MI Rewind: Future of the Financial Markets? w/ Howard Marks

27:11There were five times more shares, but you didn't know. There was no regulation. So the SEC came in and regulated and say, look, if you want to raise money from the public, you have to register with us, which means we will check everything. And we know we're going to make sure that everything is done right. Anyway, 80 years later, this new law comes out that says, finally, the Jobs Act, finally, equity crowdfunding, the idea that a company can go raise money directly from the public. I read it in April 2012 when it was signed. And I started reading it page to page, cover to cover again and again, until I understood what was this thing all about.

27:52It was innovative. It was groundbreaking. I had to educate my attorneys about it. They didn't understand the nuances because they would say, yeah, I can help you with that. And they would say things. I said, no, page 23, chapter number five, look at this. Oh, yeah, you're right. Anyway, it took four years for that law to go into action, to actually become real. During that time, I was investing in these startups who mostly were failing. I think 90 % of my investments failed pretty much in the first few months. And the ones that survived were very resilient and great entrepreneurs, and I really admired them.

28:36And that's fine. That was the deal. And I wondered what happens if I had crowdfunding and I could have all of them succeed. That would not be such a bad idea after all. So I decided, you know what? I'm going to pivot the company into an equity crowdfunding business from an accelerator business. Now, why would I do that? Well, I thought, hold on a second. If I can help 20 companies a year and invest in them, with equity crowdfunding, I could help 2 ,000 companies a year, maybe more. Much bigger impact. Huge impact. Well, I don't think I necessarily knew exactly how the market would evolve and how it starts.

29:17So I started making some assumptions. So I looked at a model that I understood was called Kickstarter, which was a crowdfunding model where people could go and back a project and give money to entrepreneurs and get a t-shirt or get the product. But that was it. I don't know if you remember Oculus Rift. That was a VR virtual reality headset. It started on Kickstarter. And the first time they launched their campaign, in a matter of weeks, everybody went crazy for this idea. And within weeks, they raised$3.5 million from 7 ,000 backers who wanted this Oculus Rift so badly. I mean, they would gift money with the idea that the money that the company got could make the Oculus Rift and then deliver to them.

30:10Now, there was risk involved because maybe the company would fail and they would not get their headset. They didn't care. And then they went on the community on the bulletin boards and everybody was writing about Oculus Rift. Now, unbeknown to these 7 ,000 backers, Mark Andreessen, who is a huge venture capitalist, went in and invested$80 million in the company. And he sits on the board of Facebook. So he invested. It was pretty quiet. And then what happened, the company got sold within a year to Facebook for$2 billion. Now, those 7 ,000 people did not receive their headsets. but they had put their money hoping to get a headset and didn't get any of the$2 billion.

30:57And I saw this and I said, this is so unfair. They took the risk. They're the ones who made Oculus Rift something. Why wouldn't they get something? Well, I didn't understand that the regulation, the laws were designed that they couldn't invest and the company couldn't offer the shares. That was illegal. So now we understand that, right? But okay. But now we have something, equity crowdfunding. We can solve it. So now the next Oculus Rift can have 7 ,000 investors, sell for$2 billion, and everybody makes 100 times their money. What's wrong with that picture? That feels part of our heritage, the American dream.

31:39Let's take a quick break and hear from today's sponsors. Even Einstein had blind spots. That's why modern science is built on the idea of peer review. Investing may be more art than science, but that doesn't make peer feedback any less valuable. The tricky thing is finding qualified people who are interested and willing to help vet your investment ideas. That's why we built the Intrinsic Value Community. It's a place to connect, share ideas, learn, and get feedback. Nobody ever wishes they'd spent more time buried in spreadsheets, but connecting and building relationships with others who may be smarter on a topic than you, but who are also schooled in value investing, that's valuable.

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34:18To begin getting smarter about investing, just visit theinvestorspodcast.com slash get started with stocks. That's theinvestorspodcast.com slash get started with stocks. And for a limited time, you can use code stocks15 for a 15 % discount at checkout. All right, back to the show. One of the things that I've taken from this conversation so far is that I need to get a Wall Street Journal subscription. Well, that may date a lot of people because obviously I've been reading it since I'm in my 20s. And I think the Wall Street Journal is still very well written and still appropriate for people to read.

34:56But I know there are other places that can get your information, similar information. So it's still one of the better places because they have good editors, by the way. But I'm not here to sell the Wall Street Journal. I'm here to tell you about equity crowdfunding. So here's the deal. As the law was written, I knew that I could build a business that will allow entrepreneurs to put their company on our website and solicit investments from the mass, everybody, anybody. Now, as I mentioned to you, 5 % of our country is accredited. Most of them are in the retirement age and are not participating that much in risky startups, as you can imagine.

35:39I mean, if you're in your 70s or 80s, the last thing you want to do is wait 10 years for an exit, you probably will exit first before the investment. So therefore, there is a disconnect here. So we're talking about what? 100 ,000, 200 ,000 angels, 400 VC firms, that was it. That's your market. And if you don't get money from VCs or angels, what are you supposed to do? The banks won't lend to you. You have to go to your friends and family, but that goes just so far. What are you supposed to do? I pondered that and I said, look, the answer could be the future of finance is at play here. The future of finance.

36:17Why is that? The same way as we talked about the future of video games was rich entertainment on a medium that was accessible like the compact disc. But it was also the same thing with games becoming free and you can invest in them and they're being online. That's the future of games. Today, most games are downloaded and they're free. And I think the same thing with finance. And then that's a strange concept that the world of finance is going to change dramatically. The future of finance, what is? And that was the question I had for myself. And the answer I came up with, I believe the future of finance is an equity crowdfunding.

36:58Here's why. Because it democratizes access to capital. Anybody now can go access capital. They don't have to be part of the elite. They don't have to graduate from Stanford. They don't have to have a certain gender, creed, whatever. They can be anybody. As long as you are good at what you're proposing and you're able to give, I would call it a compelling offering with a well-defined message, wow, you can raise capital. It frees people from the elite. It frees people to have more freedom and not give up control as they would with VCs. So I saw this as unnatural. And you know what the answer was?

37:41From the lawyers and my advisors and people I hang with, no, it's not going to work because no one will invest their money with a credit card online. Forget about it. That doesn't work that way. And the editor answer, I said, you're going to get sued by all of these investors. So you're going to get sued out of your business. So, I mean, when we talk about naysayers, oh my God. I mean, with Activision, we had a lot of naysayers because they said the video game world was dead. Here, no one said finance was dead. Here, they said, you're going to be dead. You're going to get taken out early and it's unsustainable.

38:19And then when you hear this, this is when you move forward. This is when you say, you know what? Maybe I'm against what the common understanding is of the world of finance. Maybe there's something there. Why not explore this? Why not go and look for what it's going to look like? Why not build it from scratch? So we were the first on the market with a website. And we launched StartEngine as an equity crowdfunding business. I want to talk about that Oculus Rift example for a second. I completely agree with how it's not really fair that those 7 ,000 people that put up the money and risked their money didn't really get any return at all for the sale.

39:03But from Oculus Rift's perspective, why would they want to do equity crowdfunding if they could just do Kickstarter? Because Kickstarter, they keep, in theory, obviously they sold a piece to that Facebook investor that you mentioned, but But in theory, they keep 100 % of the business if they do a Kickstarter campaign, whereas if they do equity crowdfunding, they're giving up some of their equity, which means when they sell or exit, they're not getting as much money. I mean, it sounds like they could be successful. Companies could be successful with a Kickstarter campaign. So why would they want to do equity crowdfunding and give away some of their equity?

39:33You make a very good point. Why buy the cow if you can't get the milk for free? But that doesn't seem like the economics can last that way so long. because now that equity crowdfunding exists, people who are going to go on Kickstarter are probably going to think about why should I not get shares in that company? Why am I giving away my money? And by the way, they're taking some risk and they're not getting any reward for it. That doesn't seem fair. Now, it's true. Many of the companies who come on StartEngine have started on Kickstarter with a little campaign. They call it proof of concept. So then they invite those backers to become investors.

40:15So that works well. So I don't think we're killing crowdfunding. We call it reward crowdfunding. That has its life. It's actually a very successful business. A lot of people are artists. A lot of people are not for-profit businesses. They do very well. But the answer is very simple. If you're a company, if you're an entrepreneur, you can go on Kickstarter, maybe raise 2 or 3 million, but you can raise 20. Very few projects have raised that kind of money. But in equity crowdfunding, as of today, hundreds have. So equity crowdfunding offers more access to capital than reward crowdfunding. It aligns the shareholders very well with the mission of the company.

40:59And they can, in turn, become the big, loud voice for the marketplace and be helpful. So in a way, I think our model is fair because it aligns the interests of both parties. The company needs money, the investors need equity so they can get an upside in their investment down the road. And by doing that, you have the ability to have a lot more success for your company. Stardegin specializes in regulation crowdfunding and regulation A+. What are these two regulations and why did you choose to focus on them? So I decided to focus on equity crowdfunding. There's three regulations in them. One is for accredited investors and some people call it Title II of the Jobs Act.

41:50It's complicated stuff, but it basically says that if you want to raise money from wealthy people, you can do it online now and publicly before you had to be private. Now, there's two other things in the Jobs Act that are phenomenal. One is called regulation crowdfunding. That rule said you can raise up to a million dollars on a crowdfunding platform like StartEngine from anybody. Now, there's some limitations. Someone can invest more than 5 % of their income across their investments in a year, things like that. but they can invest a minimum of$2 ,000 for sure. That's pretty good. And they can use credit cards.

42:34That was written in the rule, which is unbelievable. Now, the other rule is called Regulation A plus, and that says you can raise up to$50 million, 5-0, 50 million, but you have to take your offering and go to the SEC and they review it. So it costs you about$100 ,000 in legal fees and you have to audit your company that costs total about$100 ,000, maybe a little bit more. That's still a pretty good rule. And the nice thing about it is you can have investors invest up to 10 % of their net worth or income or net worth outside of their home. So if they own, they have a million dollars, they can put in 100 ,000.

43:16But let's say most people, let's say $100 ,000 in savings, they could put$10 ,000 into this deal. So both regulations are great. Now, on March 15th, something new is happening. There's an upgrade that was voted in. And on March 15th, the Security Exchange Commission announced that by March 15th, they're raising the limit of 1 million for regulation crowdfunding to 5 million. That's a major, major, major move. It's an enhancement. And the 50 million goes to 75 million. Now, why would that be a big deal? Well, a lot of people did not take equity crowdfunding as seriously as they could have, because they said, oh, if I can only raise a million, that's not enough.

44:00I need more. We've raised money for 600 plus companies over$300 million. I mean, we've done great with this, but a lot of companies were kind of in the middle between 1 million not being enough and$10 million is too much for them and they can't get it right. They're too early, but they needed three to four million. There's a sweet spot there. And with this new enhancement, this solves the problem. And so equity crowdfunding with regulation crowdfunding, it's very easy to do. It costs, when we bring in a customer, it costs them nothing. They don't have to spend a single penny. They have to spend money on getting their financials reviewed.

44:42They may need some legal advice to clean up their company, whatever. It's thousands of bucks. It's nothing. It's really not a lot of money. And they can raise up to$5 million a year using this regulation. So I thought, hold on a second. This is even better. The gift keeps giving. The gift of the JOBS Act is even better now. And I'm myself so enthusiastic and pumped by this new regulation upgrade that I think it's going to help the equity crowdfunding business grow even faster. The SEC is also kind of rewriting or tweaking the rules for being an accredited investor too, aren't they? Well, you could argue that they made a very small change.

45:28What they did is they said, if you are a financial expert, so for example, you're a CPA or you have a license to sell securities, you work for a broker dealer, you work for E-Trade, you can invest like an accredited investor. That's it. And you're talking about not even a million people, not even. So is it that few? And the reason I say that is because I personally thought that that was a pretty big change because I have a license that's very similar to the CPA. It's the CMA. And I think that would also qualify me. And I don't have the necessarily net worth yet to be an accredited investor. But I think with some of the licenses that I have accounting wise and Being in accounting, a lot of my friends are CPAs.

46:10So that kind of made us all accredited investors. But then how many people are CPAs and SCMAs and how many people are brokers? Okay. So maybe 2 million people, but we're still not covering... We have 350 million people in this country. There's probably 30 to 40 million people are active investors. So that doesn't cover them. I mean, you're covering... Yes, they made an effort. They went forward with a proposal and they did less than what Europe does. Europe says you can be a sophisticated investor if you have investing experience, but that without a license, right? But here they were very specific.

46:46You have to have one of these licenses. Yeah. I think it's a big number, but I think you're right that relatively speaking, in terms of the whole population, it's not big. When you think 2 million people, you're like, wow, that's a lot of people. But when you think about 350 million, it's really not much. When you talk about the American public, where they have this concept of savings,$10 trillion of savings, and all of the money that the American consumer represents, the credit investor is a tiny piece. It's not that much. You mentioned that people can invest with credit cards. How do you think about that?

47:20Do you think that's dangerous? Well, it's interesting that you say that because a lot of my friends that I play golf with always have this question for me. It's like, hold on a second. How is someone able to use a credit card? Well, I say it's built into the rule. Okay. But I don't understand. So basically, if they are from the financial world, they will say, well, that means they're borrowing the money because they have to pay the credit card in a month or over time. And I think that's one of the innovations. I think the innovation of credit card is significant because it makes it very accessible.

47:57You don't have to go in and enter your bank information. You can just put your credit card and it makes it a very fast purchase. Apple Pay, simple. People do that. It fits, I think, in the world of satisfying a market out there, which is the consumer. How they pay typically is with a credit card. That's how it works. So I think in adding securities, shares, buying shares to the credit card is logical. I think in terms of the process, that makes sense to me. But what concerns me about that is that people are going to rack up credit card debt. I think it could be potentially dangerous. I like how it makes it easier, but it worries me a little bit that somebody I know could just buy shares in a relatively illiquid, and we'll get to how it can be more liquid in the future soon, but a relatively illiquid security with debt, specifically high interest debt.

48:53Yeah. I understand what you're saying. A lot of people have margin accounts and those are not cheap. And I would say our average investment is it's around a thousand bucks. So typically, that's not going to take you out. It's still in the realms of reasonable. That's a really good point. What is the process for a company to raise capital through a platform like StartEngine? It's pretty simple. They apply, they go online, they go to startengine.com, they type in a few things, they tell us who they are, and then we get on a call. I have a bunch of people who at our company talk to entrepreneurs all day long, and they talk about the process.

49:37They need to learn how equity crowdfunding works for themselves, how they're going to raise their money. And then we need to make sure that it's a good fit. They're able to go on our page and the company's formed and a lot of different little details that we go through our own review. We review every company carefully. We have to do that. And if it's a fit, we onboard them. We have a team that does just that. They go in and they onboard companies. They talk to the CEO. They talk to the CPA. They do all the things they need to do to get them live. We rewrite the page for them. We also help them.

50:11We're kind of like a mini agency inside of our company, help them with their marketing. And then they go live. And they didn't have to put up much money at all. They had to do, you know, if they have their financials, get it reviewed. That costs a few hundred dollars. And then they may have needed an attorney to make sure that their shares they're issuing are correct. They have the shareholder vote. They have the board resolutions. These are things that typically you go through anyway when you raise money. And we make sure it's all done right. That is key. It's done right so that when the investor comes on our page, they make the decision and whether they should invest or not.

50:53Does the company have to be at a certain stage in order to start? We have not found any correlation regarding the stage of the company, frankly, for success. What we have found is three things that are important. And I think your listeners would understand it. First, you want the CEO of the company to be willing to put themselves out there. That's important. They put themselves out there. They're going to go out and solicit, and they're going to talk to all their friends and family. They're going to go on Facebook, on social media. They're really loud. The second thing is a compelling offering, something that people relate to.

51:31It's exciting. It's something you believe in. And a third is a well-defined audience. Who are the people you think should invest? When all three come together, the campaign is a success. We've seen it. It's amazing. It works. Robert Leonard You mentioned the due diligence that you guys are doing at StartEngine, but what other due diligence should individual investors be doing before making an investment in a company raising capital through equity crowdfunding? And how do you go about valuing a business like this as an individual investor? Robert Leonard Well, I think the investor needs to go on the page, read it, and then look at the comments because guess what's happening?

52:08The entire investment community is writing things on the page, commenting the same way you would see Wall Street bets where people are making all these comments. Well, it's the same thing here on StartEngine. People are making comments. And guess what? Sometimes they come up with stuff that we had no idea. And we may have to either get the CEO to correct information. I mean, it's really amazing how the crowd has a voice. People call it the wisdom of the crowd. they have a lot to say. So we think, even though we've done our due diligence, we did our work, you and I know that's not the end all of everything.

52:49I think when you add the crowd to it, now you get the real story. We're going to talk about the secondary market in just a second, but putting that aside, how can investors in these private companies get their capital back? When there is a liquidity event, how long is it before investors receive their share of the returns? Typically, a liquidity event happens between five and seven years after the company has raised the capital. So that's a pretty long stretch. I've had one deal that took me 20 years to get out, and I didn't get out in a very good way, meaning I had to sell my shares back to the company for a song and a dance.

53:28And I think this idea that the consumer has to go through five to seven years is pretty harsh. And you said it several times on this conversation. You said, you know, illiquid shares. You said no market for it, how you get your money out. It's a big question. And you would argue, hold on a second, if the Security Exchange Commission is permitting equity crowdfunding, what are they thinking? How are those investors going to realize their returns. How long do they have to wait? Well, if you look at today, the average is probably seven years for private equity to become sold. So what is an exit? Going public on the NASDAQ, New York Stock Exchange, or being sold to another company.

54:17And the shareholders receive either stock or cash, and they keep going. And if they receive cash, they can reinvest in another deal. If they receive stock, they can sell it on the market if it's public. So that's what people call exits. Robert Leonard It seems more companies are choosing to stay private for a lot longer than companies historically have. We're seeing a lot more unicorn private companies these days, like Airbnb, Facebook, Uber, all these companies that took a lot longer to go public than historically companies have. With companies waiting so much longer for IPOs, how does this impact equity crowdfunding?

54:55If you go back into the old days of Silicon Valley, Intel, when they went public, raised$10 million. Okay, so now you get the picture. Today, if you want to go public, you have to raise$2 billion. It's a whole different story. And we're only talking about 40 years later,$2 billion. It's reserved for the very few, only the very few. You're talking about a couple, 300 companies a year go public. In fact, right now, most companies, if they want to go to the public markets, they don't even go public. They do these reverse mergers, also called SPAC. They do these reverse mergers with existing companies that are designed just to raise money, and they're not even going public on their own.

55:38And so you wonder what happened. Well, I'll tell you what happened. Regulation came in and made it very expensive and very hard to go public. So unless you're a big company like an Uber, Airbnb, your prospects of going public is very, very low. You can't find a bank who will take you out on the public market. And even if you did find one, you can't raise much. And if you did raise some money, what happens the minute you go on the market, you get shorted by all the hedge funds, and your stock goes to penny stock. And now you're in a different zone. You can't raise any more money. It is really harsh.

56:16Small companies, unfortunately, do not belong on the public markets. It is unfortunate. I say that because I believe in the public markets. It's just the way it's been. That's the nature of the beast today. So how does this impact equity crowdfunding and specifically individual investors who are potentially betting on a future IPO to get their liquidity event from an equity crowdfunded investment? Well, I think it's a factor that I think it's a problem, frankly. I'd say it's a big problem. The idea that you invest in a promising company and you have to wait seven years is a problem. It's not necessarily the way it should be because consumers may not have the strengths or the wherewithal to wait seven years or longer.

57:05So I would say that's one of the, I think, issues with equity crowdfunding is lack of liquidity. I would say that's a big issue. And that's an issue that StartEngine is trying to solve. And that's with secondary market, which I've mentioned a couple of times so far throughout this interview. I mentioned in the intro that I'm an investor in StartEngine through the platform. So I like the business in general, but this concept of a secondary market is arguably the most exciting thing to me about the business. Tell us a bit about what the secondary market is that you're building with StartEngine. So we're in year five for StartEngine.

57:43Three years ago, I saw this problem that we are talking about and I needed to solve it. I believe that lack of liquidity is a hurdle for equity crowdfunding. The idea that we're going to grow into the future of finance without providing people access to liquidity, I think that's a problem. That's a big problem, probably the number one problem. Most people were saying to me, oh, no, no, Howard, the number one problem is fraud. It turns out that's not the number one problem. Fraud has not been a factor in our industry. So I went, my classic Howard Marks move, went to start reading about how do you create a stock market from scratch?

58:24How do you do that? Well, I read that in the regulation in the Jobs Act, it said that the shares are freely tradable for regulation and crowdfunding after one year, and for regulation A, right away, tradable. Okay. So then I went to my attorneys, I started talking, and they didn't have necessarily a solution for it. They said, well, they can go on the NASDAQ. They have a small capital markets for NASDAQ. I said, yeah, but they have to go public and they have to have quarterly financials. It's too expensive. It costs a million dollars a year. These are small companies. Maybe they raised a million.

59:00They're not going to spend a million a year. So I found a regulation called the ATS, alternative trading systems. That is also known as dark pools. And what it is, is 20 years ago, the Security Exchange Commission decided that they want to create markets that can compete with the NASDAQ and the New York Stock Exchange. And those markets typically work after hours. So when the market closes, then these other markets are open. And they're owned mostly for institutional investors. So it's not for the consumer. The people who are listening to your podcasts are not going on a dark pool to invest or sell shares.

59:41It's typically institutional investors, hedge funds, and broker dealers. That's what's going on. So there's a thing called the aftermarket. There is a thing. So I said, well, why can I use this to create a market for regulation crowdfunding and regulation A? So I challenged my lawyers on that idea. And so we filed a proposal with the regulators. And the proposal was to create a marketplace. Took us three and a half years. Last April, April 2020, we were approved. And I can't tell you, it happened on my birthday, on April 16. So on my birthday, I get the only stock market for equity crowdfunding approved.

1:00:28And I'm thinking to myself, I can't believe this. This is unbelievable. This is amazing. And so we were preparing for it. We didn't know we were going to get approved. And so now we have to scramble and build it, right? And we built it and launched it end of October 2020. And that is the beginning, I think, of a new opportunity for our whole marketplace. You know, I talked to you several times about the future of finance. What is the future of finance? Well, today, finance is what? The big banks that take out the big companies public, and the small companies, they don't even talk to them. And then if you go to mid-market, these are broker-deers that are smaller than the Goldman Sachs and the Morgan Sands of the world.

1:01:18They're only interested in a company that does at least$10 million in revenue minimum. them. But most companies don't do that. So then if you go down the food chain, it's like the big pyramid and then the bottom of the pyramid, that's everybody. The 5 million small businesses in the United States are at the bottom of the pyramid. The midsize broker-deers are not interested in them. So I saw this as a huge blue ocean. I said, look, if equity crowdfunding handles just the 5 million small businesses in our country, just that, I don't know. That seems pretty big to me. I don't know about you, but that seems big, 5 million companies.

1:01:56And what do I need? If I had 1 % of the markets, 50 ,000 companies. I mean, it's no, the big brokers, they work with dozens of companies, if not 100. And I would do 50 ,000? That's pretty big. So I see, you see, I'm looking at scale. I'm looking at the scale of what we're building here. But what a missing component was the liquidity, this idea that if you go on StartEngine to invest in a company, you can trade. Now, think about this, Robert, this idea that you can go on StartEngine to do equity cross-funding, to invest in a company, and a year later, you can trade, is spectacular. To me, that's an amazing idea.

1:02:43And that takes, in my view, equity crowdfunding to a whole new level. And now the missing piece has been solved. We have the missing piece, which is we can issue the shares, and we can allow the investors to trade. Think about that. What are we doing here? We're replicating Wall Street for small business. Now, hold on a second. Why has that not existed before? Wall Street for small business, because they're not interested in it. But the biggest industry in our country, the biggest market, the biggest economics are small business. We all know that. Big business are important, but they're not everybody.

1:03:2370 % of all jobs in our country are small business. So come on, really? And now you're telling me, oh, you know, the banks are right. They should work with the big companies. But they're forgetting the most important part of our economy, 70%. Now, something I'll tell you that you may have not thought about. The stock market, New York Stock Exchange and NASDAQ represent 10 % of our economy in terms of the wealth, real estate. 10 % of all the real estate of our country is in REITs that are on the stock market, okay? 90 % are not. They're on limited partnerships. 90 % are private. Same for companies.

1:04:0010 % of the wealth, you know, Apple, Facebook, Amazon, you know, those are big companies. Trillion dollars, right? But the 5 million small businesses, what do you think that's worth? 100 trillion. So 90 % of the economy is locked in private hands. My job is to unlock that. Yeah. I mean, I really don't have a ton to add because I agree with it so much. Like I said, that's probably the most exciting thing to me about StartEngine, the business, is this idea of the secondary market. I really like it. Only StartEngine is traded on your secondary market right now. So why is that? You mentioned that it's almost like a seasoning period.

1:04:40Companies have to wait a year or so. Is that why? We are at the beginning. And we need to bring as many companies as we can on our trading marketplace. And like it was at the beginning when I started equity crowdfunding, it was impossible to convince companies to come on because they were afraid and what will happen. And it's a new way of raising money. I don't understand it. So now they go and do something different. They're like, okay, Howard, I raised money on equity crowdfunding, and you want me to trade? So I'm convincing companies. We've signed a bunch of companies already that have publicly announced they will trade, but not many.

1:05:22And I don't know when this podcast will become live, but hopefully by the time it goes live, we will have several companies on it. Our goal is to have thousands of companies on it. But we had to start somewhere. And this is how we started.

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1:09:02All right, back to the show. Is the goal to eventually have all of the companies that raise in StartEngine to be able to trade their shares on the secondary market, assuming that they're issuing common stock, not convertible notes, bonds, or preferred? Robert Leonard That is absolutely right, Robert. So here's the idea. When you come on StartEngine to invest, you can trade. Robert Leonard Is there any cost or reason why a company raising money wouldn't want to trade? Robert Leonard There are some costs involved, and there's a thing called blue sky. And I don't want to go into much of detail, but every state has a different rule about how you should trade.

1:09:40They're not unified. And we We found a way to do it through another regulation, and we're able to do it. And so it costs the company about$10 ,000 to trade. And then they have to pay maybe every year another couple thousand. So it's very reasonable. They don't have to do quarterly financials. They can just do what they normally do once a year or twice a year, depending on the regulation they used. It's very reasonable, very reasonable as a means to provide liquidity. Typically, if you want to go on the national markets, it costs millions of dollars to do it. Lawyers and accountants and bankers, and it's insane.

1:10:22So if I say to you, look,$10 ,000, you can do it, that doesn't seem so bad. We haven't raised the bar that high. I'm thinking about the founders of these companies, and I could be wrong, but my guess is that they probably like this idea of the secondary market because oftentimes founders have a lot of their personal net worth stuck in these companies. And if they're not public, they often don't really have much choice in terms of getting any cash out of the deal or their business if they need it. Whereas it sounds like as an owner, they could potentially sell some of their shares maybe on this secondary market.

1:10:56Is that something that's possible for owners? And I know there's regulation around being over 10 % owner of a company in public markets. Is there anything like that in the secondary market? Yes. So we do permit companies, officers, insiders to sell, but we put speed bumps on them. And the speed bump is to protect the other investors. So you don't want an insider who knows something to change the marketplace. So we protect that with the right speed bumps that will slow down the sale of any significant amount of shares to a very small portion. Basically, we're just as a nutshell, like, for example, we'll allow someone who is an insider to not trade more than 1 % of the last 30 days, for example.

1:11:43So it's small. But it's still liquidity gives the entrepreneur and the original investors some form of liquidity. And if they're patient, they can sell some over time. Obviously, if they want to sell their business, they can always do that. There are plenty of buyers out there may be interested. it. That's another option. But I think what we've built here allows entrepreneurs to achieve their dreams because they don't have to sell. They can still keep building their future while having some access to liquidity. I think it's the best of both worlds, frankly. I think it's great. Yeah. I think there's probably quite a few founders that want to keep their business, but they ultimately sell because of personal reasons and they need the cash for X, Y, and Z.

1:12:28That's right. And it puts a lot of pressure on these founders, on these entrepreneurs. And if we can relieve that pressure slightly, allowing them to sell and disclosing that to the investors, to the shareholders that they sold a portion of their shares, that's great. I think access to liquidity for founders, insiders is a big innovation. I think access to liquidity for the investors is an incredible innovation. And I think if you put the whole thing together, the idea that you can now be a small business and do what the big guys do on the stock market, I think it's incredible. What's interesting too is, as I think about this, founders, I think sometimes they make decisions in their business based on sometimes their personal life.

1:13:14It's like, maybe I know that this probably isn't the best decision in the long term for the business, but I need to sell this in the next one to three years so I can get some liquidity out. So they're making short-term decisions because they personally need it, whereas it's not necessarily in the benefit of the company long-term because they need the liquidity. But now it sounds like founders are going to be able to think a lot more long-term because they're going to have access to liquidity. They can have access to liquidity. They can think long-term, which is better for the business. And they don't have to have pressure from their existing investors.

1:13:47Because if the investor is getting a little antsy saying, hey, you know what? What's going on? Is your company, can we get some liquidity? Hey, just go on the secondary market, just sell. Oh, okay. Conversation's done. It's a big innovation. Robert Leonard Those speed bumps that you guys put in place for the founders selling shares, is that something that you guys, you and StartEngine as a company have chosen to do, or is that required by the regulation and law? That is something we chose to do. There are regulations around insider shares called Rule 144, and they exist on the stock markets, but they don't exist for our market.

1:14:27But we believe that we have a responsibility to make sure that it's a fair marketplace. So you mentioned insider shares, but if you think about the stock markets, typically you have a lot of things going on, including the insider selling shares, which exists. Rule 144, you disclose it. It's now public. They file with the SEC. They're selling shares in the company. Companies traded publicly. Some people see this as a negative, so they sell their shares. Other people say, okay, this is good. The founder has some money off the table. Now they can focus more on the business. And so we decided to put these in place because we wanted to create a marketplace that gives confidence to investors.

1:15:13Is there insider trading with equity crowdfunding on the secondary market? I think technically it's possible. We will monitor that. I think if you look at the stock market today. And a good example is a GameStop stock that went crazy. The idea on the stock market, New York Stock Exchange, NASDAQ, is you can short shares, which means you can borrow shares, sell them, and then bet that they're going to go down and then buy them later and give your shares back to whoever you borrowed from. And that's called shorting shares. And sometimes you short more shares than there are shares on the market, and that's called naked shorts.

1:15:54And then you saw what happened with GameStop when the share price went way up. It created a short squeeze. People went crazy. The price went way up. The regulators got scared. Everybody got scared because they thought people would lose their money. Well, you know what? That exists today in the stock market. So are all the options, puts and calls, and all of the different instruments that you hear about. There's more money in options than probably in stocks, which is kind of strange, but okay, that's the way it is. we decided for our marketplace to keep it simple. It's peer-to-peer. Now, what does that mean, peer-to-peer?

1:16:28It means there are no market makers in the middle. There's no shorting. There are no options. There are no derivatives. It's basically an investor buying shares and selling the shares to another investor. We call it peer-to-peer. And that type of marketplace, I believe is what originally existed a long time ago. And I think it's refreshing to see a marketplace that has that type of behavior. One example is we show the order book. What's the order book? All the people are trying to place orders before the market opens. All the people are selling shares before the market opens. We show that in complete transparency to everybody.

1:17:11That's a big innovation. You can't do that. I mean, you go on Robinhood to invest. You don't see the order book. You know who sees the order book? The hedge funds. They see it. The market makers see the order book. That's why I think it's not a fair marketplace. It's not fair for everybody. I believe our marketplace is fair. Now, people can criticize us all day long and say, you're this tiny market, you're nothing, you're like a blip in the ocean. True. That's true today. That might not be true tomorrow. Every company has to start somewhere, right? And yeah, I mean, I think the order book and the market history data is really cool.

1:17:47I'm looking at it right now. I've actually spent quite a bit of time looking at it. And right now there's a bid at 925 for 28 shares. I can see this right in the order book. And the market history I could see on Friday, this past Friday at 236, 30 shares traded at X dollars. So it's really cool that you're able to see that data. And we made it so that every investor has the same information. Now you could argue that an Insider has different information, and that's why we have speed bumps. And that's why we disclose when they sell their share so that people know. So in a way, creating a fair market share means in a way that everybody has the same information and the rules are clear for everybody.

1:18:29Robert Leonard I'm really, really curious to see how the lack of financial products, derivatives, bonds, options, all these different things in this market impact it. And I'm curious to see if over the long term, five, 10 years, if this secondary equity crowdfunding market becomes popular, I'm curious to see if the broader financial markets learns anything from this and implements it to the larger stock market. And I think it's going to be tough just because of how much money there is in the bond and options and derivatives markets. And there's so many people that make so much money from there.

1:19:01But I'm curious if this is a case study that we can use to impact the broader financial markets. Well, you saw Robin Hood screaming loud recently saying, hold on a second, we need to change how things are done. There's this notion that you buy shares and it takes two days to clear it. And that two days is a systemic risk opportunity. So you have to cover it with capital. And so Robinhood had to put$3 billion of money up and stop selling the GameStop shares. And now everybody's saying, hold on a second, you're in on it. You're in on it with the big guys. And all of this is because of regulation.

1:19:42And the regulation is such that it creates these dilemmas, right? The naked shorts, the idea that you can short more shares than exist, the idea that you need more capital if something explodes in price. In our marketplace, our trades are instantly cleared. Exactly what Robinhood has been asking for, except it's 2021 and we do it. By the time the market goes to instant clearing, I think we're talking about 10 years from now. That's an opinion. I may be wrong. Maybe they have plans to do it earlier than that, but it's not today. And we have instant clearing. So you can sell and buy and sell and buy stock in companies and not worry about whether during the round trip, when I'm selling and the money comes or doesn't come, what happens?

1:20:33The whole market crashes and you're out. I mean, these are called systemic risks. In theory, they're theoretical risks. They're not necessarily there. The risk is there in theory, but it doesn't mean it happens. In our marketplace, we took that out. We made it really, really convenient. And we believe that as we grow, and again, our goal is to have a lot of companies on our marketplace. We hope every company that raises money on Star Engine will be trading. That's what we hope. That's up to the company to decide. We think that we're bringing something new to the table that I think is refreshing.

1:21:11And I think it's going to benefit entrepreneurs and investors. Robert Leonard Charlie Munger talks a lot about incentives. And when I think about the broader financial markets, I have no idea how long it's going to take for that instant clearing to take place in those markets. But I think the big hurdle there is how many people are incentivized by trades not clearing right away, right? How much money is made by those market makers in the middle. And I think that's going to be a huge hurdle for the broader financial markets to overcome. When people are making billions and trillions of dollars, it's hard to cut that out.

1:21:45I think a study will come out one day. Right now, I'm told that studies show that market makers add value. I don't believe that. I think they don't add value. I don't believe it. I think over time, if you're a freaking trader, it erodes. It takes money out of the market instead of putting it into the market. That's an opinion. That is me saying something out of no, I would say, research and paperwork and studied it, it's just intuitive to me that people say market makers matter because they create liquidity. But if you have a market of 5 million investors, each trading between themselves, that's liquidity.

1:22:29I call that liquidity. The fact that a market maker can say at 2 p.m., I can step in and buy the shares if no one's in there, I think it's ridiculous when there's just so many people. At 2pm there will be a buyer. Robert Leonard I completely agree. And again, it goes back to just there's so many people in the middle that make money. I think it's just hard to cut out. And I forget the exact saying, but there's a saying that basically if you want to study for something, if you need a specific result from a study, there's enough money you could pay to get a study to provide that result. And with incentives being what they are, I wouldn't be overly surprised if that isn't how these types of studies for market makers are being made.

1:23:09I think you're right, Robert. There's too much money in play today in these markets. And there are conflicts of interest that are all over the place. The fact that the big brokers own the DTC, which holds all the shares. The fact that the hedge funds are borrowing money from those big brokers. Everybody has an incentive on everybody. There's a lot of cross-ownership in the stock market, in the financial industry. So, you know, that's how it is. Is it going to change or not? Well, regulators are looking into it. I think every time there's a scandal, every time there's a debacle, every time there's a big financial crisis, things change, right?

1:23:53Guess what happened? Why am I here even talking to you? The reason I'm here talking to you is in 2007, 2008, the Great Recession, where the financial markets collapsed, People came to Congress and said, look, we're small businesses. We need another way to capitalize ourselves. The big guys are not allowing us to do it. So we want something new. We came up with this thing called crowdfunding. Think about this, Robert. That happened only because of that financial crisis. And we are here recipient of that benefit today. Now, it's true it's 10 plus years later. So what? it now exists. You mentioned that it's up to the company whether they are available to trade on the secondary market.

1:24:43Is this something that you're going to require these founders and these companies to publicly make known in their offering when they're raising capital on StartEngine? So as investors, are we going to know ahead of time whether they're planning on trading on the secondary market or is that going to be a variable, a risk that we might have to take as investors? That is correct. My goal is to inform investors ahead of time, at the time of the offering, if they're going to be trading or not. Now, it's possible that if we don't mention that they're going to trade, they can elect to do it later. Yes.

1:25:18And that could be one of the questions an informed investor can do on the page and say, hey, are you going to be trading or not? And guess what? If you're not going to be trading, I'm not going to invest. I don't know. if I was an entrepreneur and I got a lot of those messages, I would be starting to wonder, maybe I should allow the trading and why not? For 10 ,000 bucks, why wouldn't you, right? Yeah, why not? No reason not to. So I think your point is pretty valid. It's going to be natural that as time evolves and this marketplace becomes more mature, equity crowdfunding will be trading as well.

1:25:58And I think we're the pioneers here. We're the first, and we hope to set the standard that an equity crowdfunding investor who makes an investment in a risky startup with the understanding they could lose all their money, right, at least can have some idea that eventually in a certain near future, there is some form of liquidity. There's no guarantee of liquidity, By the way, when we talk about liquidity without a market maker, it's only good if there's someone else on the other side buying or selling. But so what? That's good enough, I think. And some will benefit from that liquidity and others will sell.

1:26:40Some will buy and let the market decide in the end of the day. The price will be made based on the appetite. To the extent there are more buyers than sellers, price goes up. to the extent they're more sellers than buyers, the price goes down. Doesn't that seem logical? It seems pretty obvious to me. And we build it so that transparency, that system makes sense. Yeah, me too, completely. And I think you're right. I think you make an important point is that just because there's the secondary market doesn't mean there's necessarily liquidity. I think it's still a relatively illiquid market in comparison to the broader financial markets in the stock market, but I think it makes equity crowdfunding a lot more liquid than it was previously.

1:27:22So it's still not necessarily super liquid, but it's definitely more than it was previously. And obviously your team and you at StartEngine are a lot more experienced than I am and a lot smarter about this stuff than I am. But as an investor and a user of the platform, I think it's a really good call. I think you'll add a lot of confidence to investors if they can know ahead of time as to whether or not those shares are expected to trade on the secondary market? We agree with you. We believe so. Again, there's a transition period of time right now. We launched it recently. We believe it's the future of finance.

1:27:57The future of finance is this, democratization to access capital for everyone, not just the elite, and allow investors to be early in great new ideas. Yes, there are risks, but so what? That's part of the whole world of investing. And giving access to great new ideas early with some form of liquidity, which will power entrepreneurs to achieve their dreams, we're creating a whole new economy here. And we believe that's the future of finance. There's currently a limited trading window of just 1 to 3 PM. Why is that? We're experimenting right now. We're trying to figure out the right window. We have the flexibility to have a different window for every company.

1:28:49And we are going to try to figure out what is the right amount of time something should trade. I mean, it would be nice one day to have 24-7. What's wrong with that? Yeah. I mean, that's super popular with cryptocurrency. So I think if an equity crowdfunding market can be 24-7, I think that would be a huge, huge advantage, at least from my perspective. As we wrap up the show, I want to briefly touch on your relationship with Kevin O 'Leary. I was actually honored to have him here on the podcast back on episode 58. On that episode, he actually briefly mentioned partnering with a crowdfunding platform.

1:29:25I don't think he mentioned the name at the time. I'm not sure if the deal had been fully finalized yet, but he had briefly mentioned to me that he was getting really involved in the space. He eventually joined StartEngine as a strategic advisor. How did you get Kevin to join the team? And why did you specifically want Kevin? Well, I play golf with one of his agents. And I'm a big fan of his because I think on Shark Tank, I think Kevin O 'Leary is the smart investor. He always gets the best deals, I think. And he has a demeanor that is very straightforward. He doesn't beat around the bush. He's really clear to the entrepreneurs what his intentions are.

1:30:08I like it. I liked his persona. And so I needed a way to explain to the general public in the United States what equity crowdfunding was all about. And to me, Kevin is one of those people who can simplify things down to the basics, better than most. He has that knack, that ability to communicate in a way that I think people resonate. So yes, he came on board. We had one meeting with him. He immediately understood what we were doing. It merely got it and was on board on the spot. So we closed our deal. The day we closed our deal, the market went down 2 ,000 points. That was in March of 2020. 2 ,000 points.

1:30:59That's a pretty big drop for a marketplace. I think everybody was pretty surprised, frankly. It hasn't recovered since a lot. But just then, I think it was a great moment to sign a deal because we were in, no matter what happened to the marketplace. We were in because we believed that Kevin can help us communicate in a way that we couldn't do it before ourselves. And so we've been placing ads on the television, on different networks, on social media. It's been a great response. I think it's helped us tremendously. So he is an advisor, as a spokesperson for our company is great. I think he provides a lot of validity to the idea of equity crowdfunding as a whole as well, because on Shark Tank and just in general, he often calls out people for not necessarily the best businesses or the best models or just all these different numbers that he says, this is not real or right or good.

1:31:58And if he's backing equity crowdfunding, he believes that this is something that's real and true and going to stay for the long term, I think. Well, some of his companies actually came on StartEngine and raised capital and very successful. So I think it's more than just being a believer. He's actually using equity crowdfunding for his own businesses. And I think that's a great thing. I mean, you can't ask for a better endorsement than that. Yeah. It takes it even a step further. What advice would you give to an aspiring millennial entrepreneur or aspiring equity crowdfunding investor listening to the show today?

1:32:35In terms of entrepreneurs, my best advice is you should pursue your dreams. It is difficult. It's a long journey. It's uncertain. It has a lot of risk. But if you think about it, the idea of risk as an entrepreneur has not been properly priced. Risk, when you buy options or sell puts or buy puts or options, are priced. Entrepreneurship is not priced. and I think is underpriced. I believe that the idea of entrepreneurship has a lot more potential than people realize. And now that you can access capital using equity crowdfunding, we've made the lives of entrepreneurs a lot better, a lot better than it was before.

1:33:23So I think the main ingredient that's left for you, the entrepreneur, is your grit. I call it the intersection of passion and resilience. You need both. That cocktail is critical to your success. And now that we can bring capital your way, I think it's made entrepreneurship even better than it was before. Now for the investors in equity crowdfunding, I can't provide any advice to them because I'm in the market as an equity crowdfunding platform. But I think there's a lot of literature out there. There's a lot of information for investors to read. I think follow our company, follow what we're doing and see if it's an area you're interested in.

1:34:10I call it alternative assets. What we do is not national market securities like NASDAQ, NeuroStark Exchange. We're an alternative investment. Some people look at alternative investments like real estate and gold and oil and gas and collectibles. And I think startups belong in a portfolio of an investor as any alternative investment, including real estate, belongs in the portfolio of an investor. Robert Leonard Howard, thank you so much for joining me today. It's truly been an honor. And this has been one of my favorite episodes to date. For everyone listening that wants to learn more about you, equity crowdfunding, StartEngine, where's the best place for them to go?

1:35:00Well, the best place is to go to startengine.com and see what this all looks like. And you can sign up, it's free. And if you're interested, you can invest. If you're interested, you can follow companies, you don't have to invest, and you can follow the dreams of hundreds of entrepreneurs. I'll be sure to put links to the platform and a bunch of other interesting equity crowdfunding literature in the show notes. You guys that are interested can go ahead, check that out. Howard, thank you so much. Thank you, Robert. It's been a pleasure. All right, guys. That's all I had for this week's episode of Millennial Investing.

1:35:38I'll see you again next week.

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