Crowdfund This!

Crowdfunding will change Wall Street for the better! There, I said it…let the hate mail ensue.

This view is held by a new friend of ours, Dara Albright, the founder of NowStreet Media. She’s a pioneer in reforming the financial markets, and my new hero. Plus she’s just a cool chic!

Her site, NowStreetJournal.com is a primary provider of analysis and insight into the private company marketplace. She is intimately involved in the legislation and innovation that is currently powering the Crowdfunding movement.

Dara, through her work at NowStreet, is known in various financial circles as someone who is committed to repairing a damaged capital markets system. Saying the markets are damaged is like saying venereal warts is a mild skin rash.

Prior to founding NowStreet, Dara had a distinguished 20-year career in investment banking, investor relations and institutional sales. She serves on the boards of both the Crowdfund Intermediary Regulatory Advocates (CFIRA) as well as the Crowdfunding Professional Association (CfPA). She is a graduate of the George Washington University and holds securities industry Series 7, 24, and 63 licenses. Smart women are sexy!

On that note, let’s get on with it…

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Mark: Dara, you recently spoke at an event in Washington DC where top lawmakers, regulators, Crowdfunding enthusiasts, entrepreneurs and investors all came together to discuss the rules that will eventually govern Crowdfund investing under the JOBS Act. Bureaucrats and entrepreneurs make strange bedfellows. Can you talk a little about the mood of the event?

Dara: That’s true! Sure. I would love to.

It was truly a historic moment in the progression of our capital markets where all of the parties – the legislators who drafted the Crowdfunding legislation, the regulators (SEC & FINRA) who have been tasked with implementing the new rules, as well as the entrepreneurial and investing public whose lives will be affected by the rule changes – were all able to band together, have meaningful dialogue and understand one another’s particular concerns.

The overall tone of the event was congenial and I got the sense that regardless of one’s occupation or political belief, one common objective was shared by all – to see the US financial markets thrive once again.

Mark: Cats and dogs, living together (laughs).

Dara: Nice reference…I have to say that I arrived at the event somewhat skeptical that anything would really get accomplished. However, I left feeling hopeful that our regulators are making a genuine effort to understand the intent of the legislation and to create a regulatory environment that will not only protect the investing public but help capital proficiently reach the nation’s smaller businesses.

Mark: I don’t normally consider regulators to be too forward-looking or innovative. Aren’t you worried that overzealous regulation could end this market before it really begins?

Dara: Appropriately imposed, regulations can be beneficial not destructive. I believe that the entire private company marketplace (Crowdfund offerings as well as private company secondary transactions) needs to have suitable regulatory controls in place so that investors can feel comfortable investing their money there. Investors need to have exposure to this marketplace because this is where today’s growth companies live.

Mark: I agree with that statement wholeheartedly!

Dara: Interestingly, when the 1964 Securities Acts Amendments extended the mandatory disclosure requirements, many in the investment community were in a panic thinking it would destroy the OTC marketplace. Studies have shown that the additional regulatory requirements actually led to a boost in share prices of OTC securities as a heightened level of integrity and investor confidence penetrated the marketplace.

Mark: Yes, investor confidence is productive. But actions speak louder than words. Over-regulation that strangles issuers such as Sarbanes Oxley and Dodd-Frank is not productive. How can we be confident that the regulators can protect investors without stifling the small business capital formation that leads to economic growth and job creation?

Dara: That will be a challenge. I believe that regulating fraud is imperative; however, regulating the risk out of the marketplace is counterproductive. Risk is what built our capital markets and made them the envy of the world. It is what led a small boutique investment bank in 1971 to take a chance as the lone underwriter on a little known company called Intel.

Once Wall Street stopped risking its own capital and starting “guaranteeing” returns for its institutional clients, as seen with certain PIPE financings, was when the markets began to dismantle. Look how much the Street has changed since the dot com bubble burst – most broker dealers no longer commit capital to their banking deals or their trading desks. They act strictly on an agency basis. Many investment bankers even demand upfront retainers, eliminating any risk whatsoever. I guess Wall Street isn’t so different from the vast majority of entitled Americans who count on guaranteed stipends without feeling the least bit guilty for not laboring to earn them.

The truth is, as in life, investing is a risk. It is a gamble. It is a constant challenge. It is about acquiring wisdom through mistakes and achieving success out of failure. Our ancestors took unthinkable risk to build America, and they endeavored to succeed. If society does not reclaim those strong work ethics and the aspiration to venture, our assurances and complacency will, without a doubt, destroy everything our predecessors worked so hard to construct.

Thankfully we still have a few risk-takers left. They are today’s entrepreneurs – the ones who work tirelessly for little to no pay in hopes of changing the world with innovation and securing their family’s financial future. Like our forefathers, they have no guarantees, no assurances and no safety-nets. Our successful entrepreneurs are the ones who advance this planet with invention and who create jobs for the masses. Ironically, they are also the ones who are viewed as the potential fraudsters whom the regulators must “protect” us from.

Mark: Lately I feel like we’re living Atlas Shrugged.

Dara: So here’s a thought – instead of over-regulating our small businesses and making it virtually impossible for them to flourish, perhaps our regulators should prohibit Wall Street from guaranteeing its investment returns through the manipulation of our small-cap issuers?

Mark: Amen to that. It’s criminal, and it’s rampant. The big trading houses use algos and all kinds of high-tech wizardry to manipulate…sorry, I mean “trade” the markets. So how can the regulators make use of today’s technologies to detect fraud and better regulate the capital markets?

Dara: Global communications is light years ahead of what it was in the 1930s when much of these securities laws were enacted. The amount data we can access from the comfort of our own living room is incredible. And it makes it much easier for us to detect fraud than it was in the days when we had to wait for the delivery of our morning paper. Here’s an interesting example: a company called Mythic tried to launch a campaign on Kickstarter recently. Unfortunately, it was a complete scam. Yet it took the crowd all of 2 days to detect the sham and “NOT ONE PERSON” lost a dime. That is the power of social media – where the crowd and technology finally converge.

Mark: I wrote a post called Take Me Public! a while back. In that post I described the seedy underbelly of the micro cap market. I laid out the pump-and-dump roadmap for those who don’t know how it really works. I think Crowdfunding can put a damper on that business, thankfully.

Dara, the regulators missed the July deadline for implementing the removal of the solicitation ban. Do you think they will miss the Jan 1, 2013 deadline for employing the Crowdfunding rules?

Dara: I personally don’t think they’ll be ready by January 1st. I think that more than likely Crowdfund investing will be a 2014 story. However, I am hopeful that the solicitation ban will be lifted in 2012.

There is just so much fear and skepticism regarding Crowdfund investing. I believe that much of it is a result of Crowdfund investing being misrepresented in the media as the “next fraud-infested sector of the market”. Many people have a difficult time making a distinction between Crowdfund investing and penny stock investing. The truth is, the ONLY similarity these asset classes share is a “small capitalization”.

Mark: I agree 100%. Can you describe the differences for readers?

Dara: Gladly.

For one thing, Crowdfund investors do not share the same investing philosophy as the typical micro-cap public investor. Penny stock investors aren’t buying shares of a pink sheet stock because they believe that the company may eventually become the next Apple. They are buying stock because they think they could make a quick buck.

Crowdfunding breeds an entirely different type of investor – the long term, benevolent shareholder. Crowdfunders are not interested in trading tickers; instead, they are drawn to a company’s products, its mission, its value to the community and its positive impact on society. They envision a more profound upside – one that is unfathomable to the trading mentality.

Unlike the public micro-cap markets, Crowdfunding allows issuers to obtain shareholders whose interests are more aligned with their own. This alliance gives companies a greater chance to succeed. If Crowdfunding achieves nothing else but altering investing behaviors and making it “chic” to be a long term shareholder again, it will go a long way towards improving our capital markets, our economic future and even advancing society as a whole.

Mark: It is interesting that you bring up the shareholder. There has been a lot of rhetoric about how the JOBS Act will impact issuers. But very little is being discussed about how it will impact investors. Will the JOBS Act benefit investors and if so, how?

Dara: I am glad you asked, Mark. The JOBS Act will undoubtedly benefit investors. In fact, it will save them. Here’s the harsh reality:

•      DJIA 2011 performance: +5.5%
•      Nasdaq 2011 performance: -1.8%
•      S&P 2011 performance: FLAT
•      Current yield on a 10 yr T-Note: 1.57%
•      Savings account interest: 1% (high-end)
•      Average yield on a junk bond: 6.95%
•      2011 Inflation Rate: 3.2%

THERE IS LIMITED GROWTH LEFT IN CONVENTIONAL ASSET CLASSES! Investing in the public markets barely enables investors to keep up with inflation.

Nasdaq was once upon a time the greatest wealth generator that the world had ever seen. That was because it took a “chance” on small innovative businesses and allowed them list on its platform. Business like Intel, Microsoft, Dell, Adobe, Oracle, Cisco, Amazon…you get the point. The investing public back then had the opportunity to invest in these companies when they had tremendous growth in front of them. That is no longer the reality today.

Today, Nasdaq deserts America’s small caps as it chooses instead to compete with the NYSE for the larger, “more mature” company – the $100B company, like Facebook, whose growth was achieved in the private markets and captured by venture capitalists, angels and other accredited investors who took the early investment risk.

Because small investors are legally prohibited from investing in private companies, they have been forced to become the “exit strategy” for those who are allowed. I will never understand the logic behind laws that permit average citizens to purchase stocks only when “sophisticated” investors are ready to dump them.

Mark: Chris and I beat this drum constantly. Hey, it’s OUR MONEY. If I want to give it to a homeless guy, that’s my prerogative, and no one will stop me; in fact they will applaud me. Meanwhile, if I want to actually do something productive with my cash, like back an entrepreneur who is trying to cure cancer, I’m told I cannot. What kind of crap is that?

Dara: Exactly! Unfortunately, without the ability to invest in growth companies, the investing public is not given the chance to build wealth. In fact, with social security likely to be bankrupt and most retirement portfolios underperforming because they are restricted to investing in public assets, the majority of today’s American workers may never even get the opportunity to retire!

Investors need to diversify outside conventional asset classes. They need the same access to growth that investors were given in previous decades. And since the public markets no longer possess the infrastructure to support smaller growth companies, today’s investor must learn how to restructure his portfolio in order to gain access to privately-held companies.

Mark: You seem to be pretty passionate about this marketplace and the passage of the JOBS Act. Why is it so important to you?

Dara: Mark, I really believe that if we don’t do something to repair U.S. market structure, my children will end up raising my grandchildren in the United States of China.

With the U.S. regulatory environment, its capital markets and the innovation that drives those markets simultaneously on the threshold of extraordinary change, there has never been a more opportune moment to act. I believe that we are currently witnessing the embryonic period of the next great stock market which is being fueled by unprecedented advancements in mass communications and regulatory reform. And I believe that this incredible configuration is what will reignite our economy. In fact, with escalating domestic debt and Europe in fiscal ruins, the rising private markets are our only hope.

Mark: I couldn’t agree more Dara, and I love your passion…thanks for sharing your views with us!

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You know how Chris and I feel about Crowdfunding by now. It WILL change the way that entrepreneurs fund their businesses.

For those that don’t know about the Pebble watch campaign…these guys set out to raise $100k to manufacture a watch that downloaded your email, and did some other “fancy” stuff. The VC’s laughed at them, so they put the project on the crowdfunding platform, Kickstarter.

The market laughed at the VC’s…within weeks these guys had raised over $10M from almost 69,000 people!! How much did they pay in marketing, legal and underwriting fees? How much dilution were they forced to endure? You figure it out.

If I were an investment banker looking to buy a summer house in the Hamptons, I might step back and reassess… Welcome to a brave new world!

- Mark

“The most dangerous poison is the feeling of achievement. The antidote is to every evening think what can be done better tomorrow.” – Ingvar Kamprad, Founder of Ikea