is the Chief Operating Officer still to this day of Andreessen Horowitz, you know, teamed up with, with the CEO of Jeffrey Solomon of counting company, and they did an equity capital markets taskforce report to the US Treasury. And so, you know, we have they in Silicon Valley, they sort of all of a sudden got the message, oh, my God, we’re not going to get small IPOs done again. And that helped precipitator accelerate lots of larger later stage funds that that that rounded out that echo system would probably put the unicorn phenomena on steroids. But if you look throughout the United States, now, we’ve got half and a half, nine states and the vast majority of states are have not states, they’ve seen a massive decline in the number of startups, they don’t have a venture capital ecosystem, like in Silicon Valley. And I would argue that, that most other venture capital ecosystems, regional ecosystems are nowhere near as important as or they don’t rival Silicon Valley in New York, you know, little bit, Austin, Texas, even you everybody hears about startups, but most of the companies when they get to a certain size, they end up transplanting over to Silicon Valley to get financed at later stages. So
Vincent Molinari 41:24
I gotta jump back in there for a second, David, because I think this is so important. And, Sara, I’m sure I want to come back to you on a specific question on RegA right after this. But I do think this is essential. And you know, no secret I am an advocate of ATS, is I wrote early petition in 2015 to amend RegA ATS to the full stack of private and unregistered securities.
David Weild 41:48
Vincent Molinari 41:53
Hey David, I’m sorry, you froze there. Could you say that again? Please? I’m sorry.
David Weild 41:56
I said I am an advocate for ATSs too
Vincent Molinari 41:59
Oh, yeah. I know that.
David Weild 42:00
Yeah. And it’s what I see it as a piece of a solution of a full solution. Not, not the solution in and of itself, though. It doesn’t solve
Vincent Molinari 42:12
Yeah. No. And I think that’s really kind of what I wanted to bring forward for part of this discussion, David. So and I fully recognize and I agree with you a different set of challenges. NMS securities, ATS and the connectivity and you’re just mandated, right? It’s a different market structure at this point, where I do think the opportunity for growth and maybe it’s somewhere between our public markets, the Venture Exchange, which I know you’re you’ve advocated for, where we can bring together and create symmetry of information much different. I think, when we were talking having this conversation 2015 2016 private companies who didn’t want to disclose information out of fear of giving something away to competitors, right, the hierarchy of private companies who didn’t want to allow reselling, because they wanted to kind of have a bit of the handcuffs on employees, right, as we seen this valuation expansion, which is very much I think, part of your work of private securities, pre IPO morphing into public company, enterprise valuation, right. And that ability to capture that delta, right and the alpha within that growth, to have the opportunity of an ATS for private unregistered securities, that allows for margin right, that gives that incentive to begin to stimulate liquidity to post for mark to market pricing, and to create some level of standardization and best practice, where we can elevate and create liquidity. So I just wanted to bring that forward. And I think it is part and parcel to you know, very much Sara’s comment earlier of pre empting blue sky requirements or the work that she’s doing to allow secondary liquidity of blue sky requirement filings to make that more efficient for secondary liquidity. So I just kind of wanted to put that forward in a bit of a more of a comprehensive conversation around some market infrastructure fixes for private securities.
David Weild 44:09
I think that private markets can be made to do the heavy lifting. I think a lot of the work that we’re doing is moving in that direction. I think there needs to be more work done. I know why. Why should you have a restriction on trading shares in the aftermarket on day one, there’s typically a seasoning period, right? And I and I, and you know, and they have to be architected in a way that you have an aftermarket compensation model for somebody to get on the phone and sell something to go find a buyer because otherwise, it ends up being small trades between small investors where you end up having to design securities that trade more bond, like you know, have a dividend associated with them, that kind of thing. So, you know, it’s, it’s, look, it’s a big step in the right direction. You know, it’s the oldest It goes Rome wasn’t built in a day, right? We destroyed, the greatest, you know, in new industry innovation birthing engine that the world had ever seen. And so it takes an army of people that are interested, bringing their ideas to the fore and tweaking and moving in the direction, pushing that ball up the hill that rock up the hill until we get it right. And, you know, personally, I’d like to get it right in the public market version. And in the private market version. I’m a little bit concerned look, buddy of mine reports to Abigail Johnson at fidelity. And, you know, he said, that fidelity, his view is, is that all the alphas moved into private markets now. Right. And I think that as a nation, you know, we don’t, that’s not a place you really want to be. Right. And now there’s a lot of reasons for that happening, not the least of which is, when you collapse trading spreads and public markets, it’s been taken over by exchange traded funds, other index funds, computer based trading, that the fundamental investors really can’t compete. But one thing that I will tell you that is is, is really important is, it’s always great to have fundamentally orient oriented professional money to be pricing securities, because if you want markets to work properly, you need to be allocating stock efficiently and out allocating capital efficiently and to allocate capital efficiently, somebody has to be legitimately valuing these securities, right? But when there’s no money in that part of the business, then the valuation of those securities is is is is never, never going to be efficient. And I think that, that, that that creates misallocations of cap, look, look at the distortions, GameStop, you know, everybody on the on its face knows that when that stock goes up, you know, to, you know, ridiculous proportions and back down, that there’s nothing efficient about that. And guess what, that is one of the things that’s baked into the SEC’s mission statement. So, you know, we looked at it that week, somehow confused investor protection in this country in public markets with, with the notion of low cost trading, and we went to a low cost trading model in public markets. But what gets lost sight, and is this shorthand that the SEC has always done, which is we want to protect new investors coming in, as opposed to the investors that are already in the company. Right. And arguably, the early stage investors are the most important money because they’re the ones that get the business started to begin with. And I think we need to kind of redefine our definition of who we’re protecting out there and create market structures that protect, you know, all investors
Vincent Molinari 48:01
Couldn’t agree with that more. Hey, Sara, I miss you. Sorry. Come on back into the conversation. Did you want to comment on any of that? Or?
Sara Hanks 48:13
Actually, what while David was speaking, we’ve got a question for Oscar actually, is there a way for people to raise questions directly with David, since I’ve actually seen some emails asking, asking me to ask David up, for example. For example, why and ATS for RegA plus would be subject to NMS. I mean would it?
David Weild 48:40
Well, I look I’m, you’re the attorney, I would have a better idea than I am. I’m in it. I don’t know that. I don’t know the answer to that question. Right. But I mean, it RegA plus a, you know, it’s already sort of it sits in a kind of a funny, funny place in the live. It’s sort of an exemption from public registration, but yet you’re a publicly reporting company now under
Sara Hanks 49:01
Yeah, well, you’re in sort of hybrid. I mean, yeah. Yeah. I mean, the thing about the ATS is that have stood up so far is they are very much peer to peer. I mean, it’s a sort of, you know, to go back to the whole democratization of capital, they are very much a, you know, eBay type thing. Yeah. Retail person, one retail person to one is interested in mind, one is interested in selling and you’ve got a matching engine. And that’s it. There’s no market maker or anything else. Now, whether now to go back to one of the things that you said earlier, I mean, maybe we do need that. But where they are at the moment, I think that the answer would be NMS wouldn’t apply to be ATSs that have stood up in their current form. And Vince is nodding so because we
Vincent Molinari 49:57
No, question about that having have had an approval. For RegA plus ATS, currently no mandate for that, to adhere to NMS.
David Weild 50:09
And maybe the bigger challenge than really getting behind it in the aftermarket is is is, is the whole blue sky issue, right? I mean, you, you know, you, what do you do, you end up if you if, if you want to get out of aftermarket blue sky, and there’s so some complications on blue sky, even though the intent of Congress was on the primary distribution, the capital raise, under reg a, the intent of Congress was clearly to get them out of the 50, state blue sky And still, in some places, you know, you still end up needing a broker to do it. But I, but But the bigger challenge is, you know, if you want to, in the aftermarket, be able to solicit trades, you can’t do it without blue sky filings. Unless you register with NASDAQ, or that word list with NASDAQ, or the New York Stock Exchange, at which point you’ll become a fully reporting company. And then reg S will apply.
Sara Hanks 51:05
Yeah, but the I mean, that the clunkiness. I’m sorry, reg NMS will have so yeah, the clunkiness of the secondary market. I mean, I think this is something that the SEC has rules, as you know, as we know, a whole bunch of changes go into effect today. Some of those are improvements, some of those, arguably not I know this, too many opinions on some of the changes. But when you look at what the SEC proposed in 2019, and then what, you know, in the concept release, where they said, should be changed this, should we regulate sales and not offers? Should we do away with the entire concept of integration? Should we permit QR codes and adverse TV advertisements? There was a whole bunch of questions raised in the concept release in 2019, where some of us, including crowd check said yes, yes, yes, yes, yes, do all of those things, please make a big change. And then when the proposals actually came along, in 2020, just about a year ago, now, they sort of pick the low hanging fruit. And some of the things apart from the bump from 1 million to 5 million. Most of what they did was not controversial, they did the easy stuff. One of the hard things that they raised in 2019, was state preemption of secondary trading. They sort of hinted at it, we said, please do this. They didn’t do it, because it would be incredibly unpopular, obviously, with the states. But that’s so we are left now with state preemption at the primary level. And then at secondary level, you need to get go through all of the various, various requirements. Some of the states say if you RegA, you’re fine. Others say if you get into Mergent, as events, as mentioned, in a crowd check has its own 50 state solution for secondary trading, trade check. But it’s clunky. It’s clunky, is expensive. You know, it’s a product that we sell, but I wish we didn’t need it. We introduced it. Because our first choice, which is please preamps didn’t happen. And that’s one of the areas that I think I can’t see the current commission, changing that. So if there is a solution in the next four years, it’s got to be a legislative solution. Not really seeing that happened at the legislative level, either. But that’s, it’s a structural problem, when you’re talking about small companies having to pay this money in order to have their securities traded.
David Weild 53:54
That’s, that’s a test for that’s why we need a logical that’s why we need the jump coalition. You got to do the kind of the hand to hand combat in there and get people to understand why it’s in their best interest. The challenge, the challenge, and I think you nailed it on the head says you got a democratic administration, by the way, was the Obama administration has signed the JOBS Act into law, it was President Obama through, you know, some of his advisors that told the senate democrats that he wanted to, he wanted to build a put to lobbyists on it. And that’s how it got passed into law. And, and interestingly, the guy that is co chairman of the, of the Obama transition team, Senator Ted Calvin, you know, gave a speech on the floor of the New York Stock on the floor of the US Senate. And the concluding remark was, iif we can get the $25 million dollar IPO to work again, both on the offering and in the aftermarket, we’ll get America back into business. So I think that these guys have a lot of appetite for the politics. as you point out, the irony is that that that that the republicans in most areas of government tend to be pro states. And democrats tend to be Federalists. But when it comes to securities regulation, you flip that. And in this case, states like Massachusetts in particular, but you know, New York, California, they tend not to want to have their local state regulation assert of securities. And so, you know, you’ll you can bet your bottom dollar that the state securities regulator of Massachusetts, if we go down this path of trying to try trying to get preemption of state regulation in the aftermarket for RegA, which is something that really needs to happen. It’s going to be a grind for a democratic administration with major democratic states. That’s just the challenge.
Vincent Molinari 55:55
Sir, if I can come back, back to you on this point for a second, you know, and, David, I think you’re so spot on when we talk so many times about legislative intent, right. And the outcome tends to be particularly different at times when you go to an implementation phase. So you know, we talked about blue sky preemption, and again, significant difference in perhaps in the issuance in the secondary liquidity aspect, you’re talking about trade jacket. And I know, you say it’s clunky. But again, I look at that as past, present, and future. If we are, indeed, perhaps in a legislative environment that is not going to move the needle on preemption, whether, even on the secondary space, you have market participants like yourself, you have a good friend, share with nice with guard, right? market participants coming to bear to try to solve for a pain point. So yeah, I’d love you to just talk about trade check a little bit in that journey, because I think I do think that’s a vast improvement and trying to create a systematic approach, although, as you said, clunky, not work could be in the future. But why is that so important for secondary liquidity today?
Sara Hanks 57:05
I mean, this is sort of starting from the legal point. You know, as we said, preemption applies only at the issuance level, for the issuer, it does not apply at the state level. And so at the state level, you’ve basically got state securities laws that say, all transactions need to be registered or exempt with our state. And everybody’s got a slightly different one, because nobody even takes a model statute and implements it the same way as everybody else does. But so you’ve got these state securities laws, each of which are slightly different, which say, in order to buy or sell securities in our state, in or from many, many of them, then you have to be registered with us or exempt. And then the exemptions go for secondary trading, isolated transactions, some broker transactions, some transactions are all transactions on a registered exchange. And national Securities Exchange, as David pointed out, there’s an exemption for so there is patchwork of, of exemptions at the state level, many of them have accepted the if the information about the issuer is in a securities manual, which is basically Mergent. At the moment, if they’re in a securities manual, then there is an exemption for them. Many of them have sort of added to that and said, by the way, Regulation A if you’re reporting under Regulation A, then that counts as if it were a securities manual. And so the trick is to get the securities into securities manual, which we do, and as you mentioned, they’d be competiting competing products due to but then there’s also a couple of outlying states, I think Tennessee is one of them, where we have to follow 15 c 211. And then there’s Virginia, my own state doesn’t follow everybody else. There’s a limited number of transactions. So you’ve got to code to make sure that no more than a couple of nobody does more than one or two transactions. And then you’ve got California, bless California, which is complete outlier, where you actually have to go and do efiling, which we do. And so yeah, it’s clunky, it’s expensive. We’re lawyers, you know, and compliance folks, we make money from doing this thing, but we don’t want to make this doesn’t add anything to investor protection. The investor protection that you get from Regulation A is compliance with the ongoing reporting of the regulation, a disclosure, that’s where the investor protection is audited financials every year. That’s your investor protection, you don’t need that other stuff, and I never state. So, you know, I’ve got friends at the state regulators. Some of them were absolutely superb securities lawyers, this is obviously a place where we, we diverged. That’s where we are at the moment.
David Weild 1:00:25
I mean, I historically have been very frustrated that I think that, you know, I think there are a lot of people in the industry historically that have done really outrageous things and moved around and never been prosecuted. And I wish they would just do it, you know, take it from prevention, and all the things that really clued j, and harm capital formation and just get much more aggressive. On the enforcement side. It’s, you know, if you got bad, if you got evildoers, you can figure out who they are because they have a pattern, it’s not just one instance, throw them in jail for Christ’s sake. But that’s so that you can kind of let the rest of us do our thing help contribute to the economy, there is no sin in failing, right. I mean, if you work hard, and you’re honest, and you’re doing what you’re supposed to do, now, the vast majority of early stage businesses don’t succeed. But that’s the price of success, you know, we learn, you know, in those failures, we get better we create an entrepreneurial nation, we succeed, you know, over the long run better, because we try and, and that’s, that’s been historically, I think, one of my greatest sources of frustration with the emphasis on the securities regulation front, it’s not enough enforcement of evildoers really systematic, you know, not not the guy that makes an honest mistake, or a problem, you know, the, you know, the footfalls and things but people that are, you know, that we’re doing pump and dump schemes, and God knows what else. And, and, and, and loosen it up so that people can actually, you know, contribute, create jobs, innovate. The next that, you know, the next successes, that, you know, the solution of global warming is going to be an engineering and an entrepreneurial solution, you know, mark my words, you know, it’s the energy in renewable energy solutions, or engineering solutions, innovation solutions. It’s not, they generally don’t come from large corporations. And so, you know, we harm more people than we help by taking these sort of, you know, sort of very restrictive views towards capital access for smaller companies.
Vincent Molinari 1:02:40
So another great segue, David, thank you. So as we think about fostering innovation, job creation, and really the brain trust that we do have with increased access to capital, great day to talk about that, as we have revisions in front of us today on CF and RegA. I want to jump to Sara first. You know, you started, I don’t know if anybody’s lived the journey more of RegA approval going effective than crowd check. Yeah. Tell us a little bit about your kind of some of the trials tribulations and where we are today, what looks like a loosening and greater activity? And what do you think today does to continue to perhaps spur that forward?
Sara Hanks 1:03:27
It’s gonna be interesting to see what happens today. In the very, very, very short, near term future, I hope that they’re going to fix the fact that we haven’t been able to make filings for 5 million this morning. Because the Edgar system apparently wasn’t updated. So that when you put in remember the securities, if you enter more than 1.0 7 million, you’re getting rejected. So I’m, I’m hoping that somebody, somebody has fixed this by the time we get off this webinar. Hopefully, they’re watching. Hopefully, they’re not watching and hopefully, they’re putting the codes in for the right fields. Now I’m sure they’re working on it. There’s there’s always something isn’t there. So that’s the very short term future. Those of us who were planning to look to see what the filings we’re going to show I think is going to be a sort of near term over the next couple of weeks, we will see whether the predictions which were that we’re going to have slightly later stage companies coming in. Some of the companies you might have been thinking of doing RegA will do reg CF instead. So we might see slightly larger companies. So that might be one of the things that happens. I think one thing that has had an impact over the last few days is miscommunications about whether you needed audited financials for going up to five months. And there was some debate last week about whether or the SEC had or hadn’t changed the relief for first time as you as they’ve not changed it. So if you’re seeking more than $1.07 million, you are required now to have audited financial information, which, you know, was it a quality improvement from the SECs point of view? But there was a little confusion about that. So I think there’s a lag in some of the companies getting filed. So we’re going to see over the next few weeks, you know, are there more? Are there larger, or they cope better? companies? That’s certainly what people were predicting. In the longer sort of medium term, I think we should very much expect to see the SEC, focusing on quality and compliance. I mean, that’s one of the points that we had made several times when the SEC said, should we put the limit up. And our response was, if you’re going to do that, make people comply with the rules that exist already, because they are not doing it. So I think both intermediaries and stos are going to see the SEC looking at some of the problematic practices, which we have identified a number of times, one of the biggest issues that we keep running into, it’s not running away with the money. It is, although we’ve seen that we have literally seen the running away with the money. And I’m shocked that there hasn’t been more, more publicity about that. But what we see in terms of problematic, it’s that many early-stage companies truly do not understand how corporate law works. So we have conversations with the issue is along the lines of Okay, who are your directors? Alright, well, he’s the CFO, and he’s the tech of No, that’s officers, they’re different than board members. Okay. What are the board members do? So misunderstanding how our company is structured? And who is responsible for what? And then misunderstanding things as basic as how do you create new securities? Have you approved your, your preferred shares? Yes, we have. Here’s the board resolution. Okay. But we’re not seeing the filing in Delaware. What do you mean, we have to file in Delaware. So we’ve seen companies who have gone out there and sold securities that do not exist, literally do not exist. And that takes a fair amount of fixing. So I think there will be pressure by the regulators, both FINRA and the SEC, on the intermediaries in this market, to hold people’s feet to the fire and make sure that compliance happens, or at least I hope so since a sort of medium term. And in the long term. Who the heck knows.
David Weild 1:08:09
Now on RegA, that was one of the reasons why, you know, we didn’t get this, but we had proposed to congressman Schweikert, when it was still hr 1070, that we have all Regulation A plus transactions go through broker dealers, right. And, you know, because, you know, FINRA has jurisdiction over the broker dealers that don’t necessarily have jurisdiction, and you look at enforcement resources and the ability to do you know, an on and regulatory on it. And if you go if you’re going direct in the public marketplace, you know, it’s less clear to me that you’ll have the necessary sort of oversight infrastructure that you’d like to have.
Sara Hanks 1:08:44
That’s a really good point, David, because I mean, one of the important things about the broker dealers are, you know, their function in this market as gatekeepers, and this is something that I will make a prediction on. Because what we’ve seen in Regulation A is, as you say, broker dealers not mandated. Many of us do recommend the use of broker dealers, because if you don’t use a broker dealer, in order to sell into certain states, you have to register yourself as an issuer dealer. That’s a pain. And the broker dealer, you know, they’ve got the imprimatur, you’ve got the gatekeeping function, you’ve got the discipline, especially in valuation, because we do see these astronomically aspirational valuations, shall we say? And so broker dealers sort of put a bit of a cap on that. But one of the important trends that I think I am seeing with the SEC, is the SEC saying non broker platforms and or anybody, whether they’re online or offline, who is performing functions. solicitation of investors, which includes throwing up a broker platform should really look out to see whether they are should be registered under Section 1534 act. And you see them several times in the recent past, we’ve seen them circle back to the proposal for relief for individual finders, which I think probably is not going to go through I don’t know whether it whether there’s much internal appetite for that at the moment. But when you look at the reasoning that they put forward on what are the dishes of being a broker dealer, we’re always focused so much on transaction based compensation, and really, really focused on that and saying, Oh, you the rest of it’s just technology. And the SEC, his point is that is not just technology you’re actually soliciting. And so if I could give anybody who is a non broker, active in this market, whether it’s an online platform or whatever, you really need to look at that and start thinking about what’s going to happen. When the SEC says, No, you’re doing broker dealer functions. And you have to become a FINRA member.
David Weild 1:11:15
Now, and we always took the position that if you’re streaming a quote, it’s a solicitation. Right. And, and there was a lot of discussion with the Bermuda Stock Exchange about how to, you know, get quotes into the US market, you know, and it was sort of basically decided that you, you know, if these were not us registered securities, that you couldn’t stream them broadly to consumers, and having that conversation. There’s a clear analogy, though.
Vincent Molinari 1:11:51
So David, if I can jump in? Right. And I know, you may have a long list on this one. But, you know, here’s where we are today. Looking to the future, you know, what’s next? I love you bringing forward new advocacy platform to start knocking on the doors in Washington. But, you know, what, what’s the cornerstone? And what do you think are the biggest fixes that we need?
David Weild 1:12:17
Well, I think a Venture Exchange that basically is optimized for the needs of Mike of, of micro cap small cap companies, their investors, particularly institutional investors, and we need to get an aftermarket, you know, working so that you can bring research into it and bring professional money to price things, you know, they the professional money has largely vacated micro cap stocks, I mean, fundamentally oriented, because they just because they got chewed up trying to trade in and out of it, you need intermediaries there. And then I think, also that if we can, you know, can make markets work for in similarly in private markets, you know, so that you have professional money coming in and playing and, and can solicit, you know, solicited trades, I think that, that those markets both need, they’re very kind of like opposite sides of the same coin, they both need to function better, and you need that aftermarket. preemption of state blue sky regulation is critical. You know, to get it there, you need a safe harbor, you should be able to trade things on, you know, immediately. I mean, why do you wait three months, six months, whatever the, your attorney says, I mean, you should, you know, you should be able to trade it, you know, right away. And, and I don’t think it serves any Look, I made a, I made a career down at the SEC, being a little boy in the Emperor’s New Clothes, you know, saying, why do we do it this way? Why do we care who we solicit, you know, and you know, that that 500 share increase? I actually said 500 share limitation that went to 2000 in the JOBS Act, and is that why do we care what the number of shareholders are? Right? I don’t think we should do that. If they’re all accredited, and then, you know, and they’re not otherwise protected. Why do we care, but it’s just easier legislatively for people in Congress across our 500 and insert 2000. That’s how that happened. Right? So, you know, but the two big things are the aftermarket. And it’s aftermarket in the private markets and aftermarket in public markets. It has to be optimized for companies of this size of these float sizes. Right. So then you know, the congressman Emmer legislation which was called the main street growth act that got bundled into the jobs and investor confidence act that I already said got waylaid under the Trump administration when he tried to when he closed down the government you know, that was intended to get you in public markets away from things like decimalisation Penny tick sizes, regen and mass the hyper competition to allow you the freedom to whiteboard and create a new exchange for sub billion dollar mark. market value companies that was optimized for the needs of companies that size and their investors, because let’s face it, if you know, a lot of the fundamental investors have largely vacated these markets, and then we need to do something similar in for Regulation A plus. So that we can create real liquidity. And then you know, then interestingly, I think you got two building blocks, right? If you look at Capital access as a continuum, you can start with things like reg CF and crowdfunding, you can do things, you know, through the general solicitation provisions that wonder 506 C, or 506. b, and which is non general solicitation in reg day, you can walk companies up, you can do a bigger transaction under regulation, a plus now going from 50 million to 75 million, but there’s no aftermarket because of the fact that the state blue sky problem in the aftermarket. And, and, and then ultimately create a public market, a fully blown public market, and so that we can walk companies up and if we do those things holistically, right, rather than thinking of it as a patchwork quilt, you know, there is, you know, company is a company, and it has different stages of development from startup all the way to fortune 500, we need to have no longer a Death Valley of finance, which is kind of what we’ve been fighting to fix, which is to really make the markets function and eliminate that Death Valley of Finance. So there’s a continuum and that stocks, when they start raising public capital, and they start trading, they’re actually supported again, till they get off their training wheels. And they and, and the network effects. take home, which is that you know, where there’s 1000s and 1000s of investors looking at any particular company at any point in time, which is the non natural state of large cap companies. But is, is by far and away not the state of micro cap companies.
Vincent Molinari 1:16:56
Well, I love the visual and I don’t want to put words in your mouth. But as I see this kind of, you know, heavier lift getting some of the private markets stood up a bit more efficiently and, and that access to secondary liquidity on a comprehensive basis to kind of handoff to the Venture Exchange equivalent to perhaps then the handoff to a national market exchange. It’s really a holistic systematic approach to that capital formation process. And getting back to I think, the beginning of your conversation of redefining or re evaluating Who are we protecting from whom and at what stage right as we look at investor protection, so
David Weild 1:17:36
People lose sight of the history of markets, right. And even before my time 1971, which is when NASDAQ was founded, most people think well, 80% of trades on NASDAQ are done away from NASDAQ, and through all the ATMs and other exchanges and they think NASDAQ lost 80% of its market share. No NASDAQ gained 20% market share what was that? Because NASDAQ in its infancy, was a trade reporting facility. There were no electronic transactions on NASDAQ. And, you know, you and actually at that time, the New York Stock Exchange thought that IPOs were too risky. The nysc would not do initial public offerings, except for companies that were it was a spinoff of an already listed. You know, I never knew that. That’s, that’s interesting. Wow. Yeah, yeah. So So NASDAQ in its infancy was ultimately the That’s why they call it the over the counter market, because the trades were done upstairs in the firm’s and then reported on to the NASDAQ trading trade reporting facility. So, you know, then we went down this path of electronic markets. And I think that people didn’t understand the importance of being able to do a telephone quoted market, hold a stock price there move a big block of stock without having it get crushed. Because of course, if you’re a large investor, and every time you come into the market, they push it down three points and you get your lungs ripped out on price. You’re not you’re What are you going to do? You’re going to just, you’re going to have some more, please. Yeah, you move out of that market, you move to larger capitalization stocks, which is largely what’s happened. And here’s a little bit of trivia for you, you know, we used to cover almost all 13 af reporting companies, which there are over 3000 institutions in the United States. When I was at Prudential securities, we had 8000 retail brokers, they got covered in the institutional equity sales force, they got covered by the middle market, Salesforce institutional sales force, they got covered in the retail system, but they all got covered actively. What’s happened now is that most of the big Wall Street firms are covering 60 institutions, and that’s it, and they cover night that 90% of their Commission’s everything else is there. They’re an order taker for because there’s not enough commissions generated by the smaller institutions to make any money from because under the current system, so what happens is, those smaller accounts don’t have them liquidity constraints, they would be the natural, long tail buyers of most public small cap public companies. But they’re not getting actively covered. So the game has become on wall street because there’s no alpha left anywhere except on the calendar is to systematically underprice new issue equities, IPOs, the big ones to the top 20 institutions and that have an expectation that they’re going to reward you for the alpha that you generate at the detriment of the company. They’re going to send more Commission’s back over your desk. That’s the economic model. And it’s one of the reasons why so many people have fought for direct listings, because they understand that they become product that they’re that wall street wants to see them is trying to talk them into a 40% increase in share price on day one as a marker of success. And they’re saying the heck with this and Silicon Valley, let’s go and see if we can do who’s capturing that differential right on a mispriced offering. Hey, yeah, I mean, it’s Wall Street, correct, you know, but what I’m saying is that that broad base bonafide distribution that was so essential to companies, not just on the offering, but on the app in the aftermarket, that’s a thing of the past. And what we’re saying is that we have to build back distribution is not going to be overnight. It requires some legislative, regulatory, you know, support and and fixes to do properly. But I think it will be so worthwhile over the long term, because that was the secret sauce that made the United States IPO markets, the envy of markets throughout the world. We can we can do that. We’ll get America back into business.
Vincent Molinari 1:21:37
Agreed. We’ve got just a few minutes left. Sara, you want to jump in anything that you want to add? rounding the conversation out? Before I think we have one or two questions that are out there that we’ll have to take?
Sara Hanks 1:21:51
Oh, no, um, I think I’ve I’ve done all of the predicting that I can usefully do. And I would just say, I mean, we need to watch out for the SEC to take a slightly different tack. And so the intermediaries should be very concerned about enforcing compliance. People who are unregulated entities might want to consider becoming regulated entities. And I’ll leave it at that so politely and calmly sorry, you just might want to think about becoming he might just want to think about clients Skinner. Well done. Thank you, Oscar, I, I would wish.
David Weild 1:22:37
And I and I don’t have a crystal ball on this. But when I testified in the wake of the flash crash, it was Gary Wexler, who’s now nominated to the SEC chair, and Mary Shapiro, who was the then sec chair. And there were a number of people from both the derivatives business at Chicago testifying and the equities business. And it was very clear that CME and the Chicago Mercantile Exchange that they were much more centralized markets, and that and that the the the profitability to the market participants had been largely preserved in in Chicago, and people and which is where to where, where Chairman nominee, Chairman elect Wendler comes from, they really thought that was the right way to go. Okay. Whereas in the equities markets, we became highly decentralized and interconnected. And so it and a lot of people felt that we ruin the character of the markets, and particularly for capital formation. So it’d be interesting to see given that, that that, that Mr. wessler comes from that Chicago environment, you know, how he thinks about markets now that he’s plopped down in the securities markets years ago, that head of the CME tried to recruit me to be head of strategy there. And one of the things that he said to me was that he would never buy a Securities Exchange, because the SEC had ruined the economics of the securities business. And so I think that that’s not an uncommon view in Chicago.
Vincent Molinari 1:24:25
So I’m gonna be interested. Interesting. I think how perhaps enforcement gets balanced here with some changes. I want to jump and I think Oscar has made more permata live another, another friend in the evolution of the crowdfunding and marketplaces here, Martin. Mark, are you live with us now to ask your question? He’s on mute. Oh, here we go. Mark, can you Here’s your if you do, you’re on mute. While you did ask her.
Oscar Jofre 1:25:06
Now he’s, he’s still on mute. He asked to unmute himself. Okay. He was the one. He had it up a while ago. Obviously, this is the time if anybody wants to ask a question of David, and Sara and Vincent, please put up your hand, and we’ll bring you into the discussion. And the meantime, please continue.
Vincent Molinari 1:25:25
Right? Yeah, I guess just give us a prompt What what? Mark is unmuted, and we can jump right in there. I’d like you know, I know, we just have literally a couple of minutes. But if there’s a short answer to this, probably not. Look, we look at blockchain. We look at digital assets, as to me as part of the evolution of what we’ve been talking about from the beginning of the JOBS Act and democratization access, symmetry of information, transparency. Curious, David and, Sara, how you may agree disagree with that. Where do you think perhaps the place for blockchain is in this environment?
Sara Hanks 1:26:08
If I could start there, I think it’s, you know, it’s just a tool. It is a method of recording things that happen. And as far as we’re talking just about blockchain in the background, it should be something that you know, the SEC, at least at this point is, is comfortable with when we’re talking about blockchain. And its and its children as a product, then then you’ve got a slightly different answer, which is, it’s still very difficult to get anything other than here is a share, it is represented by a token through the SEC, if you’ve got anything that is something other than absolutely straight debt, or equity represented in digital form, digital forms, I think they’re comfortable with that. Now, it’s the other animals that are more difficult. And where we are going to see this happening in the next few weeks is obviously NF T’s we are going to have a slew of the damn things on reg CF. And it, it’s sort of one of the things that we have to look out for is when you have an asset, whether it’s a digital asset or a sneaker or a racehorse, one of the first things you have to ask is, is the method by which you’re holding an interest in it a security because if you hold an NFT, or a racehorse directly, it’s a physical hard asset, even if it’s a digital hard asset. But if you’re holding it through somebody who is holding those things for you, then you’ve got Investment Company Act is used that you have to address. And that’s where we’re going to see a whole bunch of complication of the howey test. Oh, yeah, it’s it’s oranges are the f nf T’s oranges? Well, yeah, they’re oranges. So the interests in the trading of them, you’ve absolutely got the howey test there. That’s gonna be fun. NFT is a crazy.
David Weild 1:28:22
I agree with that. I’ve always looked at the blockchain and you know, like you got a blockchain smart contracts, which software layo can automate and do some wonderful things KoreConX based on that, except you don’t hear closed system, you don’t pray tokens. I mean, I think that when you get there, you know, they the challenging part is been tokens and keeping track of them and being able to afford people the same protections with tokens that you do traditional securities, you know, whether somebody does something stupid and loses a cyber wallet, or you have a divorce, and they have to freeze a securities account, normally the court would do that the marital assets, but you can’t do that, necessarily the token, I think that a lot of the protections that, that have, you know, properly been developed in securities markets ultimately are going to be, you know, emulated and afforded in, in token markets for one of a better description. But the big lesson for, you know, for me has been the constipation in us in US markets is largely because of the interdependencies between, you know, you can’t get a token listed on NASDAQ, or the New York Stock Exchange. So if you issue a public token, which we did with iron axe, you know, you’re stuck in blue sky, you know, how, and even though you otherwise might qualify, the other part of it is if you, you’re still got to Crossing the Chasm challenge with the adoption of tokens, right? It’s just another form of transacting and settlement. You know, just the way that you know, we had physical certificates and then we had a digital rep representation through DTC You know, you’d love to be able to deposit tokens into the into dtcc. So that then those tokens could be could be reflected in somebody’s trade account or Morgan Stanley’s securities account, no reason why you shouldn’t be able to do that. So, you know, each of those sort of you no gatekeepers needs to play ball, if I was going to put on my wish list, you know, there needs to be some overarching organization that gets all of the bottle, you know, all of the different parties to play nice in the sandbox and come together if we’re going to make these technologies fulfill their potential.
Vincent Molinari 1:30:43
And Oscar thinking about traditional functions of transfer agents and KoreConX in the process may have some things that to chime in on Oscar I know according to my clock, I think we are out of time, but I don’t know if mark is in there for his question or not.
Sara Hanks 1:31:00
I can’t. Can’t see we have Ron. Ron is here wrong. Please ask away. David, Good morning.
Morning. Would you talk about the research that is showing the correlation between IQ and your break it up? Ron, I
can’t hear you.
David Weild 1:31:27
When I talk about which research? Sorry, David. got here. Yeah. Yeah. Much there. Yeah, this
Sara Hanks 1:31:45
signal is completely out of whack. Obviously, everyone would love to ask questions of David, sir. And Vincent. Well, I
David Weild 1:31:54
mean, he worked for that for the guy whose committee got the JOBS Act done. He was the guy he Oh, that’s Ron woessner. Ron worked for Jeb Hensarling, who was the who was a six year chairman of the House Financial Services Committee. So
Oscar Jofre 1:32:11
it would have been great for to have him ask a question. I’m sure we’ll be seeing him again soon. Vincent. Thank you, Sara. David, thank you so much for a wonderful sight. You know, it was you know, it’s an enjoyable ride. I got a lot of great takeaways, and today being the memorable day, no memorable vehicles without bumps, right. And today’s a doozy. Today’s a doozy.
David Weild 1:32:40
Nothing. Nothing like trying to get an IPO effective on a day when your examiner decides that they’re going to move offices that’s happened to me twice in the past.
Oscar Jofre 1:32:51
I don’t know, I need a large enough host to put out everything and it just it’s coming at it. But it was great. You know, I’m glad we’re able to record this moment for different reasons, because we can reflect back and see what changes. And for me personally, it’s been such an enjoyable journey. It really is I’ve never strayed and I want it. The excitement that I have today is the same one I had over a decade of COVID still is still as high and I and I do see that we’re eventually going to get there because the momentum has started. I think that’s the most important thing. And you know, the other takeaway I got from you, Sara, is that I do agree 100% with you regarding the point that the market is going to change, we needed to change we needed to get it the regulator’s are going to come in or they’re going to or all of us are going to have to start being the watchdog for them in order. So we keep operating the way we are effectively so I can’t wait to have you all have you back again, to everyone else is live on our YouTube channel KoreConX so you can watch it again at KoreSummit.io. If you want to reach David or Sara, their contact details are right there at the KoreSummit website. You can find them both on LinkedIn. They’re going to be very swamp this week. But after this week, I think they both should be coming out soon. And we’re going to bring David back because there’s going to be another version of job jack. I won’t sneak it in today but which is excitement for all of us. So thank you, all of you, today. Looking forward to seeing you again soon. Take care have a good day.