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On this episode of The Modern CFO, Woodie Neiss of GUARDD shares how he architected the roadmap of Regulation Crowdfunding (Reg CF), what is so powerful about crowdfunding, and why one-size regulation does not fit all.
“I had started a company with my brother-in-law called Flavor RX. We flavored medicine for children so they’re more compliant. The coolest thing about our company was a mother got her kid to take her medicine by going into the pharmacy and asking pharmacists to flavor it. The kid took the medicine and she's like, ‘Oh my God, you just saved me countless hours of struggling.’ I would get a phone call the next day: ‘How do I invest in your business?’ I thought, well, you can't because we can only raise money from accredited investors. When my lawyers told me this, I knew this was a complete missed opportunity. I have hundreds of mothers calling me saying, ‘How can I become an investor in your business?’ They can be a marketing agent for my company. Why can't I take money from them? These laws were written 80 years ago to protect retail investors, and you have to live by them. I thought was stupid.”
“We wrote this eight bullet-point framework for investment crowdfunding. We went to the SEC, they said it was cute. Then they said, You should head over to that building with the white dome on it.’ I kid you not. Naively enough, we just walked over there, because we had a few days in Washington. We started knocking on the doors of both Republicans and Democrats. People were shocked that entrepreneurs were there, so they listened.”
“The industry launched in May 2016. Just this past month it surpassed $1 billion in funding. When we put this together, I was thinking, ‘Wouldn't it be great to use a website to be able to allow people that have a customer list, or their own friends and family, to invest in their business the same way that a campaign on Kickstarter or Indiegogo can?’ To see people using Twitter, Instagram, YouTube Live as the outreach, the public solicitation, I think is awesome. It really connects the people to the entrepreneur in a way that a website just doesn't do by itself. I think the advances in technology are really benefiting the industry because it ties you closer to the people that are raising capital. I think that's all good, too, because I think it brings this level of transparency that you otherwise don't have in the private capital markets.”
“Any accredited investor can risk everything that they have in one company. Do they? No. They're smart enough to diversify their assets. Now, when we built this framework we were concerned that people might be risking more than they can afford to lose. This is the only segment in the private capital markets where investors are capped on how much exposure they can have. We built into the framework, based on net income, or annual salary I should say, as an individual investor, how much you make or how much you have saved thresholds as to how much you can invest. That doesn't exist anywhere else. People will tell us that’s pedantic, but quite frankly that was an investor protection mechanism we put in there. So, the investors that are saying, ‘I think it's too risky for certain investors to put in there,’ my response to that is well, there are caps and limits on how much people can risk.”
“The deals are the same deals that are being seen in the Bay Area and New York City, with the same investors. What we've seen is the evolution of this industry, where instead of those people saying, ‘You know what? You shouldn't go to crowdfunding.’ They're saying, ‘Well, we should use crowdfunding and we should syndicate our deals to the crowd because the crowd brings something that we don't bring.’ We can bring deep pockets, but they can bring marketing power because they've got a vested interest in the outcome of the business. They can bring connections. They can bring their own brainpower to how we can help scale this business. VCs are great for that Rolodex of people that they might be able to connect you to, but the reality is you can get so much more out of a crowd.”
“We were in the right place at the right time. In 2008, we had a recession. Washington was looking for solutions. We went and showed up in 2010 with this [pitch]. People were looking for an answer to the question, ‘How do we create jobs in local communities?’ The whole point of investment-based crowdfunding is you are, essentially, helping people that have great ideas all over the country create businesses that hire people. The government can't do that on a macro level and so they need to look at innovative solutions like this that can actually solve what they need to solve at the most basic zip code level. That's what we delivered to them. That's why we were able to build support for this.”
“In the public markets, we have a structure under which you raise capital, and you have to do filings with the SEC. They have to be reviewed and approved, and then your offering can go public. But you also [need to] use a broker-dealer. There's a tremendous amount of time, effort, and money that goes into these IPOs that take place. In the private capital markets, that structure doesn't exist because when your company goes out and raises money, they do it behind closed doors. What we tried to do was create a structure and a framework. I believe we did that. With the private capital markets they say, ‘If you want to raise money from retail investors, you actually have to provide them a certain level of disclosure that they're typically used to in a public setting. But let's scope it down.’ And I think that's one of the big things that I, as an entrepreneur, and my experience over time, has taught me--that one size regulation doesn't fit all.”
“People take advantage of people where there's efficiency in the market. The fact that you don't have a holding period on something means that someone can come in there, buy a bunch of it, and then push hype out there, and then push up the price of it. They sell. And then everyone's left holding these points that are worthless. I think if you had the holding period attached to it, it would keep the people out that are like, ‘Well, I have to wait until I can make my money off of this.’ They're looking for quick get-rich schemes. A holding period on anything pushes the frauds away. Not that it doesn't happen. There will be fraud, and there is fraud everywhere. I'm just saying that when you can put triggers like that in there that keep people out of the marketplace, I don't think it's such a bad thing. So we put that in there for regulation crowdfunding.”
“The other thing I tell these issuers is, if you have a desire to raise a future round, if you have a desire to go public, there is no better way to value your company than a supply and demand decision. To let the market decide what an investor is willing to pay for that security. Because then you don't have an argument. VCs will sit behind a closed door. Investment banks will sit behind a closed door and price your IPO based on what they think the market will pay for it. But what these alternative trading systems provide now is an actual proof point that says: these are what our shares traded for in the past. I think that's a baseline for where we are. I think we can go up from there, because we've accomplished X, Y, and Z.”
“This is where this market's going to go, mark my words. VCs make money in private equity by returning money to their investors. There's no money in without money out. That's our mantra. The way in which we have these alternative trading systems, these secondary markets now have evolved to the point where VCs can say, you know what, let's take 10% of this hot company that's doing really well. We'll still have the 90% of it on our cap table. But we'll get rid of 10% that people pay for that. We'll get the money for that. We'll return that to our investors. Let's go out for our next fund. They're going to be thrilled at how we're doing because they can see actual—it's not unrealized ROI at that point. There's a way in which they can say, this is what we got for this. So we know it's proof of what it's valued at. And it allows them to actually raise more money. So they're going to be using these secondary markets to liquidate some of their investments so that they can get more investments down the road.”
The Modern CFO podcast is designed to illuminate the hard work that is behind the scenes in financing next-generation ideas and technologies, as well as acknowledging the developing role of senior financial professionals, and the tools they rely upon.