Ep 140: SEC Chairman Paul Atkins on Making IPOs Great Again, Crypto's Comeback & New Rules for Retail Investors

0:00President Trump said he wants to make America the crypto capital of the world. The SEC started by looking at crypto as maybe the ostrich with the head in the sand. We reversed course on that. We're now embracing it. We have now an opportunity to make our financial system on-chain. A lot of people get angry at me. They say, Joe, you're building these companies. I'm not allowed to invest in them. We are tackling that. I think that it can and should be done. We have about half the number of public companies as we had 30 years ago. The goal is to make being a public company cool again. There's a lot of reasons it's annoying to be public.

0:34We don't want a random shareholder lawsuit. What we're doing is... So we're sending this clip to Governor Abbott and to Elon, and we're going to fix it for everyone.

0:47Paul Atkins is the chairman of the SEC. He has a very different philosophy than his predecessor, Gary Gensler. Gensler took an adversarial approach that a lot of people thought was very unfair in the tech and crypto world. Wouldn't define the rules ahead of time. Paul's 180 degrees different. He wants America to be the crypto capital of the world. Paul Atkins wants to make IPOs great again. And you know, also really important to me, Paul wants to let the middle class access the innovation world, let people actually invest in what we're doing in this AI wave, I think which is really important for our country.

1:15Paul's a really creative thinker, really bold guy. I think you'll enjoy hearing from him. Welcome to American Optimist. Really excited to have Paul Atkins here with us today. Chairman Atkins, you're a commissioner at the SEC. The president's made you the chairman. And you know, I guess in the 90s, you worked with chairman in the past. You were on the commission before, 2002, 2008, and now you're in charge of the SEC. And you're here at UATX in Texas. Why are you in Texas today? Well, thanks, Jim. It's great to be here with you today after we've known each other for a while here. So we're here in Austin.

1:46We had a roundtable, so decided to get out of Washington and go to the heartland and talk about issues around trading rules in the stock markets, basically the equity markets. We had the stock exchange here in Texas getting started. Exactly. That's right. And so, we were here. It was really good to get input from all sorts of market participants, as we call them, meaning brokerage houses, investment folks, and all of that who trade actively in the markets. And so, they had a lot of good things to say about some issues that we really want to tackle here over the next couple of years. Awesome. Did you get to meet any students or professors here at the University of Austin?

2:24I did. A few. Yeah, so the students are out of class now. They already had their exams, but did meet some faculty members and the president of the university. So that's great to see what they've been able to accomplish in a relatively short amount of time. Awesome. Well, we're trying to breed warriors here that share the values of pro-America and making these things functional. Because we're here in Texas, I have to ask you about our new business courts, by the way, as well. This is something that I'm excited about. What do you think about companies coming to Texas instead of Delaware? Is that a thing that should be happening?

2:57Well, I think it's great to have trading of public stocks all around the country. We're a big country after all and doesn't necessarily just have to be in one place. It doesn't have to be in one state. Let's let the states compete with each other to get companies in. And I don't think it's a race to the bottom because, after all, you have investors and others on the outside who are very discerning. And they decide, after all, what makes for a good company and what policies matter. Awesome. Yeah. Well, as an investor and as someone who builds these companies, as they get to be big companies, I don't want them to be able to be ridiculously harassed by random small shareholders.

3:45I want it to be fair. So, I love that we're shifting and trying new rules for that right now. You know, this is your third cent at the SEC, we said. You're now the chairman. Looking back, how have U.S. markets evolved? What were the big challenges 30 years ago versus what we're seeing today? It's amazing. Things have changed a lot. 30 years ago, so in 1990, say the late days, 1990, still 50 % of the capitalization on the U.S. stock exchanges were held by individuals directly. That means people like you and I or whoever would go out and buy directly through a broker a share of stock of whatever, IBM, Exxon, or whatever it is.

4:25Now that's really changed. So now it's completely reversed. And so that was about half and half back then. So now it's the institutions, so meaning insurance companies, pension funds, mutual funds, ETFs, things like that. It's like Vanguard and State Street and these big players. Right. Who are – they're basically advisors for these funds. So anyway, so now that way of holding shares has become the predominant way that individuals don't hold it directly, but they hold it through these intermediaries. So that's been very interesting, has created a lot of interesting developments in the marketplace.

5:11It's difficult for companies to know exactly who owns their shares because a lot of times they're held through brokers and street name. And then you also have the big funds and the institutions. Yeah, they'll say your shareholding is 8.7 % Vanguard, but really that might mean any number of people who own that underlying thing or that sort of thing. How does that change your job? Well, so it just means that the relationship between companies and their shareholders is different. And it makes the role of these intermediaries even more important as far as disclosure and the rules that govern how they interact with their customers, their investors, and the duties that they have.

5:56And so one of the main ones is fiduciary duty, which means that it's the highest level of care that a service provider has to his customer. And he has a very high duty under law not to put his own interests ahead of his customer's interests. And it's interesting, too, because in the old days, I guess you'd get to vote your shares how you wanted, but now there's someone else voting your shares for you, and they're listening to these very large institutions telling them how to vote. So, I think there's some interesting, complicated things going on there. Yeah, so things have evolved that way where the big institutions want to focus on – well, A, they want to keep their fees low because that's a very competitive issue.

6:44and investors properly are looking to find a low-fee structure to invest their money because the compounding of dividends and interest, depending on what you're invested in, over time really adds up. So that's where we need to keep focused from a regulatory perspective on allowing people to focus on fees and keep the fees low and not overload the service providers and intermediaries in the marketplace with extraneous burdens that wind up increasing fees and ultimately hurt investors. That's the kind of stuff that I call the leftist activist nonsense. So maybe you don't use those words. But many of my tech friends, speaking of that, were really turned off.

7:40Even some of them turned off against the left overall because of the adversarial approach of Gary Gensler at the SEC and the previous administration. A lot of activist stuff, a lot of ways of not defining the rules when he's trying to crack down on certain things. Because it seemed to us like he didn't like some of those people in crypto or whatnot. But can you explain how your philosophy differs, especially on issues related to innovation? Well, so the SEC traditionally, it was started back in 1934 by Congress after the big market crash of 1929. FDR brought in RFK's grandfather to start it off, we said, right?

8:1491 years ago. He did. So throughout the years, SEC was never, I'd say, at the vanguard of pushing innovation and that sort of thing on the marketplace. But at the same time, was never kind of blocking it, just standing athwart progress, blocking the street. So one example is when I was a young lawyer and just joined the SEC in the early 90s. One day, the chairman, Richard Breeden, came into my office and had a big stack of files and said, can you find out why this hasn't been approved yet? And that was the first ETF exchange-traded fund. And that was called SPIDERS. That's the S &P 500 index. And the attitude was to make sure we approve it.

8:59Well, the attitude was like, why is it still here in the building? Because apparently it had been there for like three years or something like that, not being approved or yay or nay either way. And so anyway, the staff of the commission basically said – when asked about it, they said, well, we don't know if the market will accept it. And Richard said to them very, I think, in a good way, he said, well, how do you expect we're going to find out if they'll accept it? So you have to approve it to issue it. So the staff – so Richard gave them some like 10 days. If it's not out in 10 days, I'll do it myself or something like that.

9:36So the staff wound up approving it, of course, and went out. And it did have a rocky start because the market wasn't quite sure that the whistles and bells of the program would work. But then it really caught on, and obviously, here we are now, 35 years later, and see how things have really advanced. ETFs are the backbone of the marketplace to a large extent. And then now crypto. And so to your question there, unfortunately, the SEC started by looking at crypto as maybe the ostrich with the head in the sand, as was their attitude. Like, maybe this stuff will go away by the time we lift our head out of the sand.

10:17That obviously didn't happen. And then came the very basically regulation through enforcement where the decision was made apparently that we don't like this new technology. We think that you're going to encourage money laundering or who knows what, illicit finance, that sort of thing. and that we're going to ask the industry to comply with the rules and regulations from an antiquated era that really weren't opposite to the new technology. It seemed to a lot of us that they were purposely trying to kill things. They're purposely trying to shut things down. Maybe you can't – I don't know if it's an appropriate question, but it seemed like they're trying to say you have to do this in order for them to go after it and attack it.

11:05That's what it felt like. Yeah, well, so I mean you can draw your own conclusions. I really can't really say one way or another, but let's just say that we're finding right now we've changed from regulation by enforcement ethos to an embracement of technology and innovation. And so the trouble with the past practices of the commission is that it drove trading of crypto assets offshore. And so people are going to do it. The internet is worldwide. You can't stop people from doing it. You can't forbid it. And so Sam Bankman-Fried and FTX is one example where they went offshore to the Bahamas. And so, one example of how good regulation can help in that respect is that FTX bought a company called LedgerX, which is a swaps trading platform for crypto assets.

12:05And so, swaps are a type of futures product. And so, this was regulated by the Commodity Futures Trading Commission. It was onshore here in the United States and a subsidiary of FTX. So when FTX imploded, LedgerX didn't really miss a beat and they had segregated accounts. So every customer's assets were accounted for and nothing, as far as I know, was lost. And so then LedgerX has survived and now was sold out of the bankruptcy estate and so lives on. So some of these well-regulated functional areas of the economy, it's actually better for all the people who actually are participants. Exactly.

12:49So if you have clear rules that are tailored for the particular instrument, then that sort of innovation can survive and thrive or fail, and it'll be up to the marketplace, not for the government to choose winners or losers, and not for the government to substitute its own judgment as a merit regulator for investors. This is a really great point because I think there's two different spectrums being argued on here. One spectrum is how tight or loose should the rules be, like what should the rules be to regulate it? And some of us believe they chose rules that were so tight that it actually made it impossible.

13:24But the second argument is how much should we tell you what the rules are versus how much should we tell you afterwards what the rules are, which it seems like you're a fan of being really clear up front as much as possible. Transparency is the best policy. And so I think – and I think that has served the United States really well. Well, this is why our markets are the largest and the most vibrant and deep and liquid and blah, blah, blah in the world. And now the United States, the capitalization of our equity markets is fully half of the entire world's capitalization. That's up from 30 percent from 30 years ago.

14:03So if you have good rules that are fit for purpose and you kind of tend your garden, don't let weeds grow up. And that means the riffraff that will come along and lie, cheat, and steal. So you need to have a vigorous policeman on the beat, of course, because that's human nature to do otherwise. But also to make sure that you are not overloading the system with rules that are antiquated. You're just not providing what they're meant to provide. So you whittle it down to what is the proper prescription for what you're trying to avoid. I love that. I mean, that's very moderate in a lot of ways because there's people who are more authoritarian and want to crack down.

14:54There's people who are more libertarian and don't want as many rules or any rules at all. And then – so, you're in a moderate stance, but you're very pro-transparency in allowing innovation. So, that's a great combination. So, if we have – and there are lots of rules that need to be revised, gotten rid of or whatnot. So, I compare it to a boat. The real goal is to make sure that if you have a boat, that at least once a year, you go and scrape the barnacles off the hull so it can actually move through the water quickly and not get bogged down by things that impede its progress. So that's what we want to try to do with respect to regulations.

15:33We've allowed over the years things to build up over time and without going through and pruning and weeding the garden for things that are no longer needed. I love it. I love it. Well, that sounds very reasonable. I want to get to some of the more aggressive stuff as well. You have a lot of really good reasonable stuff we're going to go through, which I really appreciate. You're being a very responsible leader. I think there's some more aggressive stuff that I'm excited about. And I think one of them is interesting is the company bylaws and what you can agree to ahead of time in a company. So through the corporate governance system is where a lot of this comes up.

16:09So what my goal is here, I mentioned that today we have about half the number of public companies as we had 30 years ago. And so what we're trying – what the goal is is to make it being a public company cool again. And so – because right now, you have a big, robust private equity, private capital market. And so that makes it comfortable for companies to graduate from VCs to private equity firms. We don't want a random shareholder lawsuit. I mean, every time SpaceX launches a rocket, it doesn't go well. You don't want it to be sued. It's crazy. Right. So there are three things, I think, that have discouraged people from going public.

16:53One is the cost of regulation. Like I said, scrape the barnacles off the hull of the boat. Second is what you're getting to, and maybe in some people's minds, the most important, and that is the litigation environment in this country. And so for the longest time, the Securities and Exchange Commission staff, it was never a formal policy of the commission adopted by the commissioners themselves. But the staff has been turning away would-be public companies if they had in their bylaws a provision that basically required mandatory arbitration, so no class action lawsuit or anything else for that as between fiduciary issues between shareholders and the company.

17:43And then secondly, the whole issue about fee shifting or like you mentioned, loser pays where if you sue the company and you lose and you pay, vice versa if the company goes after a shareholder, I guess. But it's usually shareholder to the company. Yeah, someone's harassing someone is wrong. So theoretically, if SpaceX goes public, they could now put this in their bylaws before going public if their shareholders approve it. So, what we're doing is – so, I made it explicit that the commission will not turn away and the staff will not turn away those sorts of would-be IPOs if they have a bylaw with either of those two provisions.

18:25And significantly, the state of Delaware over the last 10 years has made both of those out of bounds, illegal for public companies who are registered and franchised in the state of Delaware. That's why you got to leave Delaware if you don't want to be harassed by little petty lawsuits from my point of view. Well, so in Texas, it's not quite clear whether those are allowed. So you got to clarify it here more clearly. So I think there's some work to be done in some of the other states if they want to do that. Hey, guys, we're sending this clip to Governor Abbott and to Elon, and we're going to fix it for everyone.

19:03So that's up to the state of Texas to do that. Maybe a speaker here, too, then, and the lieutenant governor, huh? They have to do it, too. Is the legislature that has to do it? Well, I assume. I'm not a Texas lawyer, so I can't really tell you. Okay. Well, that'd be my guess. But probably. I think they'd be a fan of it. The legislature would have to pass it. I'll get the clip. We'll fix it for you. So anyway, I think that that's very important. But again, going back to what we talked about earlier, it's very important to allow states to experiment. That's why we have 50 states, and that's great.

19:41We're not one big country, and so let's have the states compete and find what's best. I love it. It's up to shareholders. You don't have to invest in things that you don't agree with the frameworks. So the whole theme of this right now for this area is also reviving IPOs, which is very exciting for us. You said there's a lot of depth, obviously, in private markets. There's a lot of reasons it's annoying to be public. I think it's dropped from, what, 7 ,800 in 2007 to about 4 ,700 or so public companies today? Yeah, about 40 % dropped. So is the goal to get that back up? We want more companies public?

20:13Does the public participate in more things is better? Is that an idea? I think so. So to have a good, robust public market is great for average people to be able to invest. And if we can help make disclosure issues fit for purpose so that investors can actually sit down and read an annual report and understand what's going on with a company. Like when I was young, my father used to go through the annual reports and proxy statements and things like that, watched him do that. and explain to me what was going on. So people just don't do that anymore, and especially now that these disclosures are so voluminous.

20:58And one example I like to give is the first section of the annual report, 10K, is called Item 1A Risk Factor. So I voted on that when I was a commissioner back in 2002 or 2003, whenever that was, And the commission adopted it, and the idea was that the first thing that investors should see is what keeps management up at night. And we thought it would be a page or two of bullet points to convey that to the shareholders. So, 20 years later now, 20-some years later, the risk factor section is the – on average, according to surveys, the largest number of pages of any section of 10K. You have to just close every possible risk when you get in trouble.

21:47One of my favorites is, well, if the government increases corporate taxes, then your dividend may go down. If a meteorite from outer space smashes the window, we're going to have to have expensive repair. There are a lot. So, yes. And so it's gotten out of hand. And so here about six or eight years ago, the commission voted to say that if your risk factor section is more than 15 pages, you have to have an executive summary. So now you have an executive summary. Then you have the risk factors. And then you have the rest of the 10K into which all these risk factors are intertwined. And so you're repeating things at least three times in the whole disclosure document.

22:29It's like a comedy of errors. Right. And so who's going to read this stuff and figure out what it means? And so that's why we have to – I mean, this does no one any good. I hear from individual investors and from professional investors, you know, large funds and whatnot. Please, please, please get back to brass tacks. Get back to material disclosures because we cannot separate the wheat from the chaff. This is like something I've seen both at the UN and at the Pentagon is they'll have a list of like 15 or 70 things that they're doing as opposed to five or six. And if you have too many things, it's nothing, right?

23:02You've got to have a smaller number that actually matter that you're talking about. So, I mean, people need – the SEC in the last few years started using in a bad way, I think, the term decision useful. But I mean, people definitely need to have material information that is geared to what they need to know. And that will make it helpful for them to make a decision. And so anyway, so that's the goal that I have. And so what else can we do to make IPOs more appealing? Is there anything else on your list? One final thing. So, first is to right-size the amount of disclosure so we don't turn people off from investing.

23:47And if even professional investors are complaining about the amount and complexity of it, that's just not doing anyone any good. It costs a lot. It turns people off. And it obfuscates what's important. Secondly, litigation. And then third, as I'd submit, is the corporate governance area. So this is not what people would normally kind of think about with public companies. But the one vital aspect that shareholders have to do is elect a board of directors to represent them and to help guide the company. And management basically through the CEO reports to the board. And so that's a really important function.

24:31And every state that I know of requires an annual general shareholders meeting for the election of directors and retention of auditors and things like that. And so, unfortunately, over the years, and basically the SEC was the one that kind of instigated this back in 1942. And some would say it's, you know, contrary to some state laws and at least the ethos of the state governance laws that, you know, has allowed for, I call it the weaponization of shareholder proposals. So, shareholder proposal is something that the shareholder, a shareholder who owns a requisite amount or number of shares can put to all the rest of the shareholders to vote on.

25:24And so over the years, it's gotten to what are called by lawyers precatory proposals. And precatory means advisory. So it doesn't order the board to do something, but it says, well, you know, would you please consider producing a report on something? You know, why did you paint your building yellow instead of green or something like that? And it's not quite so frivolous. But anyway, but things like that that are advisory. So unfortunately, these have been weaponized to push particular views or issues by certain – I call them politicized shareholder activists. So they – yes, they own shares, but a very – usually a very minimal number of things.

26:10Small amount of people that push their own agenda. There's nothing to do with the corporation usually. And they found out – so if this goes back to the one that really weaponized this to begin with, it was a community organizer named Saul Alinsky. back in the 1960s and 70s. And so he wrote a book in 1970, I believe, called Rules for Radicals. So the penultimate chapter is called Project Proxy. And so what he realized is that for the cost of a stamp and writing on a piece of paper a proposal that you want submitted to the shareholders and if he mails it into the company, that he found oftentimes that he could get the company to basically eat out his hands and come to him and say, oh, what can we do to get you to withdraw that proposal rather than our putting it before the shareholders?

27:05So basically that has led over the years to weaponization of this where it's become a big, almost a little sub-industry of particular, even individual shareholders who submit maybe dozens of proposals to various companies. What kind of proposals are the activists doing? Is there anything that comes to mind? Well, over the years, it's been things like, I mean, even some things that actually deal with governance. So like should shareholders have majority voting for directors versus just approving slate from the nominating committee? And some of that's not a big deal, right? Well, it's very important and everything has a consequence to it, intended or unintended.