Crowdfund Capital Advisors Part 1

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C R O W D F U N D C A P I T A L A D V I S O R S - P O D C A S T # 1

Mark: Welcome everybody to our first podcast with Sherwood Neiss and

Jason Best from Crowdfund Capital Advisors. This is Mark Wallace, I have my partner Chris Tell on the line with me as well. How are you guys doing today?

Jason: Doing great, thanks. Woodie: Doing wonderful, great to be with you guys. Mark: And you guys are bi-coastal today, right Jason? Woody, you are down

in Florida; and Jason, you are in California? Jason: That is correct. Mark: Okay great. So we are, of course, doing this from where we live in New

Zealand, bridging technology and connecting the world here. Today we are going to talk to Jason and Woody about what their activities in the crowdfunding space are looking like. We are going to talk a little bit about the history of how they got involved with the JOBS Act, which is fascinating; their work with the act and how it has progressed, what they are working on currently.

Well we are going to go ahead and start with their backgrounds first.

So Chris, why dont you go ahead and take it away? Chris: Yeah, sure. First I just wanted to mention that we had Jason at our

Aspen meet up probably about a month ago now. I know from feedback at that event that the speech that he gave was one of the most interesting and insightful speeches on the space. Thats no secret to Mark and I, based on the background of Jason and Woody, which I would like to delve into today.

I think that is where we will kick this off. Because Jason and Woody are actually successful entrepreneurs that looked at the opportunities in this space and really what needed to be done. I think it is fair to say guys that you did what many regulators and bureaucrats had said was impossible to do. So why do not you give me some background around how you got involved with the JOBS Act?

Jason: Sure, this is Jason, I can start things off and if Woodie can join in. We,

as you said, we are both entrepreneurs, we both have had a chance to build successful companies. I could talk about my companies that I have been involved with and Woodie can talk about his. The most recent one of which was a healthcare technology company called


Kinsser Software where we were providing electronic medical records to home health agencies.

We were able to grow that business from five employees to a hundred employees and from about $1,000,000 in revenue to about $20,000,000 in revenue in about four years. We were a two time Inc. 500 company, so among the fastest 500 growing private companies in the US. During that time, and previous to that with other entrepreneurial ventures, we have raised capital from angels, VCs, private equity groups for the businesses. We knew what that process was like, we knew how hard it was, and certainly we began talking about that actually at a friends wedding in August 2010. Because Woodie and I have been friends now for 20 years, we met in graduate school. We were talking about the lack of access to capital and the question really came down to if I can give away money on sites like Kickstarter. If I can lend money to entrepreneurs in the developing world on sites like Kiva. Why cannot I invest in businesses that I use every day or in entrepreneurs that I believe in? That is really the process that we began this whole genesis of this idea of how can we change the current laws to number one allow everyone, unaccredited investors included to be able to invest. And also the opportunity for general solicitation to take place in the United States, so that we could make them more available and update the security regulations to the Internet age.

Woodie: The thing that I would add to that, Jason and I, to the point that you

brought up earlier, we are practitioners in this process. We are entrepreneurs that have built successful businesses that have raised millions of dollars in the private capital markets and understand what is known as the stickiness of the process. So anyone that has invested in a company that is not a public company most likely had to hear about that investment opportunity through someone that they knew directly or through a friend of a friend.

You could not use the mechanisms, which we communicate today, meaning the Internet, in order to solicit people for an investment opportunity, because the ability to do that was outlawed in 1933, well before the Internet was even in existence. So when we went down this path to legalize debt and equity crowdfunding, our goal was to really bring, like Jason was saying, the securities laws to the Internet age.


Say if we communicate via the Internet, if we share information on Twitter and Facebook so that we have information in a more rapid fashion so that we can make better decisions, why are not we relying on that type of technology in order to facilitate capital formation for startups and small businesses. Why are they kept out of these opportunities and the technology so that they could actually grow faster if only we change these laws. That is really what we went to Washington D.C. with. A ten point framer, called the Startup Exemption, to look at the bottlenecks that exist in the private capital markets and allow us to address them so that we can use the Internet and general solicitation; that we do not have to restrict it only to the wealthy, but anyone that wants to invest in these businesses.

Chris: You guys bring up a very interesting point, and really that was around

the fact that legislature very rarely changes, at least with respect to the financial services and regulatory environment around financial services. For the last 80 years we have not had a significant change in that space, in securities laws, and the ability, as you mentioned, for private companies to raise capital.

I can only imagine what my friends would say to me if I went out and tried to change, or suggest at changing, something that existed for close to a hundred years. Now what sort of feedback did you guys get when you first came up with this crazy idea?

Jason: People laughed at us and told us we were crazy, and that we should

not waste our time, and we should go back to work and find something else to do, because this was never going to happen. Every security attorney we talked to said that everybody who had experience in this space said that. I think that one of the things that entrepreneurs can bring to these situations, someone new can bring to these situations, the fact that you have to bring equal amounts of naivet and maybe a little bit of crazy to try something new.

I mean we were very fortunate, we had great timing because the country was still dealing with the global financial crisis, and Washington was full of people, elected officials, who were looking for something to do to demonstrate that they were trying to help the economy move forward, and we had a lot of good luck. We had a lot of people who were willing to listen and willing to work with us and willing to move this agenda forward. I mean it was definitely something that most people never thought we had a chance to do, and sometimes we would agree with them, but we


kept going. For me it has been a powerful lesson in the power of perseverance.

Chris: Sounds like a convergence of economic troubles together with your

naivet in bureaucracy that managed to break through. Woodie: That is very true. We understood that this was going to be a fix that

needed to take place in Washington, be it the SEC or a legislative one. Believe it or not, it was the SEC that turned us on to the legislative route, because they were not prepared to make any further changes in the securities laws. But it was, like Jason said, it was a combination of showing up, not knowing what you cannot do, but what is possible, making sure that you are connected with the right people.

The rules that we followed are the same rules that we follow in entrepreneurship, it is really the same rules that investors follow in investing in the right business, which is who is going in on that investment, who do you have surrounding you, what people with better connections, deeper pockets, more knowledge, and experience can help you get done what you need to get done. We followed that same template when we went to Washington D.C. We asked people who they knew who could help us. We were able to build our own coalition. People on the Hill asked us to form a lobby group, or hire a lobby firm to help us get this done. We looked at each other and said with what money? We are willing to use our own money to fly here and get this done, but we do not have millions of dollars to buy off politicians. You either get on board because you realize that entrepreneurship, innovations, and jobs really get our economy going or do not worry, you do not have to talk to us. That is why 98 percent of the house voted in favor of this, because entrepreneurship, innovation, and jobs is something that both sides of the aisle agree on.

Chris: Yeah, very good. So in terms of the process, how did you guys go

about doing this? Did you create your own regulatory framework proposal, or how to use the web and public solicitation for the purchase of securities, or what exactly was the process?

Jason: Yeah, it was kind of a funny process. We sat down at my dining room

table and one side of the computer screen was the 506 rules, the rules that has governed the way people raise money through private securities for decades, and the other side of the screen was a blank Word document. We just said if we were going to rewrite these rules that were written 80 years ago today, how would we do it?


And how could we do it in a way that we thought had investor protection, but also allowed for people to raise capital in an efficient way. That was the kickoff process, then we began, like Woodie said, we started out at the SEC, and they said, Nice idea, but you will need a legislative fix to make that change. So we began that process.

Woodie: Jason and I, and Zack is the third cohort to this whole thing, the silent one. We were not so nave to think that we had the final solution, we knew what we needed to do, we knew what changes needed to be made, but we knew that this input was greater than us. So we actually had the first round table shortly after we came up with this in San Francisco, where we invited people from industry, people that were lawyers, people from crowdfunding platforms, people that had a vested interest in what we thought would be changing the way we go about and fund the startups and small businesses, and got feedback from them as to our ten point framework.

We were able to, again, build a coalition that was bigger than ourselves, and a bigger voice, to go back to Washington D.C. with and say that we came up with this, we have vetted it, we have talked about the pros and cons, here is a rational basis why we put these caps and limits in there, this is a starting point for discussion, our ten point framework was drafted into an eight page legislation. That is really what title three of the JOBS Act is, it was eight pages that came from our ten point framework.

Chris: I am curious, was the existence of Kickstarter and platforms like that,

do you think that those are a certain amount of credibility that that brought to what you were attempting to do? Given the fact that you now had this framework where people were putting forward capital without getting any compensation really in terms of equity.

Like getting, for example, if it was a company that was creating a video, you might get the first look at that video. Given the fact that that had taken off and was in existence and was essentially a market proving model, do you think that that gave any emphasis towards your proposals?

Jason: You know I think for most people in Washington, they did not know

what Kickstarter was. So while the market had really grown, and at that point maybe it was about $500 million or so that had been raised through Kickstarter at that time. But we were bringing sort of new information to a lot of people in D.C. of the existence of these platforms. So it was certainly a lot of education had to do about what is social media.


A lot of education about what these rewards based crowdfunding platforms were. And being able to bring that data to them as a part of the basis for our argument.

Woodie: I think the one thing that I would add to that is we showed up there with

a theory that because crowdfunding in a donation and perks based format is working successfully, transparently, and efficiently. If we add on the ability for investors to turn those donations into a vested interest, we could really stimulate the economy. That was a theory, now that we see it happening, we see that it is true that these people that have a vested interest are marketing agents for the business.

People that preorder products, like in the Oculus Rift example that was sold to Facebook for $2,000,000 that got a goggle, but did not have equity in the company, they are irritated that they helped get the company to that level and cannot benefit financially. So they have now proven the fact that if you give these people that buy these crowd funding campaigns a vested interest, maybe in addition to a perk that they want to get, they actually are going to go out there and do something better for that business. Recently a couple weeks ago we had our first crowdfunded company go public, it was a company that raised money out of Israel. So we have now seen the entire life cycle of companies that are formed, that go to crowdfunding, and have the opportunity for an exit on a public market. Those people that were crowdfunded investors in June on that crowdfunded platform for that company have seen over a 20x return on their money when that company went public.

Chris: Well, this is a space that Mark and I have been following closely for a

long time. As you both know, one of the companies that we were introduced to a good time back was the company that are going to be discussing in one of these follow up podcasts, and we can discuss that one as well as this Israeli company that you just mentioned. I think that is going to be a very interesting topic, but we will leave that for a separate podcast.

What I am curious of is that process of getting to the actual legislature

being signed. I mean you gents must have had a lot of low points and a lot of high points. Can you talk a little bit about those and what were they?

Jason: Yeah there were lots. I guess maybe if we could each take one. For a

low point, we had one experience that was both a low point, and ultimately became a high point. One of the ideas that we had was to


have a rally in Washington on the steps of the capitol, on the grounds of the capitol for entrepreneurs to come together.

We had just passed with 95 percent of the House representatives, and then we were going over to the Senate, and we wanted to do something to kind of kick off the excitement for the Senate to take up the legislation and move this to continue the forward progress.

We had a great spot on the Capitol steps, it was near the grounds of

the Capitol between where people commuted to work and their offices on the Senate side. The problem was it was a rainy, cold, windy day, where it was sleeting rain. And entrepreneurs are busy people, so we had a pretty small turnout for our, from a number of entrepreneurs perspective.

But what we did have is we had the press that came, we had the Democratic and Republican sponsors of the bill and the Congress came, and we had two of the Senate staff stop by to find out what we were doing. They asked us to tell them more about this proposal, gave us their business card and told us when we are done with the rally to come and see them in their offices. We did, and we had subsequent meetings that turned into a number of meetings, and those two offices were two of the three offices that ultimately sponsored the JOBS Act and signing. So sometimes from the lowest of the low moment of where do we go from here, things can turn around in a heartbeat.

Woodie: I think my story is one that is a funny one. It was a real honor in this

entire process to have so many people engaged, and that includes the White House. Right after our first hearing on the hill, which is only five months after we showed up in Washington, it was the House hearing called by Darrell Issa who sat down with me in the private quarters after the meeting, he is the Chairman of the Committee, he said that they were going to make it happen, he is Republican.

The White House reached out to us, and we thought it was a joke. But

we responded with our two page write up so they would know what is going on, and we worked with some other people in the industry that helped us with this as well. And we started our dialog with the White House, and it was a really frank conversation about what this means for the capital markets, what does this mean for innovation and entrepreneurship, and how can we get this done.

When it was getting close to the House, the Republicans in the House

had drafted the bill, and the White House came out with a paragraph in


favor of the bill. So I sent it to my contacts there, I said this statement of administrative support is nice, but it would be good if you guys had a press release or something that would announce how much you are in favor of this.

And our contact at the White House goes, it does not get any better than a statement of administrative support. This is essentially the president of the United States coming out publicly saying that we are in favor of your bill. So Jason and I went oh, okay, got it.

Jason: There are lots of examples of that, where we did not know the rules of

how things worked in Washington. So we would just ask for something that was thought of as you cannot ask for that, you cannot do that, or that is not possible. Sometimes it was not possible, but there were a number of times where we were able to sort of bring a fresh approach, or solve the problem, or answer the question in a new way or a different way, and people got on board.

We had the privilege of now testifying between the house and the senate a total of five times between Woody and myself. So we had a chance to really engage in a formal way, and then an opportunity to engage in a very informal way with both sides of the aisle. I think the only other thing I would say politically is that there were a number of times we had people try to pull us to the left or to the right to make this a partisan issue, and we resisted all that, stayed right down the middle, and just really stayed on policy and out of politics. We just said that we are here for crowdfunding, we are here for entrepreneurs, we are here for crowdfunding. That was one of the important lessons for us is that you have to stay on policy, not on politics.

Chris: Jason, Woodie, the Switzerland within the White House, right? So is it

true that you guys were in the Rose Garden when President Obama signed the JOBS Act into law?

Jason: It is indeed, it was an incredible and surreal moment. Woodie: There were only 200 people or so that were invited to the event, and

there were seven parts to the JOBS Act. So to have five of us there for our one part we thought was a huge honor as well.

Chris: And one of the statements that was made about why the President

was there, this is game changing. Why do you think he said that?


Jason: I believe it is. It is a water shed moment in history, in the history of

securities in the U.S. and now it is the work that we are doing globally. It really is a huge change to enable people to, for the first time, have access to raise money for their businesses, whether it be an existing small business that just does not have access to work with capital because of the way that banks operate.

Maybe it is the access, for an entrepreneur who has got a great idea, but does not live in Silicon Valley, maybe they live in another city, whether it is Dallas, Houston, or small town in Louisiana where I grew up. You do not have to have those connections, you can raise money, and you can build a prototype, demonstrate traction, and give all in one financing, that is one of the things that we have seen already a number of times in this market. It can be a catalyst to help existing small businesses grow, as well as new technologies develop.

Woodie: This is game changing because it does exactly what we set out to do,

which is democratize access to capital, so that, as Jason said, you do not have to be living in these money centers in any part of the world. You can go to your friends, family, or a community of people that believe in what you are going to do and trust you to do that, and raise money from that.

This shifts the power; it does not take power away, but it opens up the door to allow other people to access capital so that we have got better, stronger businesses that are coming down the pipe later on for the more institutional players that are out there.

We really believe that this will make for stronger and better companies down the road, ones that really should get funding, and probably could not have gotten funding until this came about right now. This is just the continuation of a larger theme, right? As we have seen our personal relationships that have moved online, business transactions moved online, public stock trading moved online, now we have private securities trading online. Now we are moving into this sort of radically decentralized financial system that will allow a lot more people to have access to really interesting deals that will both increase deal velocity and decrease deal friction, which will open up a ton of opportunities for new innovation, that is what we are really excited about.

Chris: Well, we are definitely seeing a lot of that taking place already in

space. I mean look, if you can date online, then why cannot you invest online, right? So tell me a little bit about why you founded Crowdfund Capital Advisors and then what you gents are working on now. We


dealt with a lot of this in Aspen, for our Seraph syndicate, but I would like to just cover some of that now if we can.

Jason: Sure, we founded Crowdfund Capital Advisors right after the signing

ceremony at the White House to create a new business to be able to utilize our knowledge, our network, and our capabilities to be able to bring crowdfunding globally. So that is what we have done over the last two and a half years - to build a business that way our clients, we work with regulators and governments.

We work with investors, hedge funds, family offices, private equity groups, corporations, and entrepreneurs. And other businesses in the space, basically companies that are part of this crowdfunding ecosystem to help them grow.

Woodie: What we started out to do was to take our knowledge and experience

and put it in a book, put it into World Bank report, put it into a template that can be used by entrepreneurs, investors, governments to take what we have done in the United States and replicate it globally. What we realized along the way is that a lot of people are coming to us with amazing technologies that they are building for this system.

And we are seeing that this market is evolving to something that is much more, and much broader than just these portals, these crowdfunding websites. It is an ecosystem of opportunities that is turning into an investment opportunity for people to be looked at as an area to be deploying capital. So we played an active role in that too by seeing where we think winners are going to be existing and getting in early, becoming advisors to some of them, and in other cases becoming investors of some of them.

Chris: You gents are investing in the space? Jason: We are. Chris: And what are the kind of clients that you guys are working on their

advisory projects? Jason: Well we talked about this crowdfunding ecosystem, maybe I can define

that a little bit. It is sort of like, for the folks that are listening, may be familiar with the online advertising world. We first started out with platforms that were selling ads, and then around those platforms there were a constellation of businesses that were created, an ecosystem, that were created to make that marketplace for online advertising efficient and effective. We are already seeing that being formed today in crowdfunding.


As Woodie said there are crowdfunding platforms that are available, but there are also now new services that are being created in this crowdfunding ecosystem, which fall into four categories. First it is the platform for primary issuances and secondary sale of securities, they are kind of in the first category as market infrastructure. Two, trust and transparency tools, we need the ability for people to trust and provide better transparency on transactions so that these marketplaces can scale. Third, metrics and analytics. So that entrepreneurs can be more effective in how they raise money and investors can be more careful in their diligence. And the fourth category in the ecosystem we call the white space; all those things that you never knew you needed. If someone had told you in the U.S. five years ago that instead of a taxi, you would press a button on your smartphone and get into the back of a strangers car who would take you someplace without changing any cash at all, you would get out and you would complete the transaction automatically, you would probably have thought that was crazy. But now with Uber and Lift, and other things, that is an everyday occurrence. So those kinds of services that did not exist before in the traditional markets will be created and we want to be there to make those investments.

Chris: With any new technology or any new sector, one of the things that

often crops up is where there is risk where there is reward. Could you tell us three things that you can think of right now that an investor should know about the crowdfinance industry? Really I guess the question that I have got is how do you separate some of the hype that exists out there, and that will exist as this goes, how do you separate that from the reality on the ground?

Jason: Well I will take a swing at it. One of the things is we spend every single

day in the space. We have now worked in over 28 countries, as well as a deep expertise here in the U.S. So we are vetting companies and helping to separate that kind of hype from reality every single day. It is important for us that this be a stable market that forms and scales over time. So we are trying to do everything we can, like to create industry best practices.

We founded the industry trade organization, crowdfunding regulatory intermediary advocates, that is now the group that is the industry voice at the SEC and FINRA. We also have created industry trade groups in other countries and regions around the world. And we also created a crowdfunding research program at UC Berkley to create those best


practices and academic practice and policymaker forums to help those processes to scale.

Woodie: One of the data points definitely is this industry, crowdfinance, is here,

it is real, and it is growing. It is happening, it is a billion dollars that has been invested into the industry, the infrastructure of the industry since 2006. So if you think that it is new, which it is, if you look at the grand spectrum of how industries are developed. A billion dollars shows a lot of validation.

A billion dollars has also surpassed on Kickstarter as a platform alone in terms of funding, which adds a lot of credibility to what is going on. Facebook, again, paid two billion dollars for a company that was proven by the crowd to be a tool of technology that they should acquire for their own business model. I think when you look at these different billions, you are seeing that this is something that you should be taking very seriously, this is something that you should be looking at as an investment opportunity, and you need to spend the time to find the resources with individuals that can really help you figure out which part of this ecosystem is the right area for you to be investing in.

Chris: Those are very wise words, gents. And it is key to one of the reasons that we are engaging with you guys. It is fair to say that it would be very difficult to find two gentlemen that are more knowledgeable in the space themselves in a position where you are not only seeing what is taking place in the United States.

But you are seeing globally the opportunities that are opening up with your research and your advisory work that you are doing on a global basis. I think we are excited to talk about some of that in our next podcast, which we will have out to readers in the next few days.

Mark: Yeah, we want to probably wrap it up there then today guys. Thank

you for your time, fascinating story, really, and I think that we are just getting started. Let us leave it there and we will rejoin Jason and Woodie, Chris and myself for the second podcast here, which is, as Chris alluded to a moment ago, we are going to be talking a little bit more about the countries leading the charge on this, and also a little bit about what this means for traditional broker dealers and investment bankers. Until next time guys, thanks.

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Crowdfund Capital Advisors Part 1