This Week in Startups - E1136: SEC Commissioner Hester Peirce on evolving accreditation laws, SPACs, importance of capital markets in wealth creation, spotting fraud & more

Episode Date: November 10, 2020

FOLLOW Hester: https://twitter.com/HesterPeirce FOLLOW Jason: https://linktr.ee/calacanis

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mainstreet.us slash twist. Hey, everybody. Welcome to another episode of this week in startups, and this is an episode I've been looking forward to for a long time because today we're going to speak with one of the, I would say, more innovative or most innovative people at an organization called the SEC, the Securities and Exchange Commission, which is something we're very lucky to have here in America, the most vibrant democracy and the most vibrant capitalist combination of capitalism and democracy in the world, which is why we as a country are so innovative and we have such an amazing amount of trust in our system. having traveled the world and watched angel investors and venture capitalists invest in other regions,

other geographies, sometimes they lose their money, sometimes they get screwed. There's no referees. And we have a wonderful, wonderful group of people at the SEC who are incredibly principled and who try to referee and essentially create some guardrails around what we do in creating businesses and having shareholders. The mission of the SEC, as stated, I believe on their website, I'm not sure if this is change, is the mission of the SEC is to protect investors, maintain fair, orderly and efficient markets, and facilitate capital formation. Capital formation, it's a fancy way of saying, put it a bunch of money together to start a company and to build a

product or service. Efficient markets. We all want efficient markets. We don't want to slow people down. we need to have that speed and velocity. But with speed and velocity and with innovation comes complexity. And people in the United States are risk takers. If you were to look at the companies that have become global companies in the world, well, there's a handful of them that you can name off the top of your head. Amazon, Google, Facebook, Instagram, Uber, Airbnb. The reason why this great country, America,

of only 300 million people, not one of the biggest countries in the world by far, punches above its weight. The reason why we have companies that make it around the globe in record time is because we have figured out a way to create a fair and balanced and efficient system. The SEC is a critical part of that. Now, the SEC, sometimes you say the words SEC, people get a little nervous. Oh, my God. Is that like the FBI?

Did I do something wrong? They're actually a very approachable group of people. And I believe they're some of the most principled people in the world. And certainly in the business world because they take a job with a level of knowledge and expertise that I believe their compensation is dwarfed by what they could do in the private sector. Hester, Purs is with us today. She's very active on Twitter. she knows more about cryptocurrency than most people who are in these cryptocurrency companies that I know. So I'm really, really delighted that she took the time to come on this week in startups

and help us understand why the SEC exists and how they're dealing with the massive innovation around finance in the world while still staying true to that mission that we talked about, Hester. So thanks for coming on the program. Well, Jason, it's such a pleasure to be here. Thank you for having me. And you did a really nice job of describing the function of the SEC. I should start by saying that my views represent my own views and not necessarily those of the SEC or my fellow commissioners. And that's an important point to make because unlike some other federal agencies, the Securities and Exchange Commission is made up of five commissioners and then a staff of about four to five thousand. And were spread out across. the country. And the five commissioners, we're the ones who vote on new rules. We're the ones who vote on enforcement actions when people violate those rules. And then the staff does the day-to-day difficult work of both looking for when there have been violations, but also working to write the rules and also reviewing corporations' filings when they come in, reviewing investment companies,

which are mutual funds, filings. And so there's a lot of really detailed work that goes on at the SEC. And I think you made a really important point, which is that the SEC is part of the fabric of the regulatory framework, the rule of law that governs our capital markets in the United States. And that is what makes our capital markets, markets that people want to come to to raise money, to invest money, because there's a level of trust there that they know that if they come to these markets,

they're going to face a consistent, reasonable set of rules. And that set of rules will apply to everyone. There's no favoritism. And so that is a really important piece of having markets that work. Now, I approach my job with sort of a view that markets generally work quite well. And so we do play a referee role, but our rules should be quite limited and we have to be very careful in getting in between two people who want to come together and make a transaction that's mutually beneficial. So I tend to be on the side of wanting to be very careful about

adopting rules that will change the way people behave. And an amazing analogy for this is the sports world. When we watch a football game or the NBA finals, nobody wants the refs to decide the winner of the game. We want to see the people on the court decide the winner. But that doesn't mean we want people to be able to, in the case of basketball, travel or cheat or do something that doesn't work. Now, there's a lot of topics I want to talk to you about. Accreditation is one of them.

ICOs is another when something's a token or when it's a security. But as we wrap up the first section here, what I want to understand. stand is who are the people who choose to come and work at the SEC? You heard in my little introduction there. This is something I think about a lot. I've been served papers exactly once by the SEC when I was a little bit younger, a little bit terrifying. I'll tell the story without saying any of the names. But I take it deadly seriously because I think these are very smart people with legal degrees and accounting degrees and who've gone to incredible institutions. And there's this private sector here where they would absolutely be compensated much better

if they were in the private sector. So explain to me why you chose to go work at the SEC and why do you think people choose this vocation as opposed to maybe one optimized for generating more compensation. Well, I came to the SEC first as a member of the staff, and my job was to review, to write rules for mutual funds, actually. And so that was a learning experience for me. And I came because I really wanted to see how a regulator worked from the inside and specifically was interested in the securities markets. And so that's what drew me there. And I think for a lot of people, the draw for coming to the SEC is they do believe in the capital markets, just as I do. They have this firm belief that capital markets can improve people's lives.

And so they want to be there to work on setting that solid regulatory framework. And so I think that you mentioned principled and I think people do come to the job with these principles that they're trying to live out. And it's also just a great group of people to work with. So I think there's that element of it too. It's a really nice organization. and we have lots of people who have spent their whole careers or virtually their whole careers at the SEC. Which reminds me in a way, coming from a family with a lot of law enforcement in it, from the State Department to the FBI to the New York City Police Department,

that I hear that a lot from people who co-work in law enforcement. They feel like they're doing something virtuous and good for society, and it's intellectually stimulating. When we get back from this quick break, I want to talk about the accreditation rules, which is something that I deal with a lot. And it seems to me to be something that coming from a background in which I grew up poor to maybe the bottom of the middle class, the accreditation laws, which will explain when we get back, felt unfair to me. I happened to be one of the lucky people who was able to break through the accreditation laws

and get to a level where I could make private investments. and then once I was able to make those private investments, I was able to generate, let's just be candid here, a large amount of personal wealth and wealth for other investors. But looking at it now, I wonder deeply about the fairness of it all because I see a lot of people who couldn't make that jump. And when we get back from this break, I want to unpack the accreditation laws and how the SEC is deeply trying to change them when we get back on this week in startups. The colorful days of fall are here.

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Thank you, LinkedIn. Okay, welcome back everybody. Hester Purs is here. I highly recommend following her on the Twitter because she's active and she talks and she engages with people, which is something I would think is a little risk-taking. H-E-S-T-E-R-P-E-I-R-C-E. You are active on Twitter. and you engage with people. Do other people in the SEC do that? Or are you a little unique in that regard, Hester? Well, there are others who have Twitter accounts and do engage.

So I think it's been a really useful way for me to find out what people are thinking, sometimes very unvarnished opinions. I get lots of doses of humility when I look at Twitter and people say really negative things. And I think actually that's quite helpful. for someone who's a regulator because we do have a lot of power to make decisions one way or the other. I mean, we're going to talk about accredited investor here in a second. And it's really important for us to remember that we are making decisions that affect people's lives. And we have to be very careful about how we wield that power.

So to give people just some broad strokes here, the accreditation laws, as I've understood them, is you've needed traditionally an income exceeding $200,000 a year. $300,000 if you have a joint account, if you were partners, husband and wife, or wife, or husband or husband, or any combination. And you need to have done that for the last two years with an expectation that that would continue. This is about 5% of the country based on the data I've read. But what this does is it excludes somebody, perhaps somebody who works at the SEC who makes $150,000 a year and writes the rules about accreditation or enforcers them, or an NYU professor who teaches economics, or a money manager happens to make $125,000.

And so, explain to me when we look at that number, how does the arbitrary number of $200,000 a year or, and I also think it's a million dollars in liquid net worth, how would somebody who won the lottery, how would somebody whose parents gifted them a million dollars be more? more qualified to invest in the next Uber, Airbnb, or Google, then a person who makes $150,000 writing or doing enforcement at the SEC or teaching economics at NYU. Well, I think the theory behind these numbers, which candidly were, I don't know what the rationale was for picking those numbers.

So when people say, well, you should, you should raise them for inflation since they were adopted. Since the time they were adopted, my response is, well, fine, but you've got to tell me why they came up with those numbers in the first place, and nobody seems to know. The rationale, though, is that if you make a certain amount of money or you have a certain amount of wealth, then if something goes wrong, then you'll be able to bear the loss.

And then the other piece of that is we assume that people who have more money are more sophisticated, which as you're pointing, out is a flawed assumption. Though I don't know that I would say that necessarily writing rules or bringing enforcement actions is what qualifies someone to be an investor, but someone who maybe has an MBA or has studied investing on her own, spent her time thinking about these things and really done her homework. She might well be qualified to make really sophisticated decisions. And we're just arbitrarily essentially excluding her from doing that. And the issue that I think also confuses people is we also live in in the United States

where we believe in personal freedom. If you had this money, it should be yours to invest or make a mistake with it if you so choose. So we have this really confounding situation where, and I gave you the extreme edge cases, A trust fund kid who's a dope. And on the other side, you know, an NYU professor who just happens to be right under the amount. So I purposely put those in there for dramatic purposes. We would think in the overwhelming majority of cases, the ability to make $200,000 a year would correlate with some level of sophistication.

And I think that's directionally correct. It might in fact be almost perfectly correct, 80, 90% correct. But we also live in a country where people can. go to Las Vegas and take their entire net worth and put it on black or red on a roulette table and nobody stops them. So how do we as a society reconcile that we will allow any American to take the mortgage of their house, the deed of their house, their car, their entire net worth and put it on red or black, but we won't let them put $10,000 into the next LinkedIn if they happen to work at LinkedIn, or they happen to be a human resources manager who used LinkedIn in that

first year or two, knew somebody at the company because they got so much value from in the person and said, hey, we're raising our series A. Would you like to put $10,000? And they go, you know what, I make $125. I can't. It would be illegal for me to put the $10,000 there, but I can put it on the New York Knickerbockers. And do you have those type of conversations in the SEC? see? I do. I come at it from exactly that perspective. I think there is something un-American about telling people how they can and can't spend their money. I mean, people have worked really hard for their money and they've made a lot of sacrifices to earn their money. And so they have a bigger interest in saving it and preserving it for the next generation than a regulator does. I mean,

I think there's a presumption when it comes to financial things. And part of this is true, right? there are a lot of complicated financial products. And you should think carefully before you invest your money. You should be really asking lots of questions, and you should be figuring out what your own capacity is to make those kind of decisions. And if your capacity and your interests lie somewhere else, then hire someone else to manage your money, whether that's directly hiring a financial advisor

or using another financial professional, or just putting your money into mutual funds or exchange traded funds, you don't have to be an expert to be an investor. But if you want to be an active investor, I don't think we should be standing in the way of doing that. So I've always struggled from a philosophical standpoint with the idea that I'm arbitrarily telling certain people, you have to be rich to get rich.

And again, not to say, I should caution. there. It doesn't mean that when you invest in a private investment, because I should explain that the accredited investor rules are essentially the gateway, so you have to pass that threshold to invest in the private markets. You are allowed to invest in the public markets, which means those are the companies that, those are the offerings that are actually registered with the SEC. and that means that the SEC has done some level of review and so forth. So the private markets are ones where you may not get disclosure mandated by the SEC, and that means you've got to be more proactive on your own.

And I should say that not every investment in the private markets is going to generate a positive return. You could lose all your money. So I think people need to go into any investing proposition with their eyes wide open and knowing that there are risks, there might be returns, but they're also risks. And I think this is an incredibly astute point you're making because in my day job, as an angel investor in over 200 companies, and I teach a course called Angel University. And I've taught this course close to 20 times to over 2,000 people.

I only teach it to accredited investors right now. But I explain to them, seven out of 10 of the companies or eight out of the 10 of the companies we invest in, we expect to return zero. Now, if you were to look at public market companies, public market companies, if you were to invest in 10 public public market markets, 10 of the top, you know, 500 market cap companies today, the idea that 7 would go to zero is just statistically absurdly improbable. And certainly if you did it, now you might lose half your money, you can lose two thirds of money, none of this stuff is guaranteed. But this is a very stoop point as well. So you've decided to make some changes slowly and you've been pushed,

when I say you, I mean the SEC, has been pushed by, I believe, Congress or the Senate and the Obama administration with an act that was called the Jobs Act. The Jobs Act. And this is a, and now this goes back to Obama. This has been something that's been going on for years. And the SEC has been very thoughtful, but also they've been pretty slow about this. When we get back from the break, I want to know what's taking so long and evolving this rule and what the concerns of the SEC are and what was the impact of the recent announcement that just came out this year of how you plan to evolve. But when we get back on this week in startups with Hester Purse from the SEC.

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It seems to me that the SEC is incented to move slow because when bad things happen, you get blamed for it. Any bad investment that happens, people are going to look at you, just like in the NBA, if there's a call, everybody starts yelling at the refs. You're the refs, they're going to yell at you. So I assume that you are extremely cautious in how you deploy rules. Now, was it the Congress or the Senate that mandated five, six, seven, years ago now, that the accreditation laws change, and I believe this is, was in the wake of

the great financial crisis of 2008. They said, hey, we need more startups. We need more investment in startups. Let's do this Jobs Act to spur more investment. Now, that means they're telling you, hey, referees figure out how to not only allow more people to invest in startups, but protect their downside. This is a really difficult task. What have you've moved very slowly, you being the SEC. I would like to understand if I'm correct in that the SEC is incredibly risk-averse when making changes and they move slowly. And then what are the changes that you felt comfortable making so far to these accreditation expansion rules? Well, I think you capture the sentiment very well, which is that regulators in general, the SEC is no exception, tend to be considered.

in the sense that if we say no to something, it's really hard for people to tell what the loss to society is from us saying, no, you can't do X, Y, Z. If we say yes to X, Y, Z and something bad happens, people come to us and say, well, why didn't you stop me from doing something stupid with my money? And that isn't our role. As you said, we're a referee. We're not playing the game. There were a couple things that happened. So after the financial crisis, the big people, piece of legislation that was passed was the Dodd-Frank Act. And what that did was mostly increased the regulatory framework in response to financial stability concerns. One thing it did with respect to accreditation was it did, you used to be able to count your home toward your wealth, and it said you can't do that anymore. And that was born of the fact that during the financial, the run-up to the financial crisis, home values rose quite significantly. So, So I think that was the thinking there. Then you referred to the Jobs Act, which came several years after Dodd-Frank.

And that was a bipartisan piece of legislation, which covered a number of topics, including setting up a crowdfunding regime, did some things related to general solicitation, which is whether when you have a private investment that you're a private offering that you're trying to sell, can you go and talk to lots of people about it? or can you only talk to accredited investors? So it did a number of different things. And so as the SEC was putting Dodd-Frank rules into place, it was at the same time also working on putting the Jobs Act rules into place because often when Congress passes a law, they say to the SEC, you go do X, Y, Z, you go put a crowdfunding framework in place.

And so that's what has, been going on over the last decade or so at the SEC, lots of rulemaking. Now, we're actually at a point now where we are looking back to see how some of these things work. And one area where we've gotten really consistent feedback, and this is not something new, it's not something post-financial crisis, post-jobs act, but real concern about these accredited investor rules because of the fact that they are excluding people from the private markets. And a lot of the growth now, a lot of the economic growth, the company's biggest growth years are happening when they're in the private markets.

And so if you only allow a very small percentage of Americans to participate in those markets, you're keeping a lot of that growth potential out of the hands of average investors. So what can you do to its... A critically important point, yes, because it is, we have a, and I want to just pause on this, and I'm sorry to interrupt you on it, but I think that this is such an astute observation on your part because in America we are experiencing a group of young people who believe the system is rigged against them. And they believe that it's rigged against them and that capitalism is for the rich who are

already rich enabling them to be more rich, and that they have been given the short end of the stick and that they are not allowed to participate in wealth creation. And so what do they do? Well, they open a Robin Hood account and they start trading futures or they try to get in there or they start doing gambling, you know, and wagering and draft kings become super popular. That energy is there. And the energy, instead of going into private companies where I spend my living as an angel investor, they put it into draft kings, they put it into Robin Hood.

which I'm lucky to be an angel investor in, which is good that they get that education. But they put it into things also like cryptocurrency and ICOs, and they do that essentially illegally or on the slide with no knowledge of it. And so you saw that pent up energy. Young people would like to make a bet with their extra $1,000. But the best casino, the best inventory, we're Silicon Valley companies, and we didn't let them have access to that.

We let them do draft kings. We let them do Robin Hood and buy Netflix in year 20 when we really need to let them have access to that Netflix in years one through five if there's going to be wealth creation. So I really think it's such an important point you make there. Well, and I think it's great that a new generation of investors is getting interested in the markets. But I, and I love the passion and enthusiasm of young people and the desire to make sure that the system is working for everyone. And in order to do that, we need to get as many people involved in our capital markets as we can because I think people don't recognize this, but the capital markets are the best way to transform people's lives. You can take, I mean, you mentioned it yourself.

You know, you can take someone who comes from very limited financial means and you can transform. that person's life, that the community within which that person lives, the families, the next generation will be better situated also. And so I think it's really exciting and the potential is there. But we do have to make some tweaks. And I think the accredited investor piece is one tweak that we're still taking, as you mentioned, quite a long time to do. So we've heard a lot of feedback about it over the years. And we've been stuck on this notion that no, the only test for sophistication we're going to use is how wealthy you are, how high your income is. And finally, this year, we adopted a rule which is not a massive change. It did some things

on the institutional side to include more institutions in the definition of accredited investor. But it also opened the door just a crack to say there's a group of individuals who may not have a lot of money, but they're working in the financial industry, and we think they too should be accredited. And importantly, we said now that we're making this sort of philosophical shift, we're open to the idea that there might be other groups of people who should also be considered to be accredited investors. So you need to come in and tell us, explain to us why. So whether that's a group of schools coming in and saying we think our MBA programs, give people enough knowledge that they should come out and be accredited investors,

whether someone is going to develop some kind of a test and come into us and say that, whether a group of community colleges will say, hey, we've got these two courses and the curriculum that we're using really prepares people to think about private investing. So I'm hopeful, I mean, again, I have a much different philosophical outlook, but I think we're working and we're making progress, and I like to see that door opening. Yeah, and I think just to give people some specific examples here, it used to be that if I had an employee at my venture fund, I have small boutique venture funds, they were not accredited if I

wasn't paying them $200,000 a year. But they were working with me to close 75 investments in private companies a year. So with those type of people, people working at a financial firm that does private company investing, they now have the ability to be accredited. So if they wanted to have some compensation included in a fund, they could. And people who have, in good standing, a series 765 or A2 licenses are now accredited investors. But those licenses, how harder they to acquire? So if I was, you know, a 25-year-old who made, you know, $75,000 a year and I wanted to start doing

private investing, is that a six months, six weeks, $6,000 a process to get those? Yeah, you've got to be affiliated with a firm generally for the, for the qualifications. And that's why we really do need to, this is step one. We need to go the additional mile and have some kind of opportunity for someone who just says, hey, I'm really interested in investing. What courses do I need to take to get me to the level where, you know, I'll count as accredited? When we get back from this final break, I want to give you my proposal. I'm not going to hold you to it.

So I'm not looking for you to approve this while we're talking on my podcast. But I just want to fly it up the flagpole and see if anybody salutes when we get back on this weekend startups. If you're the founder of a startup, the IRS owes you some serious cash. I know it sounds crazy. The IRS owes me and my startup cash. Well, there's one thing that is stopping you from getting this cash. What do we all hate most? We hate paperwork.

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Okay, let's get back to this amazing episode. Welcome back to this week and stars. We're having a really honest and candid and insightful discussion about the fairness of being able to invest in private companies. And private companies stay, you know, private for a long time. I was the third or fourth investor in a taxi company called Uber, which you may have on your phone. And it worked out okay for me, but it was an 11-year journey before I was able, or maybe

we had some private, yeah, we did have some private opportunity to sell Tomasiyoshi-san of SoftBank in Year 9. But this was a long, a long period of time. And I certainly got lucky on that. But I wrote a book with a publisher called Harper Collins Business, the number one business publisher in the world. I've taught a four-hour course 20 times. And I did both of these things because I felt like I learned something about Angel investing

after the first 100 investments. and I'm at 250, doing 75 a year. And I have the largest syndicate in the world for accredited investors. It's called The Syndicate.com. It's got 5,500 members. And we do, you know, 40, 50 deals a year of 500K. I know what I'm doing. I am a good angel investor.

If I wanted to create a test, just like the test to get a firearm in this country. There's a 20-question test when you're a Californian, if you would like to acquire a handgun or a rifle that you have to take. That's to acquire a gun. If I made a test that was, you know, 50 questions and that required you to read a, you know, book that took five or ten hours and take a course that, you know, require four or five hours, would something in that realm be something the SEC would consider? That's part one.

And then part two, I in when I run my syndicate, when I share a deal with people and I have skin in the game, I'm putting a certain amount of money and then I have an allocation, I tell people, please put in the minimum amount, which I said at $2,000. Other people who share deals when they do an LLC and an SPV, they say, hey, minimum's 10K, minimums 20K. I purposely set it at the lowest possible amount, 2K, which is really the low as you can do, you know, to make transaction fees and blue sky fees and setting up the LLC worth it, right? The fees associated with setting up these things. Would it not be a potential path after the great one that you've already accomplished to say, hey, take a course like this, a five-hour course, a 10-hour course, pass a 25- or 50-question quiz, and then you'll be allowed to make 10 investments capped at $2,000 each in year one, and then after that you can do, you know, whatever it is, you know, an unlimited amount. But in other words, a reasonable amount of education in the 5 to 10 hour range,

and then a cap on you have to go slow, and you have to hit diversification. There's in private company investing, if you invest in one company, the chances of you hitting the outlier is next to impossible. That's like splitting the arrow, William Tell style or whatever. It's just not going to happen. But if you hit 20, 30, 40 investments, yes, the chances of you hitting an outlier that make up for all the failures does happen. Are you talking to anybody about that yet? Because that's really the secret reason I wanted to have you on the pod was to open up this next piece of the dialogue. I know you've worked really hard to get to hear, but I'm looking at the 95% of people who contact me and say, hey, teach me how to do this.

And I say, you know what, I cannot teach you how to do it. You can read the book. You can listen to my podcast. But I don't want to get myself in the crosshairs of the SEC where I start teaching non-accredited people how to do this. What do you think of this general concept? Yeah, I mean, I think you've raised a couple really interesting points. One, I think is important to emphasize, which is diversification. is a way to protect yourself.

And so people who even may have opportunities to invest need to think about the diversification of their whole portfolio, including where you work. So sometimes you'll get opportunities to invest in the company you work in, but you have to remember you don't want to have all your eggs, including your career and your investments necessarily in the same basket. So good things to think about. And you also want to think about how much money you can afford to lose.

and I'm not giving anyone investment advice. I'm not recommending any kind of investments to anyone, but you do want to think about how much you can afford to lose, and you always want to ask a lot of questions of whoever is asking you for that money. So I think your idea of a test is one that others have thought of, and I have had some initial inquiries about that. I do urge people to come in and talk to the SEC. The SEC has opened the door for people to come in with ideas like this.

the notion of having some sort of capped investment amount is not something entirely foreign. That is what we do in the crowdfunding space. There are limitations on the amount that people can put in. Again, as a person who comes to this with the idea that people should be able to invest their money as they choose, I get very uncomfortable when we're trying to micromanage people's finances. But I can see that, you know, I have to work with colleagues who have who are maybe more conservative than I am in that regard, and they would like to put some breaks in place.

So I can see that kind of thing being attractive to people, and that gives you a little chance to practice maybe investing small amounts. I would say even if the government doesn't tell you that that's how you should approach things, it's really good idea to be cautious and how you approach things. Don't jump in with, don't empty out your bank account and jump in with both, to invest in something unless you're really sure what you're doing, you really need to be careful. And there are a lot of people out there who are just waiting eagerly to steal your money.

So that brings me to the final concern that I would have about your proposal, which I think we will see something like a test develop at some point. But you have to be careful if you're going to be the consumer of one of those tests, then you've got to make sure that the person who's selling you that test, is not just trying to sell you on an investment opportunity, which means that she wants to run away with your money. So you've got to do your due diligence. A part of what I believe in is certainly freedom to invest as you want, but with that comes responsibility to ask a lot of questions. If your gut is telling you you don't trust this person, then you've got to run the other direction.

And so I think that's part of the course material that would need to be covered, which is be careful. Be aware of some of the red flags for what a scam could be. But with that said, I think I would welcome you, Jason, to come in to the SEC with the idea that you're thinking about. come in and talk to our division of corporation finance, which is the part of the SEC that is thinking about how maybe we could further expand this definition and share your ideas. And I welcome anyone who's listening who has other ideas to do the same thing. I think it's only collectively that we can really approach this problem. And I think it's right for you to point out that we need to think about this as a country.

It's not just us, the regulators, trying to figure out what the right. answer is here. We need to draw on the wisdom of everyone out there, people who have been in the investing world and who know the kinds of information that people need to know before they invest. And I think it's that I know your time is limited and I want to be respectful of it, but I think it is a really great segue for us. And maybe we'll start to wrap on this, which is knowing when you are getting scammed. And I have witnessed on the TikTok and Instagram a cohort of people who are selling get-rich quick scams. And what I told everybody when I did my angel.

University course was it's $100 to come to the course and we donate all the proceeds to charity. We happen to do a charity called Smash, which teaches people who are from disadvantaged communities how to do science, technology, engineering, and math to help them do better in college and get those degrees. And we donated $100,000. was this year. I don't need because I don't need to make money teaching you how to be an angel

investor if I was the third or fourth investor in Uber and Robin Hood and Thumbtack and other great companies. And so we're seeing this young group of people showing Ferraris and showing, I guess, selective trades they've made on heads up displays and then making videos of it and then really shaping a person into a scam, come to my $100 seminar, come to my $500 seminar, come to my $500 seminar, come to my $3,000 personal finance thing. How on earth does a company, an organization like the SEC with limited resources deal with this level of selective fraud? And from what I've seen of these folks, they're not disclosing their complete performance, which I have to do. I have LPs. I have LPs who are serious professionals. I have LPs who are the most legendary venture capital firms in

the world. I get an audit on my fund and the results are there. But what these people do, from what I gather, is they'll place five trades. They might place five trades that are counter to each other or counterbalance each other and delete the four videos where they lost money or did broke even and take the one on the other side of the trade, you know, where they shorted it and went along on the same stock or whatever and say, look, I made $10,000 today. When really they just broke even because they took two sides of the same trade. How does SEC enforcement work? When does something hit your radar? Is it when somebody in Florida who lost money complains to you? Or do you have people out there watching this nonsense and

saying, let's dig deeper. And are you properly resourced or improperly resourced to enforce? Because when I saw the ICO craze, that to me, as somebody who really takes the work seriously, I mean, I do not want people to lose money. And when I saw people investing money in white papers with spelling errors in them and shipping their Bitcoin to a wallet of somebody they've never heard of in another country, I thought, oh my Lord, this is going to be one of the greatest scams in the world. And we watched thousands of ICOs. And I think you've been able to, you tell me, how many of those have you, you've been able to, the team been able to take action on? And how do you even make that decision of who to take action on? Well, so there are a lot of, there are a lot of questions in there,

but there are a number of people kind of watching what's going on. And so one is certainly we're we're there and we've got an active set of enforce a lot of our attorneys are enforcement attorneys or they're working in our office of compliance inspections and exams and they're watching the markets as well. They're also state regulators who are very actively watching what's going on. And then we do have this wonderful whistleblower program where people can come in and tell us about something. And now there's a monetary reward if you alert us to something and we end up bringing a case. Yes, so TCR.gov Go to the SEC website and look for tips, complaints, and referrals.

It's not TCR.gov. I can't give you the off the top of my head the address, but if you just go to our main website and scroll down, and you can see where to file a tip. So you've got to use the form there, but go ahead and do that. And we get tons of really good cases from that. And so that's a piece of it. there's always going to be a lot of fraud out there. You have these heart-rending cases where people

will take, you know, they'll build up someone's confidence and trust in them and then they'll turn around and stab them in the back and take all their money. So you've got to be always alert when you're giving your money away to someone to invest. You've got to ask a lot of questions. Don't be embarrassed to ask questions, even if it's someone that you trust and like, still ask questions. If, If they tell you the opportunity is too good and it's going to go away tomorrow, then you can just, you don't invest before you are comfortable. And you've got to be just extremely alert for red flags where people are telling you it's this or nothing. You can always find another investment opportunity, but you can't always get your money back.

So never feel bad if you feel you have to say no to someone because you have qualms. those qualms you should really listen to. So part of it is really getting people. We've got a big investor education effort under our umbrella to try to get people to come ask us questions. If something doesn't look right to you, come tell us about it. If you just want some basic information about investing, we've got all kinds of resources on investor.gov, which is our investor education website.

So come. There's no shortage of resources. come ask us questions. With respect to the ICO, the ICO craze, there certainly was fraud, and we've brought quite a number of cases now. But there were also a lot of people who put their money in with eyes wide open. And so, again, you raised the point, Jason, of you got a little white paper here and you're going to invest all your money based on a little white paper. that's a good example of when you need to ask more questions, you need to think carefully. A lot of people, one of the benefits of the ICO, of the legitimate ICOs is they put their code out there for everyone to take a look at.

So if you know how to read code, then take a look at it and see, does it match what the white paper says or doesn't it? And if it doesn't, then you probably don't want to be part of that. So there are a lot of tools that you have. And I really encourage people, don't, you know, be empowered to make some wise decisions for yourself. When you do see something bad happening, please tell us. Don't tweet it at me, but go to TCR, go file a tip complaint or referral. So it gets into our system. And our staff look at all of those things.

If you do a search for SEC tips, complaints, and referrals, it's the number one link right there. It's really easy to do. And the number one piece of advice I've given to aspiring angel investors who are accredited is I tell them, look, there is a 90% mortality rate before the product is launched. You are not sophisticated as a new angel investor to assess an individual's ability to launch a product, but you are able to download an app or use a product and determine if you think that product provided value, and you have the ability to ask that person, can I talk to three customers? Can you give me the names of three customers?

And so if you're going to write a $25,000 check to somebody, using the product takes you one hour and calling three users and asking them candid questions takes 20 minutes each. This is in our industry called due diligence. Please, if you hear my voice, do not invest in your cousins. brothers, nephews, sorority, sisters, ex-boyfriends, idea for an app. Just wait until the app is live and say, I don't invest until the app is live. For the ICOs, you would have 99% never launched. You could have absolutely avoided this problem just by not, just by waiting to see which

ones actually emerged as products, correct? Yeah, I mean, there's never, there's never harm in waiting and thinking about things. Now, I do think that there's some really exciting stuff being done in the crypto space. But again, just use common sense, use judgment. And if you're going to buy a $25,000 car, you're going to do a fair amount of research. You might want to do the same type of due diligence when you're making real investments with your money because otherwise you may never see it again. And even so, even if you do your due diligence, you may lose your money.

So be prepared for that also. You should never go into it thinking this is going to guarantee me a return. If you want a guaranteed return, the securities markets are not really the place for you to be playing. When I was early in my career and had been my first little swath of cash, I talked to my person on Alliance Bernstein for an hour. and I said, tell me what's the safest, because I was scared to death to lose my nest eggs. And they said, well, bonds are pretty safe. Historically, I said, what are the safest bonds? They said, what are the revenue-backed ones?

I said, what's a revenue-backed bond? They said, you know, when you go over the Arizona Bridge and you give them seven bucks, they take the revenue first to pay the bond, and then the city gets it. I said, I'll take those. And I bought millions of dollars in revenue-backed bonds, and I slept like a baby at night. Pretty hard to lose your money. I mean, you do have municipalities that can. go out of business, like they can go bankrupt, but the history of it is so low that that to me felt

like one of the safest bets I could have made. But it really took, I would say that was two or three hours of difficult conversations with financial advisors. But I think, Jason, you make a good point, which is that there are risk return tradeoffs. You can, you know, choose to invest in things that are riskier in terms of the likelihood that you'll get a return, or you can choose to have a little bit more certainty about your return. And even with municipalities, as you mentioned, their differences and how these bonds work, how they're paid back, whether their general obligation bonds or have a specified revenue stream. But you can go and you can look at the disclosure.

There's this wonderful system, the Emma system, which has all of the disclosures. You might find it interesting even just to look up the disclosures for the town in which you live or the state related to state obligations in the state in which you live. So take advantage of the really great resources that are out there. We have a wonderful system for public companies. You can go on and you can look at filings on our Edgar system. And you can learn all about a company before you invest in it. So take advantage of that. Read your disclosures for your mutual funds.

We've tried to come up with summary disclosures now so that you don't have to wade through a really lengthy one. But take a look to understand what the fees are that you're incurred. fees are so important because when you're giving somebody 1% it doesn't sound like a lot unless your return is 4% and then it's 1 of 4 points which means it's 25%. That was another lesson I had to learn the hard way as a poor kid who had to figure out how to manage money as we end here. When you see this SPAC movement happening and so a lot of the companies I invest in privately are being pursued by SPACs, some of them seem to be run by

really, you know, people with great track records in their careers. And then some of these people have never heard of. And then the quality of the companies seems variable. Do you think we need more public companies in general? So there's more inventory of companies because we have half the number of publicly traded companies than we had, I think it was 15 years ago. Do you think it would be good for us to have some more publicly traded companies? and SPACs, and then again, you're not going to give financial advice, but obviously invest

what you can afford to lose. And then these would be more speculative, right? So the risk or reward would be they're coming out earlier, therefore there's more risk, therefore there's potentially more return. Are SPACs a net positive for the vibrant economic system of capitalism and democracy in the United States? Well, people are looking for different ways. for companies to go public and the special acquisition corporation is one iteration. So essentially, you give money to people who say, okay, we're going to go find a great public company and we'll put it into this essentially this special purpose acquisition company, which is an empty shell in a way and you can put any private company in and then it's a public

company. And so that has existed for quite some time, but for some reason of late has gotten quite a bit of attention and has become somewhat of a, there's somewhat of a trend of these happening now. In general, I do think that we want to make our public markets as attractive of a place as possible so that more companies want to go public earlier. Because there are a number of reasons why the number of public companies has fallen in the United States and you ask different people and they have different theories about that. But one of the things that we've been trying to work on at the SEC recently is to make it less burdensome to be a public company. And not in the way,

you know, we're not compromising investor protection, but we're saying where there are duplicative rules that we can streamline. Let's take care of that. Let's think about ways to make new public companies trade easier. Sometimes you go public with the idea that, oh, you're going to a trade just like one of the biggest tech companies trades, you know, lots of liquidity. It doesn't really work like that. So can we maybe create some special ways for these newly public companies to trade? Can we think about, you know, what the other causes are? For example, there's not as much research analyst coverage for new public companies. So there are a lot of different ways to attack this problem. And I think we're trying to think about those now.

But the idea that people are being innovative in the way that they take companies public is good. I would just, again, without giving investment advice, I would just give the general thing I've been trying to hammer home, which is do your research, you know, look at who's running the SPAC and how they're going to get paid. And those are things that you should think about before you invest. Incentives certainly matter. You know, my friend Chimoth has been, he kind of brought this SPAC thing back. Chimoth is putting, when you want to talk about skin in the game in the Nassim Taleb kind of way,

I mean, Shamath is putting tens of millions of dollars of his own money into each one of these. Therefore, you know he doesn't want to lose that. There's a massive amount of skin in the game. I'll end with this. Young people who start companies and they're raising capital privately. they are sometimes dopey kids, they're inexperienced, and they do something which I'll call presenting the best picture of their company. And when you present the best picture of your company,

and it might be taking the truth and just bending it, and then at the same time you sell securities, the SEC has a view on this. When you bend the truth and sell a security, how does the SEC feel about that? Well, we feel that we might bring a securities fraud action against you. And so I think that's really an important thing to underscore because a lot of people who start out,

they're enthusiastic about their companies. And that's great. Be enthusiastic about your companies, but tell people the truth. Be honest with people about what the limitations are, how you're going to use the money, and then follow through on what you said. Otherwise, you really are in a position

where you're violating the securities laws. You cannot lie to people in the process of raising money. That's a violation of the securities laws. And we do take it seriously. For the reason that Jason brought up at the very beginning of this podcast, which is that we can't have well-functioning capital markets, if there's not, if there aren't rules of the road that people adhere to, and when they don't adhere to them, that there's an enforcement mechanism to come after them for

not adhering to them. So on both sides, you know, people need to, people who are trying to raise money need to be honest about what they're doing. People who are, who are trying to invest money, need to ask lots of questions, never just assume that because it's someone you know or a name that you respect, that you should put money in without asking. You just always want to ask questions. And that's a good theme for life anyway. Just ask lots of questions. Yeah, I'm going to go with great life advice, Esther. And this was the story of the one time I had an interaction with the SEC was somebody came on this very podcast. They painted a very rosy picture of how things were going. And I was an investor in the company. And the company went out of business.

And somebody went to your whistleblower page and said, I invested money in this company, and they told me X, and it turned out why. And then I come home from work one day, and somebody hands me a big, thick envelope from the SEC, and I got to call Wilson Cincinnati and my attorneys and say, what is going on here? And I'll tell you, the SEC is filled with principled people who are making a fraction of what they would make in the private sector. and if they're looking into something, they're not doing it for some ego trip or sadistic reason or because they're bored.

They're doing it because they're principled individuals who want to protect and have a fair game. And I had to talk to my attorneys. I mean, scary for me. What's going on here? And they said, hey, Jason, here's how it works. You give them everything you have and then hopefully you hear nothing

because they don't tell you why they're asking. They don't tell you what the resolution is. This is a document request. And that's how you guys do it, right, isn't it? You just say, hey, give us everything you got, and we're going to look into this. And we take it deadly seriously. Yeah, well, and again, I'm glad that you underscored the point that we really have a job that we're trying to do, which is we're trying to keep the markets working.

properly. We're trying to protect investors. And so this is part of what we need to do. We ask a lot of questions as well. And so you're always better off if you're raising money, if you've documented what you've told to investors and you've told them the truth. And that's a very good way to operate, tell them the truth. And you can be honest about your limitations. And that makes for a better, healthier investing environment. And in fact, especially in early stage investing, if things were perfect, there would not be the opportunity. Investing in Disney in year 50 or Netflix in year 20 or 30 or Amazon in year 30,

things are going to be tight. They're going to have had a lot of time and resources to make things perfect. Investing early, of course there's going to be things that aren't perfect yet. Just own them. And I give this speech to every founder, when they're starting out, do not bend the truth, do not paint weird pictures, do not make charts into something they're not, own the reality. Own reality because then you get to build on reality. Whereas if you bend reality, now you're starting to build this house of cards.

And, you know, like we've talked about here, in order for us to win as a country, the SEC has to enforce these rules and they have to take it seriously. And I just want to say thank you for keeping capitalism in its lane and for having this structure. Because for the people who are the good actors in the world, when I watched this FACCA crazy ICO stuff going on, who was making me mental because I was just thinking some of these people are selling securities and they're calling them tokens, but they haven't built anything yet. And I understand what a token is. A token exists in the world.

We've seen them before. But it got a little weird, did it not? Well, it did. And there was a lot of activity going on in 2017, some of which was not legitimate and some of which was. And, you know, I think there are some difficult questions that we have to ask with respect to crypto. Because I think there, when people are trying to build a crypto network, it's very difficult to do that without running into our securities laws.

And I think there is room for us as a regulator to do a better job writing rules that apply to this particular type of a token distribution event. That's probably a topic for another. That'll be our second. That'll be another hour that will have you back on the program to talk about those ground rules. Two things break my heart, you know, that I see. And one is when people do lose their money because they trusted someone and they didn't ask questions, they were too embarrassed to ask questions. They trusted in the name of someone they knew or it's an infinity fraud. It's, you know, your friend told you that this was a great investment opportunity.

So that always breaks my heart because a lot of people get really badly hurt because they just went on the word of someone else without doing their own homework. And they felt pressured perhaps to invest and you should never feel that. The second thing that breaks my heart ties to something else, you said, Jason, which is you have someone who has a great idea, an entrepreneur who has a really great idea and is building something really interesting, but it's a messy process and it's difficult to do. And capital is always hard to come by for those early stage investors. And so they end up shading the truth or not, not adhering to the securities laws and they get in trouble and their idea falls to the ground because of the securities violation. And so it's better to be compliant with the securities laws

and understand that that's just part of what you have to do because it's part of what makes our markets work well. And so it can be difficult to do that, but it's so important to be truthful people. Yeah, I mean, if you want to innovate, innovate on the product. Don't try to innovate on the rules of the game because that's cheating. And cheaters get caught. You may not get caught immediately, but we've seen it, whether it was Bernie Madoff or Elizabeth Holmes with Aranos or this fire festival dip shit, you know, like you're going to get caught. Somebody's going to figure it out. Somebody's going to drop a dime. And the rules here in America are so pro the investor and the entrepreneur already. We already have a wonderful system played by the rules,

everybody. Hester, you've been a great guest. I really do appreciate you coming on and spending this time with us. I know you got a lot on your plate. And I definitely would love to have you come back maybe in six months or a year. And like, let's get into the whole crypto thing because I know you guys got a lot of work to do there. It's not an easy one. Thanks, Jason, for having me. This was fun. All right.

It was a lot of fun. We'll talk soon. Cheers now.