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SPEAKER_02: Hey everybody, welcome to another episode of This Week in Startups.

SPEAKER_04: And this is an episode I've been looking forward to for a long time, because today we're going to get to speak with one of the, I would say, more innovative or most innovative people at an organization called the SEC, the Securities and Exchange Commission, which is something we're very lucky to have here in America. The most vibrant democracy and the most vibrant capitalist combination of capitalism and democracy in the world, which is why we, as a country, are so innovative.

SPEAKER_05: And we have such an amazing amount of trust in our system. Having traveled the world and watched angel investors and venture capitalists invest in other regions, other geographies, sometimes they lose their money. Sometimes they get screwed. There's no referees. And we have a wonderful, wonderful group of people at the SEC who are incredibly principled and who try to referee and essentially create some guardrails around what we do in creating businesses and having shareholders.

SPEAKER_04: The mission of the SEC, as stated, I believe on their website, I'm not sure if there's a change, is the mission of the SEC is to protect investors, maintain fair, orderly, and efficient markets, and facilitate capital formation. Capital formation, it's a fancy way of saying putting a bunch of money together to start a company and to build a product or service.

David Friedberg: Efficient markets, efficient markets, we all want efficient markets, we don't want to slow people down, we need to have that speed and velocity, but with speed and velocity, and with innovation comes complexity. And people in the United States are risk takers.

SPEAKER_02: If you were to look at the companies that have become global companies in the world, well, there's a handful of them that you can name off the top of your head. Amazon, Google, Facebook, Instagram, Uber, Airbnb.

SPEAKER_05: The reason why this great country, America, of only 300 million people, not one of the biggest countries in the world by far, punches above its weight. The reason why we have companies that make it around the globe in record time is because we have figured out a way to create a fair and balanced and efficient system. The SEC is a critical part of that. Now, the SEC, sometimes, you say the words SEC, people get a little nervous. Oh, my God. Is that like the FBI? Did I do something wrong? They're actually a very approachable group of people. And I believe they're some of the most principled people in the world, and certainly in the business world, because they take a job with a level of knowledge and expertise that, I believe, their compensation is dwarfed by what they could do in the private sector.

SPEAKER_04: Hester Purse is with us today. She's very active on Twitter. She knows more about cryptocurrency than most people who are in these cryptocurrency companies that I know.

SPEAKER_07: So I'm really, really delighted that she took the time to come on this week in startups and help us understand why the SEC exists and how they're dealing with the massive innovation around finance in the world while still staying true to that mission that we talked about, Hester.

SPEAKER_04: So thanks for coming on the program.

SPEAKER_09: Well, Jason, it's such a pleasure to be here.

SPEAKER_11: Thank you for having me. And you did a really nice job of describing the function of the SEC. I should start by saying that my views represent my own views and not necessarily those of the SEC or my fellow commissioners. And that's an important point to make, because unlike some other federal agencies, the Securities and Exchange Commission is made up of five commissioners and then a staff of about 4,000 to 5,000, and we're spread out across the country. And the five commissioners, we're the ones who vote on new rules. We're the ones who vote on enforcement actions when people violate those rules. And then the staff does the day-to-day difficult work of both looking for when there have been violations, but also working to write the rules and also reviewing corporations' filings when they come in, reviewing investment companies, which are mutual funds, filings, and so there's a lot of really detailed work that goes on at the SEC. And I think you made a really important point, which is that the SEC is part of the fabric of the regulatory framework, the rule of law that governs our capital markets in the United States. And that is what makes our capital markets markets that people want to come to, to raise money, to invest money, because there's a level of trust there that they know that if they come to these markets, they're going to face a consistent, reasonable set of rules, and that set of rules will apply to everyone. One, there's no favoritism. And so that is a really important piece of having markets that work. Now, I approach my job with sort of a view that markets generally work quite well. And so we do play a referee role, but our role should be quite limited. And we have to be very careful in getting in between two people who want to come together and make a transaction that's mutually beneficial. So I tend to be on the side of wanting to be very careful about adopting rules that will change the way people behave.

SPEAKER_13: And an amazing analogy for this is the sports world.

David Friedberg: When we watch a football game or the NBA finals, nobody wants the refs to decide the winner of the game. We want to see the people on the court decide the winner.

SPEAKER_04: But that doesn't mean we want people to be able to, in the case of basketball, travel or cheat or do something that doesn't work. Now, there's a lot of topics I want to talk to you about. Accreditation is one of them. ICOs is another. When something's a token or when it's a security. But as we wrap up the first section here, what I want to understand is who are the people who choose to come and work at the SEC? You heard in my little introduction there, this is something I think about a lot.

SPEAKER_07: I've been served papers exactly once by the SEC when I was a little bit younger, a little bit terrifying. I'll tell the story without saying any of the names.

SPEAKER_04: But I take it deadly seriously because I think these are very smart people with legal degrees and accounting degrees and who've gone to incredible institutions. And there's this private sector here where they would absolutely be compensated much better if they were in the private sector. So explain to me why you chose to go work at the SEC and why do you think people choose this vocation as opposed to maybe one optimized for generating more compensation?

SPEAKER_11: Well, I came to the SEC first as a member of the staff and my job was to write rules for mutual funds, actually. And so that was a learning experience for me. And I came because I really wanted to see how a regulator worked from the inside and specifically was interested in the securities markets. And so that's what drew me there. And I think for a lot of people, the draw for coming to the SEC is they do believe in the capital markets, just as I do. They have this firm belief that capital markets can improve people's lives. And so they want to be there to work on setting that that solid regulatory framework. And so I think that you mentioned principled, and I think people do come to the job with these principles that they're trying to live out. And it's also just a great group of people to work with. So I think there's that element of it, too. It's a really, really nice organization. And we have lots of people who have spent their whole careers or virtually their whole careers at the SEC.

SPEAKER_21: Which reminds me, in a way, coming from a family with a lot of law enforcement in it, from the State Department to the FBI to the New York City Police Department.

SPEAKER_07: I hear that a lot from people who co-work in law enforcement. They feel like they're doing something virtuous and good for society, and it's intellectually stimulating. When we get back from this quick break, I want to talk about the accreditation rules, which is something that I deal with a lot. And it seems to me to be something that, coming from a background in which I grew up poor to maybe the bottom of the middle class,

SPEAKER_04: the accreditation laws, which we'll explain when we get back, felt unfair to me. I happen to be one of the lucky people who was able to break through the accreditation laws and get to a level where I could make private investments. And then once I was able to make those private investments, I was able to generate, let's just be candid here, a large amount of personal wealth and wealth for other investors.

SPEAKER_05: But looking at it now, I wonder deeply about the fairness of it all, because I see a lot of people who couldn't make that jump.

SPEAKER_04: And when we get back from this break, I want to unpack the accreditation laws and how the SEC is deeply trying to change them when we get back on This Week in Startups.

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SPEAKER_04: Hester Purse is here. I highly recommend following her on the Twitter because she's active and she talks and she engages with people, which is something I would think is a little risk-taking. H-E-S-T-E-R-P-E-I-R-C-E. You are active on Twitter and you engage with people. Do other people in the SEC do that? Or are you a little unique in that regard, Hester?

SPEAKER_28: Well, there are others who have Twitter accounts and do engage.

SPEAKER_11: So I think it's been a really useful way for me to find out what people are thinking. Sometimes very unvarnished opinions. I get lots of doses of humility when I look at Twitter and people say really, really negative things and i think actually that's quite helpful for someone who's a regulator because we do have a lot of power to make decisions one way or the other i mean we're going to talk about accredited investor here in a second and it's really important for us to remember that we are making decisions that affect people's lives and we have to be very careful about how we wield that

SPEAKER_07: power so to give people just uh some broad strokes here the accreditation laws as i've understood them is you've needed traditionally an income exceeding two hundred thousand dollars a year

SPEAKER_10: three hundred thousand dollars if you have a joint account uh if you were partners husband and wife or wife and wife or husband or husband or any combination uh and you need to have done that

SPEAKER_07: for the last two years with an expectation that that would continue this is about five percent of the country based on the data i've read but what this does is it excludes somebody perhaps somebody

David Friedberg: who works at the sec who makes a hundred fifty thousand dollars a year and writes the rules about accreditation or enforces them or an nyu professor who teaches economics or a money manager who happens to make a hundred twenty five thousand dollars and so explain to me when we look at that number how does

SPEAKER_02: the arbitrary number of two hundred thousand dollars a year or and i also think it's a million dollars

SPEAKER_04: in liquid net worth how would somebody who won the lottery how would somebody whose parents gifted

SPEAKER_05: them a million dollars be more qualified to invest in the next uber airbnb or google then

SPEAKER_04: a person who makes a hundred and fifty thousand dollars writing uh or doing enforcement at the sec

SPEAKER_09: or teaching economics at nyu well i think the the theory behind these numbers which candidly were

SPEAKER_11: i don't know what the what the rationale was for picking those numbers um so when people say well you should you should raise them for inflation since they were adopted since the time they were adopted um my response is well fine but you got to tell me why they came up with those numbers in the first place and nobody seems to know um the the rationale though is that if you make a certain amount of money or you have a certain amount of wealth then if something goes wrong then you'll be able to bear the loss and then the other piece of that is we assume that people who have more money are more sophisticated which as you're pointing out is a flawed assumption though i don't know that i would say that necessarily writing rules or bringing enforcement actions is what qualifies someone to be uh to be an investor but someone who who um maybe has has an mba or has um studied investing on her own spent her time thinking about these things and really done her homework she might well be qualified to make really sophisticated decisions and we're just arbitrarily essentially excluding her from

SPEAKER_13: doing that and the the issue that i think also confuses people is we also live in the united states

David Friedberg: where we believe in personal freedom if you have this money it should be yours to invest or make a

SPEAKER_04: mistake with it if you so choose so we have this really confounding um situation where i and i gave

SPEAKER_07: you the the extreme edge cases a trust fund kid who's a dope and on the other side you know an nyu professor who just happens to be right under the amount so i i purposely put those in there for

SPEAKER_04: dramatic purposes we would we would think in the overwhelming majority of cases the ability to make 200 000 a year would correlate with some level of sophistication and i think that's directionally correct it might in fact be almost perfectly correct 80 90 correct but we also live in a country where people can go to las vegas and take their entire net worth and put it on black or red on a roulette table and nobody stops them so how do we as a society reconcile that we will allow any american to take the mortgage of their house the deed of their house their car their entire net worth and put it on red or black but we won't let them put ten thousand dollars into the next linkedin if they happen to work at linkedin

David Friedberg: or they happen to be a human resources manager who used linkedin in that first year or two knew somebody at the company because they got so much value from in the part and said hey we're raising our series a would you like to put ten thousand dollars and they go you know what i make 125 i can't it would be illegal for me to put the ten thousand there but i can put it on the new york knickerbockers

SPEAKER_42: and do you have those type of conversations in the sec i do i i um come at it from exactly that

SPEAKER_11: perspective i think there is something un-american about telling people how they can and can't spend their money i mean people have worked really hard for their money and they've made a lot of um sacrifices to to earn their money and so they have a bigger interest in saving it and preserving it for the next generation than than a regulator does i mean i think there's a presumption when it comes to financial things and part of this is is is true right there are a lot of complicated financial products and you should think carefully before you invest your money um you you should be really asking lots of questions and you should be figuring out what your own capacity is to make those kind of decisions and if your capacity and your interests lie somewhere else then hire someone else to manage your money whether that's directly hiring a financial advisor or using using another financial professional or just putting your money into mutual funds or exchange traded funds you don't have to be an you don't have to be an expert to be an investor but if you want to be an active investor i don't think we should be standing in in the way of doing that so i've always struggled from a philosophical standpoint with the idea that i'm arbitrarily telling certain people you have to be rich to get rich and again not to say i i should caution there you know it doesn't mean that when you invest in a private investment because i i should explain that the the accredited investor rules are essentially the gateway so you have to you have to pass that threshold to invest in the private markets you are allowed to invest in the public markets which means those are the companies that those are the offerings that are actually registered with the sec um and that means that the sec has done some level of review and so forth so the private markets are ones where you may not get disclosure mandated by the sec and that means you've got to be more proactive on your own and i should say that not every investment in the private markets is going to generate a positive return you could lose all your money so i think people need to go into any investing proposition with their eyes wide open and knowing

SPEAKER_20: that there are risks there might be returns but they're also risks and i think this is an incredibly

SPEAKER_04: astute point you're making because in my day job as an angel investor in over 200 companies and i teach a course called angel university now and i've taught this course close to 20 times to over 2 000 people i only teach it to accredited investors right now but i explain to them seven out of ten of the companies or eight out of the ten of the companies we invest in we expect to return zero now if you were to look at public market companies public market companies if you were to invest in 10 public open markets 10 of the top you know 500 market cap companies today the idea that seven would go to zero is just statistically absurdly improbable and certainly if you did it now you might lose half your money you could lose two-thirds your money none of this stuff is guaranteed but this is a very astute point as well so you've decided to make some changes slowly and you've been pushed when i say you i mean the sec has been pushed by i believe congress uh or the senate and the obama administration uh with an act that was called the the jobs act the jobs act and this is a and now this goes back to obama this has been something that's been going on for years and the sec has been very thoughtful but also they've been pretty slow about this when we get back from the break i want to know what's taking so long and evolving this rule and what the concerns of the sec are and what was the the the impact of the recent

SPEAKER_07: announcement that just came out this year of of how you plan to evolve but when we get back on this week in startups uh with hester purse from the sec this week in startups is brought to you by

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SPEAKER_04: what's next welcome back to this week in startups hester purse is here her name is spelt p-e-i-r-c-e go ahead and follow her on twitter she's she's super active and this has been a great candid discussion

SPEAKER_07: so far um it seems to me that the sec is incented to move slowly because when bad things happen

David Friedberg: you get blamed for it any bad investment that happens people are going to look at you

SPEAKER_07: just like in the nba if there's a call everybody starts yelling at the refs you're the refs they're going to yell at you so i assume that you are extremely cautious in how you deploy rules the now was it the congress or the senate that mandated five six seven years ago now that the accreditation laws change and i believe this is was in the wake of the great financial um crisis of 2008 they said

David Friedberg: hey we we need more startups we need more investment in startups let's do this jobs act to spur more investment now that means they're telling you hey referees figure out how to not only allow more people

SPEAKER_48: to invest in startups but protect their downside this is a really difficult task what have you've

SPEAKER_05: moved very slowly you being the sec um i would like to understand if i'm correct in that the sec is incredibly risk averse when making changes and they move slowly and then what are the changes that you

SPEAKER_04: felt comfortable making so far to these accreditation expansion rules well i think you capture the

SPEAKER_09: sentiment very well which is that regulators in general the sec is no exception tend to be

SPEAKER_11: conservative in the sense that um if we say no to something it's really hard for people to tell what the loss to society is from us saying no you can't do xyz if we say yes to xyz and something bad happens people come to us and say well why didn't you stop me from doing something stupid with my money um and that isn't our role as you said we're a referee we're not playing the game um the the there were a couple things that happened so after the financial crisis the big piece of legislation that was passed was passed was the dodd-frank act and what that did was was mostly um increased the regulatory framework in response to financial stability concerns one thing it did with respect to accreditation was it did you used to be able to count your your home toward your wealth and it said you can't do that anymore um and that was born of the fact that that during the financial uh the run-up to the financial crisis home values rose quite significantly so i think that was the thinking there then you referred to the jobs act which came several years after dodd-frank and that was that was a bipartisan piece of legislation which covered a number of topics including setting up a crowdfunding regime did some things related to general solicitation which is whether when you have a private investment that your private offering that you're trying to sell can you go and talk to lots of people about it or can you only talk to accredited investors so it did a number of um different things and so so as the sec was putting dodd-frank rules into place it was at the same time also working on putting the jobs act rules into place because often when congress passes a law they go they say to the sec you go do xyz you go put a crowdfunding framework in place and so that's what was that's what has been going on um over the last decade or so at the sec lots of rule making now we're actually at a point now where we are looking back to see how some of these things work and one area where we've gotten really consistent feedback and this is not something new it's not something post-financial crisis post jobs act but real concern about these accredited investor rules because of the fact that they are excluding people from the private markets and a lot of the growth now a lot of the economic growth the the company's biggest growth years are happening when they're in the private markets and so if you only allow a very small percentage of americans to participate in those markets you're you're keeping a lot of that growth potential out of the hands of average investors

SPEAKER_07: so what can this is a critically important point yes because it it is we we have a pro and i want to just pause on this and i'm sorry to interrupt you on it but i think that this

David Friedberg: is such an astute observation on your part because in america we are experiencing a group of young people who believe the system is rigged against them and they believe that it's rigged against

SPEAKER_04: them and that capitalism is for the rich who are already rich enabling them to be more rich and that

David Friedberg: they have been given the short end of the stick and that they are not allowed to participate in wealth creation and so what do they do well they open a robin hood account and they start trading futures or they try to get in there or they start doing gambling you know uh and wagering and draft kings become super popular that energy is there and the energy instead of going into private companies where i spend my living uh as an angel investor uh they put it into draft kings they put it into robin hood which i'm

SPEAKER_04: an event i'm lucky to be an angel investor in which is good that they get that education but they they put

David Friedberg: into things also like cryptocurrency and icos and they do that essentially illegally uh or on the slide with no knowledge of it and you so you saw that pent up energy young people would like to make a bet with their extra thousand dollars but the best casino the best inventory were silicon valley companies and we didn't let them have access to that we let them do draft kings we let them do robin hood you know and buy netflix in year 20 when we really need to let them have access to that netflix in your years one through five if there's going to be wealth creation so i i really think it's

SPEAKER_60: such an important point you make there well and i think it's it's great that a new generation of

SPEAKER_11: investors is getting interested in the markets but i i and i love the the passion and enthusiasm of young people and the and the the desire to make sure that the system is working for everyone and in order to do that we need to get as many people involved in our capital markets as we can because i think people don't recognize this but the capital markets are the best way to transform people's lives you can take i mean you mentioned it yourself you know you can take someone who comes from very limited financial means and you can transform that person's life that the the community within which that person lives the the families um the the next generation will be better situated also and so i think it's really exciting and the potential is there but we do have to make some tweaks and i think the accredited investor piece is one tweak that we're still taking as you mentioned quite a long time to long time to do um so we've heard a lot of feedback about it over the years and we we've been stuck on this notion that no the only test for sophistication we're going to use is how wealthy you are how high your income is and finally this year we adopted a rule which is not a massive change it did some things on the institutional side to to include more institutional uh and more institutions in the definition of accredited investor but it also opened the door just a crack to say there's a group of individuals who may not have a lot of money but they're working in the financial industry and we think they too should be accredited and importantly we said now that we're making this sort of philosophical shift we're open to the idea that there might be other groups of people who should also be considered to be accredited investors so you need to come in and tell us explain to us why so whether that's a group of schools coming in and saying we think our mba programs um give people enough knowledge that they should come out and be accredited investors whether someone is going to develop some kind of a test and come into us and say that whether a group of community colleges will say hey we've got these these two two courses and the curriculum the curriculum that we're using really prepares people to think about private investing so i'm hopeful i mean again i have a much a much different philosophical outlook but i think we're working and we're making progress and i like to see

SPEAKER_13: that door opening yeah and i think just to give people some some specific examples here it used to be

SPEAKER_07: that if i had an employee at my venture fund i have small boutique venture funds they were not uh

SPEAKER_02: accredited if i wasn't paying them 200 000 a year but they were working with me to close 75 investments in private companies a year uh so those type of people people working at a financial firm that does

SPEAKER_10: private company investing they now have the ability to be accredited so if they wanted to have some

SPEAKER_07: compensation included in a fund they could and people who have in good standing a series 7 65 or 82 licenses are now accredited investors but those licenses how hard are they to acquire so if i was you know a 25 year old who made you know 75 000 a year and i wanted to start doing private investing

SPEAKER_05: is that a six months six weeks six thousand dollars a process to get those or yeah you've got to be affiliated

SPEAKER_57: with a firm generally for the for the qualifications and that's why we really do need to this is step one

SPEAKER_11: we need to go the the the additional mile and and have some kind of opportunity for someone who just says says hey i'm really interested in investing um what courses do i need to take to get me to the level where you know i'll count as accredited when we get back from this final break i want to give you my

SPEAKER_66: proposal i'm not going to hold you to it so i'm not looking for you to approve this while we're talking

SPEAKER_07: on my podcast but i just want to fly it up the flagpole and see if anybody salutes when we get back

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SPEAKER_21: let's get back to this amazing episode welcome back to this week in stars we're having a really

SPEAKER_04: honest and candid and insightful discussion about the fairness of uh being able to invest in private companies and private companies stay um you know private for a long time i was the third or fourth investor in a in a taxi company called uber uh which you may have on your phone and it worked out okay for me but it was an 11 year journey before i was able or maybe we had some private yeah we did have some private opportunity to sell to masayoshi-san of softbank in year nine but this was a long a long

SPEAKER_07: period of time and um i certainly got lucky on that but i wrote a book with a with a publisher called harper harper collins business the number one business publisher in the world i've toured i've taught a four-hour course 20 times and i i did both of these things because i felt like i learned something

SPEAKER_10: about angel investing after the first 100 investments and i'm at 250 doing 75 a year deploy and i have the largest syndicate in the world for accredited investors it's called thesyndicate.com

SPEAKER_07: got 5 500 members and we do you know 40 50 deals a year of 500k i know what i'm doing i am a good

SPEAKER_10: angel investor if i wanted to create a test just like the test to get a firearm in this country there's a 20 question test when you're a californian if you would like to acquire a handgun or a rifle

SPEAKER_04: that you have to take that's to acquire a gun if i made a test that was you know 50 questions and that required you to read a you know book that took five or ten hours and take a course that

SPEAKER_05: you know required four or five hours would would something in that realm be something the sec would consider that's part one and then part two i in in when i run my uh syndicate when i share a deal with

SPEAKER_04: people and i have skin in the game i'm putting a certain amount of money and then i have an allocation i tell people please put in the minimum amount which i said at two thousand dollars other people

SPEAKER_05: who share deals when they do an llc and an spv they say hey minimums 10k minimums 20k i purposely set it

SPEAKER_07: at the lowest possible amount 2k which is really the lowest you can do you know to make transaction

SPEAKER_17: fees and blue sky fees and setting up the llc worth it right the fees associated with setting up these

David Friedberg: things would it not be a a potential path after the the great one that you've already accomplished to

SPEAKER_10: say hey take a course like this a five-hour course a 10-hour course pass a 25 or 50 question quiz

David Friedberg: and then you'll be allowed to make 10 investments capped at 2 000 each in year one and then after

SPEAKER_07: that you can do you know whatever it is you know an unlimited amount but it in in other words a

SPEAKER_05: reasonable amount of education in the five to ten hour range and then a cap on you have to go slow and

SPEAKER_04: you have to hit diversification but some private company investing if you invest in one company the chances of you hitting the outlier is next to impossible that's like splitting the arrow you know william tell style or whatever it's just not going to happen but if you hit 20 30 40 investments yes the chances of you hitting an outlier that make up for all the failures this does happen is are you talking to anybody about that yet because that's really the secret reason i wanted to have you on the pod was to open up this next piece of the dialogue i know you've worked really hard to get to here but i'm looking at the 95 of people who contact me and say hey teach me how to do this and i say you know what i cannot teach you how to do it you can read the book you can listen to my podcast but i don't want to get myself in the crosshairs of the sec where i start teaching non-accredited people how to do this what do you think of this general concept

SPEAKER_11: yeah i mean i think you've raised a couple really interesting points one i think is important to emphasize which is um diversification is is a way to protect yourself and and so um people who even may have opportunities to invest need to think about the diversification of their whole portfolio including where you work so sometimes you'll get opportunities to invest in the company you work in but you have to remember you don't want to have all your eggs including your career and your investments necessarily in the same basket so great good good things to think about um and you also want to think about how much money you can afford to lose and i'm not giving anyone investment advice i'm not recommending any kind of investments to anyone but you do want to think about how much you can afford to lose and you always want to ask a lot of questions of whoever is asking you for that money so i i think your idea of a test is is one that others have thought of and and i have had some initial inquiries about that i do urge people to come in and talk to the sec the sec has opened the door for people to come in with ideas like this the notion of having some sort of capped investment amount is not something entirely foreign that is what we do in the crowdfunding space there are limitations on the amount that people can put in again as a person who comes to this um with the with the idea that people should be able to invest their money as they choose i get very uncomfortable when we're trying to micromanage people's finances but i can see that you know i have to work with colleagues who have who have um who are maybe more conservative than than i am in that regard and they would like to put some breaks in place so i can see that kind of thing being attractive to people and that gives you a little chance to practice maybe investing small amounts i would say even if the government doesn't tell you that that's how you should approach things it's really good a really good idea to be cautious and how you approach things don't jump in with don't empty out your bank account and jump in with with both feet to invest in something um unless you're really sure what you're doing you you really need to be careful and there are a lot of people out there who are just waiting eagerly to steal your money so that that brings me to the the final concern that i would have about your proposal which i think we will see something like a test develop at some point but you have to be careful if you're going to be the consumer of one of those tests then you've got to make sure that the person who's selling you that test is not just trying to sell you on a an investment opportunity which means that she wants to run away with your money so you've got to do your due diligence a part of what i believe in is certainly freedom to invest as you want but with that comes responsibility to ask a lot of questions if your gut is telling you you don't trust this person then you've got to run the other direction and so i think that's part of the the the course material that that would need to be covered which is is be careful um be aware of some of the red flags for for what a scam could be um but with that said i think i i would welcome you jason to come in to the sec with its with with the idea that you're thinking about um come in and talk to our division of corporation finance which is the the part of the sec that that is thinking about how maybe we could further expand this definition and and share your ideas and i welcome anyone who's listening who has other ideas to to do the same thing i think it's only collectively that we can really approach this problem and i think it's it's right for you to point out that we need to think about this as a country it's not just us the regulators trying to figure out what the right answer is here we need to draw on the wisdom of of everyone out there people who have been in the investing world and who know the kinds of information that that people need to know before

SPEAKER_88: they invest and i think is that i know your time is limited and i want to be respectful of it but i

SPEAKER_07: think it is a really great segue for us and maybe we'll we'll start to wrap on this which is knowing when you are getting scammed and i have witnessed on the tick tock and instagram a cohort of people who are selling get rich quick scams and what i told everybody when i did my angel dot university course was it's a hundred dollars to come to the course and we donate all the proceeds to charity we happen to do a charity called smash which teaches people who are from uh disadvantaged communities how to do science technology engineering and math to help them do better in college and and get those degrees and we we donated a hundred thousand dollars this year i don't need because because i don't need to make money teaching you how to be an angel investor if i was the third or fourth investor in uber and robin hood and thumbtack and other great companies um and so we we're seeing this young group of people showing

SPEAKER_05: ferraris and showing i guess selective trades they've made on heads up displays and then making videos of

SPEAKER_04: it and then really shaping a person into a scam come to my hundred dollar seminar come to my two thousand dollar my five hundred dollar seminar come to my three thousand dollar personal finance thing how on earth

David Friedberg: does a company an organization like the sec with limited resources deal with this level of selective fraud and and from what i've seen of these folks they're not disclosing their complete um performance

SPEAKER_07: which i have to do i have lps i have lps who are serious professionals i have lps who are the most

SPEAKER_04: legendary venture capital firms in the world i get an audit on my fund and the the results are there

SPEAKER_05: but what these people do from what i gather is they'll place five trades they might place five

SPEAKER_04: trades that are counter to each other or counterbalance each other and delete the four videos where they lost money or did broke even and take the one on the other side of the trade you know where they short it and went along on the same stock or whatever and say look i made ten thousand dollars

SPEAKER_05: today when really they just broke even because they took two sides of the same trade how does sec enforcement work when does something hit your radar is it when somebody in florida who lost money complains to you or or do you have people out there watching this nonsense and saying let's let's dig deeper and are you properly resourced or improperly resourced to enforce because when i saw the ico craze that to me as somebody who really takes the work seriously i mean i do not want people to lose money and when i saw people investing money in white papers with spelling errors in them and shipping their bitcoin to a wallet of somebody they've never heard of in another country i thought oh my lord this is going to be one of the greatest scams in the world and i we watched thousands of ico's

SPEAKER_07: and i think you've been able to you tell me how many of those have you got you've been able to

David Friedberg: the team been able to take action on and how do you even make that decision of who to take action on

SPEAKER_11: well so there are a lot of there are a lot of questions in there but there are a number of people kind of watching what's going on and so one is certainly where we're there and we've got an active set of enforce a lot of our attorneys are enforcement attorneys or they're working in our office of compliance inspections and exams and they're watching the markets as well they're also state regulators who are very actively watching what's what's going on and then we do have this wonderful whistleblower program where people can come in and tell us about something and now there's a monetary reward if you if you alert us to something and we end up bringing a case yes so tcr.gov as to go to the sec website and look for tips complaints and referrals it's not tcr.gov i i can't give you the off the top of my head the the address but if you just go to our main website scroll down and you can see where that where to file a tip so you've got to use the the form there but go ahead and do that and we get tons of really good cases from that um and so that's a piece of it there's always going to be a lot of fraud out there you have these heart-rending cases where people will take you know they'll build up someone's confidence and trust in them and then they'll turn around and stab them in the back and take all their money so you've got to be always alert when you're giving your money away to someone to invest you've got to ask a lot of questions don't be embarrassed to ask questions even if it's someone that you trust and like still ask questions if if they tell you the opportunity is too good um and it's going to go away tomorrow then you can you can just you don't invest before you are comfortable and you've got to be just extremely alert for red flags where people are telling you it's this or nothing you can always find another investment opportunity but you can't always get your money back so never feel bad if you if you feel you have to say no to someone um because you have qualms those qualms you should really listen to so part of it is really getting people we try we've got a big investor education effort under under our umbrella to try to get people to come ask us questions if something doesn't look right to you come tell us about it if you just want some basic information about investing we've got all kinds of resources on investor.gov um which is our investor education website so come at there's there's no shortage of resources come ask us questions um with respect to the ico the ico craze there certainly was fraud and we brought quite a number of cases now um but there were also a lot of people who put their money in with eyes wide open and so again it's it you raised the point jason of you got a little white paper here and you're going to invest all your money based on a little white paper that's a good example of when you need to ask more questions you need to think carefully a lot of people um one of the benefits of the ico um of the the legitimate ico's is they put their code out there for everyone to take a look at so if you know how to read code then take a look at it and see does it match what the white paper says or doesn't it and if it doesn't then you probably don't want to be part of that so there are a lot of tools that you have and i really encourage people don't you know be empowered to make some wise decisions for yourself when you do see something bad happening please tell us don't tweet it at me but go to tcr go file a tip complaint or referral

SPEAKER_57: so it gets into our system and our our staff look at all of those if you do a search for sec tips

SPEAKER_07: complaints and referrals it's the number one link right there it's really easy to do and the number one piece of advice i've given to aspiring angel investors who are accredited is i tell them look

SPEAKER_04: there is a 90 mortality rate before the product is launched you are not sophisticated as a new angel

SPEAKER_05: investor to assess an individual's ability to launch a product but you are able to download an app or use a product and determine if you think that product provided value and you have the ability to ask that

David Friedberg: person can i talk to three customers can you give me the names of three customers and so if you're going to write a 25 000 check to somebody using the product takes you one hour and calling three invest and calling three users and asking them candid questions takes 20 minutes each this is in our industry called due diligence if please if you hear my voice do not invest in your cousins brothers nephews sorority sisters ex-boyfriends idea for an app just wait until the app is live and say i don't invest until the app is live for the icos you would have 99 never launched you could have absolutely avoided this problem just by not just by waiting to see which ones actually emerged as

SPEAKER_11: products uh correct yeah i mean there's never there's never harm in waiting and thinking about things now i do think that there's some some really exciting stuff being done in the crypto space but again just use your use common sense use judgment and if you're if if you're going to buy a 25 000 car you're going to do a fair amount of research you might want to do the same type of due diligence um when you're making real investment investments with with your money because otherwise you may never see it again so and and even so even if you do your due diligence you may lose your money so be prepared for that also you should never go into it thinking this is this is going to guarantee guarantee me a return if you want a guaranteed return um the securities markets are not really the place for you to be uh to be playing when i was early in my career and had been the my first

SPEAKER_04: little swath of cash i talked to my person at alliance bernstein for an hour and i said tell me what's the safest because i was scared to death to lose my nest eggs and they said well bonds are

SPEAKER_07: pretty safe historically i said what are the safest bonds they said revenue-backed ones so what's a revenue-backed bond they said you know when you go over the verrazano bridge and you give them seven

David Friedberg: bucks they take the revenue first to pay the bond and then the city gets it i said i'll take those and i bought millions of dollars in revenue ponds and you know i slept like a baby at night pretty hard to lose your money i'm not i mean you do have municipalities that can go out of business like they can go bankrupt but the history of it is so low that that to me felt like one of the safest

SPEAKER_04: bets i could have made but it it really took i would say that was two or three hours of difficult

SPEAKER_11: conversations with financial advisors but i think jason you make a good point which is that there are risk return trade-offs you can you can um you know choose to invest in things that are riskier um in terms of the likelihood that you'll get a return or you can choose to have a little bit more certainty about your return and even with municipalities as you mentioned their differences and and how these bonds work how they're paid back whether they're general obligation bonds or um have a specified revenue stream but you can go and you can look at the disclosure there's this wonderful system the emma system which has all of the disclosures you might find it interesting even just to look up the disclosures for the town in which you live or the state um related to state obligations in the state in which you live so take advantage of the really great resources that are out there we have a wonderful system for public companies you can go on and you can look at filings on our edgar system and you can learn all about a company before you invest in it so take advantage of that read your disclosures for your mutual funds we've tried to to come up with summary disclosures now so that you don't have to wade through a really lengthy one but take a look to understand what the

SPEAKER_21: fees are that you're incurring fees are so important because when you when you're giving somebody one percent it doesn't sound like a lot unless your return is four percent and then it's one of four

David Friedberg: points which means it's twenty five percent that was another lesson i had to learn the hard way as a poor kid who had to figure out how to manage money as we end here um when you see this spac

SPEAKER_07: movement happening um and so a lot of the companies i invest in privately are are being pursued by

SPEAKER_04: specs some of them seem to be run by really um um you know people with great track records in their careers and then some of these people have never heard of and then the quality of the companies seems variable do you think we need more public companies in general so there's more inventory of companies because we have half the number of publicly company traded companies than we had i think it was 15 years ago do you think it would be good for us to have some more publicly traded companies and specs and then again you're not going to give financial advice but obviously invest what you can afford to lose and then these would be more speculative right so the risk reward would be

SPEAKER_07: they're coming out earlier therefore there's more risk therefore there's potentially more return

SPEAKER_17: is are our specs and net positive for the vibrant economic system of capitalism and democracy in the

SPEAKER_11: united states well people are looking for different ways for companies to go public and the special acquisition corporation is is one iteration so essentially you you give money to people who say um who say okay we we're going to go find a great public company and we'll put it into this essentially this um special purpose acquisition company which is an empty shell in a way and you can put any private company in and then it's it's a public company um and so that's that has existed for quite some time but for some reason of late has gotten quite a bit of attention and has become um somewhat of a some there there's somewhat of a trend of these happening now um in general i i do think that we want to make our public markets as attractive of a place as possible so that more companies want to go public earlier um because there there are a number of reasons why the number of public companies has fallen in the united states and you ask different people and they have different theories about that but one of the things that we've been trying to work on at the sec recently is to make it less burdensome to be a public company and not in the way you know we're not compromising investor protection but we're saying where there are duplicative rules that we can streamline let's let's take care of that let's think about ways to make new public companies trade easier sometimes you go public with the idea that oh you're going to trade just like um one of the biggest tech companies trades you know lots of liquidity it doesn't really work like that so can we can we um maybe create some special ways for these newly public companies to trade can we think about um you know what the other causes are for example there's not as much research analyst coverage for new public companies so there there are a lot of different ways to attack this this um problem and i think we're we're trying to think about those now um but the the the idea that people are are being innovative in the way that they take companies public is good i would just again without giving investment advice i would just give the general the general thing i've been trying to hammer home which is do your research you know look at who's who's running this back and and what how they're going to get paid um and those are things that you should think about before you invest incentives certainly

SPEAKER_07: matter uh you know my friend chamath has been he kind of brought this spac thing back chamath is putting when you want to talk about skin in the game in the nasim taleb kind of way i mean uh chamath

David Friedberg: is putting tens of millions of dollars of his own money into each one of these therefore you know he doesn't want to lose that there's a massive amount of skin in the game i'll end with this young people who start companies and they're raising capital privately they are sometimes dopey kids they're inexperienced and they do something which i'll call presenting the best picture of

SPEAKER_05: their company and when you present the best picture of your company and it might be taking the truth and just bending it and then at the same time you sell securities the sec has a view on this when you bend the truth and sell a security how does the sec feel about that well we we feel that we

SPEAKER_11: might bring a um securities fraud action against you and and so i think that's really a an important thing to underscore because a lot of people who start out you know they're enthusiastic about their companies and that's great be enthusiastic about your companies but tell people the truth be honest with people about what the limitations are um how you're going to use the money and then follow through on what you said otherwise you really are in a position where where you're you're violating the securities laws you cannot lie to people in the process of raising money that's a violation of the securities laws and we do take it seriously for the reason that jason brought up at the very beginning of this podcast which is that we can't have well-functioning capital markets if there's not if there aren't rules of the road that people adhere to and when they don't adhere to them that there's an enforcement mechanism to come after them for not adhering to them so um on both sides you know people need to to people who are trying to raise money need to be honest about what they're doing people who are who are trying to invest money need to ask lots of questions never just assume that because it's someone you know or a name that you respect that you should put money in without

SPEAKER_42: asking you just always want to ask questions and that's that's a good theme for life anyway just ask

David Friedberg: lots of questions yeah i'm gonna go with great life advice esther and then this was uh the this the story of the one time i had an interaction with the sec was somebody came on this very podcast they painted a very rosy picture of how things were going and i was an investor in the company and the company went out of business and somebody went to your whistleblower page and said i invested money in this company and they told me x and it turned out y and then i come home from work one day and somebody hands me a big thick envelope from the sec and i gotta call wilson cincini my attorneys and say what what is going on here and i'll tell you the sec is filled with principled people who are making a

SPEAKER_05: fraction of what they would make in the private sector and if they're looking into something

David Friedberg: they're not doing it for some ego trip or sadistic reason or because they're bored they're doing it because they're principled individuals who want to protect and have a fair game and i had to talk to my attorneys i mean scary for me what's going on here and they said hey jason here's how it works you give them everything you have and then hopefully you hear nothing because they don't tell you why they're asking they don't tell you what the resolution is this is a document request and that's how you guys do it right isn't it you just you say hey give us everything you got and we're going to look into this and we take it deadly seriously yeah and well and and again i i'm

SPEAKER_11: glad that you underscored the uh the point that we really have a job that we're trying to do which is we're trying to keep the markets um working properly we're trying to protect investors and so this is this is part of what we need to do we ask a lot of questions as well um and and so you're always better off if you've if you're raising money if you've documented what you've told to investors and you've told them the truth and that's that's a a very good way to operate um tell them the truth and you can be honest about your limitations um and and that makes for a better healthier

SPEAKER_13: investing environment and it's and in fact especially in early stage investing if the if things were perfect there would not be the opportunity investing in disney in year 50 or

David Friedberg: netflix in year 20 or 30 or amazon in year 30 things are going to be tight they're going to have had a lot of time and resources to make things perfect investing early of course there's going to be

SPEAKER_04: things that aren't perfect yet just own them and i give this speech to every founder when they're

David Friedberg: starting out do not bend the truth do not paint weird pictures do not make charts into something

SPEAKER_05: they're not own the reality own reality because then you get to build on reality whereas if you bend reality now you're you're starting to build this house of cards and and you know you know like we've talked about here in order for us to win as a country the sec has to enforce these rules and they have to take it seriously and i just want to say thank you for for keeping capitalism uh in its lane and for having this structure because for the people who are the good actors in the world when i watch this fakaka crazy ico stuff going on it was making me mental because i was just thinking some of these people are selling securities and they they're calling them tokens but they haven't built anything yet and if i i understand what a token is a token like exists in the world we've seen them before but it got a little weird did it not well it did and there was a lot of there

SPEAKER_11: was a lot of activity going on in 2017 some of which was not legitimate and some of which was and and you know i think there are some difficult questions that we have to ask with respect to crypto because i think they're when people are trying to build a crypto network it's very difficult to do that without running into our securities laws and i think there is room for us as a regulator to do a better job writing rules that apply to this particular type of a token distribution event that's

SPEAKER_114: probably a topic for another that'll be our second that'll be another hour that will have you back on the program to talk about those ground rules two things break my heart you know that i see and one

SPEAKER_11: is when people do lose their money because they trusted someone and they didn't ask questions they were too embarrassed to ask questions they trusted in the name of someone they knew or it's an infinity fraud it's you know your friend told you um that this was a great investment opportunity so that always breaks my heart because a lot of people get really badly hurt because they just went on the word of someone else without doing their own homework and they felt pressured perhaps to invest and you should never feel that the second thing that breaks my heart ties to something else you said jason which is you have someone who has a great idea an entrepreneur who has a really great idea and is building something really interesting but it's a messy process and it's difficult to do and capital is always hard to come by for those early stage investors and so they they they end up shading the truth or not not adhering to the securities laws and they get in trouble and their their idea falls to the ground because of the securities violation and so it's better to be compliant with the securities laws and and understand that that's just part of what you have to do because it's it's part of what makes our markets work well and so it can be it can be

SPEAKER_99: difficult to do that but it's so important to be truthful with people yeah i mean if you want to

SPEAKER_13: innovate innovate on the product don't don't try to innovate on the on the rules of the game because

David Friedberg: that's cheating and cheaters get caught you may not get caught immediately but we've seen it whether it was bernie madoff or elizabeth holmes with theranos or this fire festival dipshit you know like

SPEAKER_05: you're going to get caught somebody is going to figure it out somebody's going to drop a dime and

David Friedberg: the rules here in america are so pro the the investor and the entrepreneur are ready we already have a wonderful system play by the rules everybody hester you've been a great guest i really do appreciate

SPEAKER_07: you coming on and spending this time with us i know you got a lot on your plate and i'm definitely would love to have you come back maybe in six months or a year and like let's get into the whole crypto thing because i know you guys got a lot of work to do there thanks jason for having me this

SPEAKER_122: was fun all right it was a lot of fun we'll talk soon cheers now