Howard Marks (00:02:26):
That was a journey that began for me my career up to today, 30 plus years of business experience, not necessarily charted that way when I started. I’m an engineer, computer software engineer, and I designed and built software systems for myself. Then, when my first company started, I designed it and built it as well. But right away I realized that my forte was not necessarily as a programmer, it was also as a business person. Imagining, visioning, seeing the future a little bit further than what people were willing to do. That’s how my first software product was basically reinventing the Mac, before the Mac. We were able to build a software program that gave you a Windows, and mouse movement, and graphics on the Apple II before the Mac.

Howard Marks (00:03:19):
Then, later when I got involved with games with Activision, we decided also to change the future for games. Because everybody told us, “No, the game industry is dead. It’s over. Atari crashed, and no one is interested in these little things anymore. It’s a toy.” We didn’t believe that we believe differently. We thought that as technology evolved and the CD-ROM came out, the DVD things will be different. So we focused on it. So my entire career has been about disrupting an existing status quo. Whatever people believe, I always had a different opinion.

Robert Leonard (00:03:58):
There are a lot of different things that I want to talk with you about today. The majority of the conversation will be surrounding crowdfunding and StartEngine. But before we get to those topics, I want to talk a bit more about your experience that you just mentioned with Activision and Acclaim Games. Activision is today Activation Blizzard, the video game maker that a lot of people listening to the show are probably familiar with. It’s worth about $80 billion as of this recording. As I was preparing for our call today, I noticed that you got involved with Activision just about four years or so after graduating college. Tell us a bit about your experience with Activision, how you got involved, and how it all kind of transpired.

Howard Marks (00:04:38):
So here’s how it happened. It was a little later than four years after college. It was in 1990. We were building software for other systems like I mentioned, Apple, Commodore, all these personal computers. And felt the market’s going to change again, and computers are going to come in and standardize themselves. We’re not going to be a player anymore. We didn’t feel that we were at the place where we could make a big difference. So the money we made, and we made some few million dollars and the company was profitable. We found Activision, which was a publicly traded company on the NASDAQ that was failing, about to declare bankruptcy, tons of debt. One of the few companies that had negative sales. So a negative sales is when you buy a cartridge for $20, and you sell it for $12. Right away your gross margins on negative.

Howard Marks (00:05:33):
So that’s weird. I mean, why would a company want to do that? I mean, that doesn’t make any sense. It was because of the way the cartridge market worked. You have to go pay Nintendo and Sega for the cartridges to be made. By the time they’re delivered, you can’t sell your games anymore because no one likes it, or it was a dud, or the market changed. Now, you have to sell it for less than you paid for. That’s what was going on with Activision. So we found the largest investor in the company who was a VC firm out of Canada, and went in and paid… I think we offered him $400,000 or $300,000, I forget exactly how much. He took it. So we instantly had 30% of the company. Then, we went to the banks who wanted out as badly as you could imagine. They knew this was a train wreck.

Howard Marks (00:06:20):
So we bought the banks for roughly $2 million, whatever they were owed. Because they owned everything, they’re secure. They had inventory security. They had everything, so we became the bank. By owning a big piece of the equity and all of the secure debt, we took the company bankrupt. We bankrupted it in November of 1991 and started all over. We had to lay off 200 people, we were down to 10. Moved the company down to LA from Mountain View, Northern California, and started from scratch basically. Raised some money, relisted the company on the NASDAQ. I think at the time we did the bankruptcy the company’s valuation was under $5 million for sure, was very small. We had too many shares, the shares were down to maybe under a dollar. So we had to do a 10 to one reverse split, which is very, very dangerous to do, but the right thing to do, and got the stock back to, I think, the minimum was $5, and rebuilt from there.

Robert Leonard (00:07:27):
Tell us a bit about why you needed to do that reverse split.

Howard Marks (00:07:31):
Well, the NASDAQ has these requirements of minimum price per share. If you don’t meet the minimum price by a certain amount of time, you get de-listed, which means you and your shares are no longer on the market and they can’t trade.

Robert Leonard (00:07:45):
The reason I asked about that is because people listening to the show, you might’ve seen news headlines that say “X, Y, Z company is potentially going to get de-listed from the NASDAQ or other exchanges.” This is one of the things that you need to consider is the price of the stock. There’s a bunch of other things that go into consideration for this, but that’s one of them. So it’s really interesting to hear that Howard had to deal with that.

Howard Marks (00:08:06):
Well, if you get de-listed, you end up in the over the counter market or in the pink sheets. That’s very hard to recover frankly, because at this point you’re like a penny stock. We thought that we could rebuild the company into a success because we wanted to go against the norm. The norm was cartridges are it? You have to put up a huge amount of capital, usually upfront to buy them. Then you go to the retailers and sell them, like Walmart. If they don’t sell all of it, they give them back to you. So you imagine, even though it’s a sale, they gave it back to you because they won’t buy your next game. It just was a bizarre market. So we thought by going into the CD-ROM, which is DVDs to CD markets. CD-ROM, the cost to make it is only a few bucks.

Howard Marks (00:08:58):
So you can take away that whole risk is gone. The whole inventory, cost of inventory, and risk of losing your shirt on a bad game. Because you have to pre-order a huge quantity for Christmas and it takes two months to deliver, whereas a CD-ROM you can build over a weekend. You can make another a 100,000 or a million copies. So we saw this as the future, except that Nintendo said they are not going to do it. There were no other people who are offering it. The only place you could do CD-ROM was the computer, the PC. So we made games for the PCs. Those games did very well like Warrior and Zork. All these games were phenomenal when we launched them we start growing.

Howard Marks (00:09:38):
Just then as we thought, “Hey, where’s our next big move?” Sony announced the PlayStation. The PlayStation, guess what? Had no cartridge on it. It was only a CD-ROM. Then Microsoft came in and announced the X-Box and guess what? There was no cartridge there too. So we knew we were right. We had the experience of building for that medium. We thought we knew how to do it. So that gave us a huge advantage over the other players who may have not saw the same thing as we did.

Robert Leonard (00:10:14):
Yeah. That’s super fascinating because it sounds like you were positioned perfectly for that transition from Sony and Microsoft to the discs. Where Nintendo was, I remember blowing on the cartridges as a kid to play the games. I’m sure a lot of people listening to the show, remember that. So to transition and you guys being positioned perfectly, it sounds like it was a great timing.

Howard Marks (00:10:32):
Well, it took a little bit of foresight because frankly, again, my theory is most people don’t want to see the future, even though it does show up, we know that the future happens. We know that, right? But there’s a sense of refusing to accept it. The markets saw the video gaming industry as a toy and did not agree that it was a real big business and could not see further. We could.

Robert Leonard (00:11:00):
Where did Activision go from there. And how did you end up exiting the company?

Howard Marks (00:11:04):
So it kept growing. We started releasing new games every year, multiple games. We had now operations in Europe, operations all over the place. I left about 10 years later, just under 10 years, I left to start a distance learning company in the internet. That’s when the internet started really booming. That was in the late 90s. I didn’t exit. I just left, I had shares in the company was publicly traded. So I just said, “You know what, I’m happy with my shares. I want to do something different.” And left started an online learning company that I ended up selling [*inaudible*], which is owned by the Washington Post. I kind of looked for something different that point. I wanted to try something different than I did in the past. The new opportunity came my way by reading in the Wall Street Journal, that Acclaim Games was going bankrupt.

Howard Marks (00:12:05):
I knew how bankruptcy worked because I did the one for Activision. So I said, “Okay, you know what? I’m going to call it trustee directly and have a chat.” That’s the person who’s appointed by the court to clean up the company or sell its assets and find a new buyer. So I called the trustee there in New York, in Long Island. I said, “Hey, I’m interested. I have a lot of experience in the game industry. I would like to buy the company.” He said, “Great, well, you should make an offer.” I said, “Well yeah, I could make an offer, but I could also tell you what I want to pay every now and, and be the first bid.” There’s an advantage for being the first bit, but not necessarily a lot of advantage. The first bit you can sign a contract with the court and say, “Look, I’ll pay X dollars and be the first.” If there’s no one bidding you win. So it’s a nice advantage, right?

Howard Marks (00:12:55):
So I said, “I’ll offer a $100,000.” The guy was laughing on the phone for $100,000 dollars. He was laughing. He said “You must be ridiculous. We’re never going to agree to that.” I said, “Look, my offer stands. Why don’t you consider it? And if someone wants to pay more great.” Two months go by and I get a call from the trustees, say, “Hey, is your offer still valid?” I said, “Yeah, why not?” So quickly I put together the contract, I offer a $100,000 and that’s a commitment. I knew it was a very low ball and it’s going to be quite expensive to get it. But I figured why not? Let me get into the race. The court is required, the trustee is required to advertise that there is an auction going on, and then there will be a sale for Acclaim. Acclaim had a big name. There was at one point, the number one video game player in the market. It had Mortal Combat, NBA Jam. It was really, really popular. They were way bigger than Activision when we started, way bigger.

Howard Marks (00:13:52):
But they got into trouble and this is a different story for why they gone the trouble. But I got lucky because the previous owners of Acclaim got into financial trouble. They made it the mistakes. They didn’t file what they should’ve filed. There were some issues there. So they didn’t participate. The auction was of beginning August. You know in New York, in August, everybody’s gone. The whole financial market is gone. Everybody on vacation. So I show up August, I think it was 2005 no one shows up at the auction. The judge is livid say, “Where are your bidders?” There were no bidders. So I get the whole thing for 100 grand. It’s unbelievable. I mean, I couldn’t believe it. So anyway, I got it. I flew right away to Korea, South Korea. I decided to go and emulate what they’re doing over there, which is online in games. There were the innovators and I took that innovation and I brought it back to the U.S..

Robert Leonard (00:14:51):
Then from there, it ended up getting acquired right by a company Playdom?

Howard Marks (00:14:55):
Yes. So I started building it and we had about 17 million players starting to do really well. And we got approached by Playdom, who was mostly a Facebook game company. These Facebook games at that time were doing great. And a lot of people thought that Facebook is going to clean house and own the game market. So they came in with a lot of capital and decided to buy Acclaim. The main reason I was selling, I was willing to do the sales because I had a VC at the company, and I had some debt. I knew that unless I got some new investors I would get into difficulty because we were still losing money, growing the company pretty fast. So I said, “Okay, well, if they buy it maybe I’ll just combine and get some shares in Playdom.”

Howard Marks (00:15:47):
So we make a deal, the VCs are happy. We do a deal. Just then Disney decides to buy Playdom. So Disney, bought Playdom. Disney, it’s a company that tried to be in the videoing business, has today probably had that time under 2% market share. Not much for global media company like they did. That was not their cup of tea. Action, online massively multiplayer games, was free-to-play where you buy items inside the game, it was a whole new idea. Was not something they were prepared for. Anyway, so I sold and exited right away and then pondered what should I do next? That was my next chapter.

Robert Leonard (00:16:32):
Yeah. Playdom actually slash Disney ended up shutting down Acclaim after just about three months or so after they acquired it. Right?

Howard Marks (00:16:39):
Yeah, absolutely. So the games that were operating were pretty significant, but they decided it’s not on Facebook, and it was not why they bought Playdom. They both Playdom for the Facebook type of games, and people call casual gaming. The games we had were hardcore games.

Robert Leonard (00:16:57):
In that transaction, was it an all stock deal part stock deal of were you just giving cash as the buyout?

Howard Marks (00:17:04):
It was mostly cash and a little bit of stock. It was not a great exit for me, it was not a great outcome, but it was something better than nothing. I would say selling was a mistake because we all know what happened with online games, it became the standard. League of Legends became the biggest game in the world, and the whole Steam, that whole movement worked in our favor. Because we were among the first to have these free-to-play massively multiplayer games. So we had a platform and we had everything we needed to compete. It just, we ran out of steam, financially. So that made me ponder how you finance a company sometimes has a lot more to say than the strategy you take for your company. Because if you don’t have the right financial structure, and you run into trouble then you could lose your business. So that kind of made me think a lot about what needs to change in the financial world.

Robert Leonard (00:18:06):
Yeah. Capital structure’s really important. I get asked a lot from listeners of the show. Like what are some of the biggest deal-breakers for me when I’m looking to invest in a company? Capital structures one of them. Significant debt, too much debt is one of the big things that’s just almost an automatic disqualifier for me. Because as you just mentioned, it’s just one of those things that can just absolutely plague a company.

Howard Marks (00:18:24):
Yeah. We took venture debt, and venture debt is debt that you put on top of your VC. That is completely inappropriate. It’s actually not suitable for a growing company. It’s only good if you’re going to for example, buy equipment machinery. That’s why you need debt. But having debt to grow companies is just terrible.

Robert Leonard (00:18:46):
I want to quickly go back to when you exited Activision, and ask about how you thought about holding, selling those shares that you had, because it’s not often that we have a guest on the show that had an exit and is able to own the shares of a public company after. How did you consider that? How did you think about holding the shares verse selling them? And how long did you end up holding the shares for?

Howard Marks (00:19:11):
Yeah. So when you are at a public company, publicly trading, you own shares. They’re restricted because you are an officer of the company. There’s this rule called Rule 144, that restricts when you can sell the shares and how much you can sell. So while you’re at the company as an officer, and I was on the board of the company, and I was an officer of the company, you’re subject to these rules. So you can sell a little bit off the earnings report and that’s it. So that was fine. When I left it frees up your ability to sell more, because you are no longer an officer and you have to wait a certain amount of time. But anyway, going past that, I did sell some shares to get some diversification over time, and was able to sell shares over time. The share price kept growing, growing, which was great. Gave me a lot of options to get liquidity.

Robert Leonard (00:20:06):
What did you learn from your experiences with Activision and Acclaim Games that you took to your next and current venture StartEngine? What did you learn that you still use to this day? And what did you learn that has helped you avoid potential pitfalls with StartEngine?

Howard Marks (00:20:21):
I mean, the word pitfall is ironic, because that was one of our biggest games at Activision. Pitfall! is legendary. Here’s the deal what I’ve learned first is the mistake I made with Activision was leaving. Because frankly, staying with a fast-growing company is a great idea. Now, if you leave because you want to do something different, fine, that’s what was my case. But financially it was better to stay because I had a lot of stock options, lots of stock. Okay, you’re betting your future on one company, but that’s fine. If you believe in your strategy, if you believe in the future of the industry that you’re in, you can keep growing. Why not? Grow it as much as you can and stay with it. The same time, one thing I did with Acclaim, I believed the whole industry is going to go to free-to-play games and multiplayer games.

Howard Marks (00:21:14):
That was my pitch was that idea of paying every month for a game, as a subscription was not necessarily the future. That World of Warcraft had that subscription system, very successful game. I thought it’s going to be challenged by people going to make them free. People wrote a play games that are free. Now it turns out and I studied the model, the free-to-play games make actually more money than the subscription games. Why? Because the 5% or 10% of the players who play for the game are paying more than 10 X, sometimes 20 X of what you would get in a subscription. I mean, some people are spending thousands of dollars, right?

Howard Marks (00:21:53):
So my thesis was correct. And when League of Legends came out, and the founder, the CEO of League of Legends saw one of my speech that I made on free-to-play, decided to change his model to free-to-play. Guess what happens next? League of Legends becomes the biggest game in the world as a free-to-play game, by the way. No monthly subscription. They did very well. That became a monster. So I think what I feel like lesson I learned from my mistakes was if you see something amazing, stick with it. Because it’s going to keep growing. That’s where it brings me to StartEngine. That’s a perspective I have now that I may have not had when I was at Activision.

Robert Leonard (00:22:37):
For those who may not be familiar with Crowdfunding or its origin. Please tell us what Crowdfunding is, and how Title II of the jobs act in June 2015 made equity Crowdfunding possible.

Howard Marks (00:22:51):
Well, here’s the deal I was thinking about the future. I started StartEngine as an accelerator, a school for entrepreneurs because I felt, hey, LA should be a technology city. Los Angeles has a lot-

Howard Marks (00:23:03):
Hey, LA should be a technology city, Los Angeles has a lot to offer. Los Angeles invented email, pay-per-click, what Google uses for their business model was created here in LA. A lot of technology, the satellites were built in LA. So I thought, “Hey, why isn’t LA full of these accelerators, schools for startups?” So I built that. I started that, just because I felt I could contribute and start investing in a lot of entrepreneurs. What I noticed was all of them could not get financing, they could not get the VCs to invest. I would make the introductions, I would pitch the company. I would put a lot of my energy behind it and the result was discouragement, couldn’t raise money, especially the women-led companies that I would invest in, would not get capital and a minority-based business, forget about it. I mean, it’s just, the numbers aren’t there. So as an investor, I don’t think I did a very good job, even at the end of the day, the fund is reasonably successful, it’s not a huge hit but it did well. I didn’t do a good job investing because I should have only invested in 22 white males from Stanford, 22 year olds, because what VCs like to invest in, they invest in people that look like them. They like to invest in these young, very I would say, fast-talking entrepreneurs. I thought, “Hey, you know what? That is strange.” I did not understand this. There was a disconnect for me, complete disconnect.

Howard Marks (00:24:38):
As I was pondering them and wondering, “How do you fix this? How do we change finance? How do we not change the narrative?” I read, again in The Wall Street Journal, pretty good, handy tool for me that congress signed the JOBS Act. I had no idea, I mean I thought it was a new act to create jobs for America. That’s always interesting, but it’s well, how do you create jobs? You regulate, deregulate, you do all sorts of stuff. When I was reading it, it had nothing to do with that. It had to do with introduce a whole new way for companies to raise money called crowdfunding, where you can raise money directly from the general public.

Howard Marks (00:25:19):
Now, why would that matter? Well, for the last 80 years, ordinary person, not wealthy, could not invest in startups. So if your neighbor started Uber and you wanted to invest, you couldn’t. Why? Because you had to be accredited, you had to be wealthy. What is an accredited investor? Well, it’s someone who makes $250,000 a year minimum for the last two, three years and has a foreseeable income of $250,000 or a million dollars of assets outside of their home. I mean, it’s quite steep and it only applies to about 5% of our country, and that 5% has the privilege to invest in all these great new ideas and startups, but not the ordinary citizens.

Howard Marks (00:26:04):
I thought, “Wow, that’s very strange, that seems a little unfair.” I’m not from the financial world at that time, and so I tried to learn more, why this existed, why it happened. It turns out during the Depression in 1929, the Great Depression, the SEC was formed in 1932 with the express task to protect investors. Because at that time in ’29, people were margin, leveraging their money up to 90%. Not only that, sometimes the number of shares you thought the company had, you were wrong. There were five times more shares, but you didn’t know, there was no regulation. So the SEC came in and regulated and say, “Look, if you want to raise money from the public, you have to register with us, which means we will check everything and we know we’re going to make sure that everything is done right.”

Howard Marks (00:26:58):
Anyway, 80 years later, this new law comes out that says finally, the JOBS Act, finally equity crowdfunding. The idea that a company can go raise money directly from the public. I read it in April, 2012 when it was signed, and I started reading it page to page, cover to cover, again and again, until I understood what was this thing all about. It was innovative, it was groundbreaking. I had to educate my attorneys about it. They didn’t and understand the nuances because they would say, “Yeah, I can help you with that,” and they would say things. I said, “No, page 23, chapter number five, look at this.” “Oh yeah, you’re right.”

Howard Marks (00:27:40):
Anyway, it took four years for that law to go into action, to actually become real. During that time, I was investing in these startups, who mostly were failing. I think 90% of my investments failed pretty much in the first few months and the ones that survived were very resilient and great entrepreneurs, and I really admire them, and that’s fine, that was the deal. I wondered what happens if I had crowdfunding and I could have all of them succeed? That would not be such a bad after all. So I decide, you know what? I’m going to pivot the company into an equity, crowdfunding business, from an accelerator business.

Howard Marks (00:28:26):
Now, why would I do that? Well, I thought, “Hold on a second. If I can help 20 companies a year and invest in them, with equity crowdfunding I could help 2,000 companies a year, maybe more, much bigger impact, huge impact.” Well, I don’t think I necessarily knew exactly how the market would evolve and how it starts. So I started making some assumptions. So I looked at a model that I understood, which is called Kickstarter, which was a crowdfunding model where people could go and back a project and give money to entrepreneurs and get a T-shirt or get the product but that was it.

Howard Marks (00:29:05):
I don’t know if you remember Oculus Rift? That was a VR, virtual reality headset. It started on Kickstarter, and the first time they launched their campaign in a matter of weeks, everybody went crazy for this idea. Within weeks, they raised three and a half million dollars from 7,000 backers who wanted this Oculus Rift so badly. I mean, they would gift money, with the idea that the money that the company got could make the Oculus Rift and then deliver to them.

Howard Marks (00:29:41):
Now, there was risk involved because maybe the company would fail and they would not get their headset, they didn’t care. Then they went on the community, on the bulletin boards, and everybody was writing about Oculus Rift. Now, unbeknown to these 7,000 backers, Marc Andreessen, who is a huge venture capitalist, went in and invested 80 million in the company and he sits on the board of Facebook. So he invested, that was pretty quiet. And then what happened, the company got sold within a year to Facebook for $2 billion. Now, those 7,000 people did not receive their headsets, but they had put their money hoping to get their headsets and didn’t get any of the $2 billion. I saw this and I said, ” This is so unfair.” They took the risk. They’re the ones who made Oculus Rift something. Why wouldn’t they get something? Well, I didn’t understand that the regulation, the laws, were designed that they couldn’t invest and the company couldn’t offer the shares, that was illegal. So now we understand that, right? But okay, but now we have something, equity crowdfunding, we can solve it.

Howard Marks (00:30:56):
So now, the next Oculus Rift can have 7,000 investors, sell for $2 billion and everybody makes a hundred times their money. What’s wrong with that picture? That feels part of our heritage, the American dream.

Robert Leonard (00:31:11):
One of the things that I’ve taken from this conversation so far is that I need to get a Wall Street Journal subscription.

Howard Marks (00:31:17):
Well, that may date a lot of people because obviously I’ve been reading it since I’m in my 20s, and I think The Wall Street Journal is still very well-written and still appropriate for people to read, but I know there are other places that can get your information, similar information. So it’s still one of the better places because they have good editors by the way, but I’m not here to sell The Wall Street Journal. I’m here to tell you about equity crowdfunding.

Howard Marks (00:31:43):
So here’s the deal. As the law was written, I knew that I could build a business that will allow entrepreneurs to put their company on our website and solicit investments from the mass, everybody, anybody. Now, as I mentioned to you, 5% of our country’s accredited, most of them are in their retirement age and are not participating that much in risky startups, as you can imagine. I mean, if you’re in your 70s or 80s, the last thing you want to do is wait 10 years for an exit. You probably will exit first before the investment. So therefore, there is a disconnect here.

Howard Marks (00:32:21):
So, we’re talking about what? 100,000, 200,000 angels, 400 VC firms, that was it. That’s your market, and if you don’t get money from VCs or angels, what are you supposed to do? The banks won’t lend to you. You have to go to your friends and family, but that goes just so far. What are you supposed to do? I pondered that and I said, “Look, the answer could be the future of finance is at play here. The future of finance. Why is that?” The same way as we talked about the future of video games was rich entertainment on a medium that was accessible, like the compact disc, but it was also the same thing with games becoming free and you can invest in them and they’re being online, that’s the future of games. Today, most games are downloaded and they’re free.

Howard Marks (00:33:11):
I think the same thing with finance, and then that’s strange concept, that the world of finance is going to change dramatically. The future of finance, what is? And that was the question I had for myself. The answer I came up with, I believe the future of finance is in equity crowdfunding. Here’s why, because it democratizes access to capital. Anybody now can go access capital. They don’t have to be part of the elite. They don’t have to graduate from Stanford. They don’t have to have a certain gender, creed, whatever, they can be anybody, as long as you are good at what you’re proposing and you’re able to give, I would call it a compelling offering, with a well-defined message. Wow, you can raise capital. It frees people from the elite, it frees people to have more freedom and not give up control as they would with VCs.

Howard Marks (00:34:09):
So I saw this as a natural and you know what the answer was from the lawyers and my advisors and people I hang with? “No, it’s not going to work because no one will invest their money with a credit card online. Forget about it, that doesn’t work that way.” The answer said, “You’re going to get sued by all of these investors, so you’re going to get sued out of your business.” So, I mean, we talk about naysayers, oh my God. I mean, with Activision we had a lot of naysayers because they said the video game world was dead. Here, no one said finance was dead. Here they said, “You’re going to be dead. You’re going to get taken out early and it’s unsustainable.” Then when you hear this, this is when you move forward. This is when you say, “You know what? Maybe I’m against what the common understanding is of the world of finance. Maybe there’s something there. Why not explore this? Why not go and look for what it’s going to look like, why not build it from scratch?” So we were the first on the market with a website and we launched our engine as an equity crowdfunding business.

Robert Leonard (00:35:20):
I want to talk about that Oculus Rift example for a second. I completely agree with how it’s not really fair that those 7,000 people that put up the money and risking their money didn’t really get any return at all for the sale. But from Oculus Rift’s perspective, why would they want to do equity crowdfunding if they could just do Kickstarter, right? Because Kickstarter, they keep, in theory, obviously they sold a piece to that Facebook investor that you mentioned, but in theory, they keep 100% of the business if they do a Kickstarter campaign, whereas if they do equity crowdfunding, they they’re giving up some of their equity, which means when they sell or exit, they’re not getting as much money. I mean, it sounds like they could be successful, companies could be successful with a Kickstarter campaign, so why would they want to do equity crowdfunding and give away some of their equity?

Howard Marks (00:36:05):
You make a very good point. Why buy the cow if you can get the milk for free? But that doesn’t seem like the economics can last that way so long. Because now that equity crowdfunding exists, people who are going to go on Kickstarter are probably going to think about, “Why should I not get shares in that company? Why am I giving away my money?” By the way, they’re taking some risk and they’re not getting any reward for it, that doesn’t seem fair. Now, it’s true, many of the companies who come on StartEngine have started on Kickstarter with a little campaign. They call it proof of concept.

Howard Marks (00:36:41):
So then they invite those backers to become investors, so that works well. So I don’t think we’re killing crowdfunding. We call it reward crowdfunding, that has its life. It’s actually a very successful business. A lot of people are artists. A lot of people are not for-profit businesses, they do very well. But the answer is very simple. If you’re a company, even an entrepreneur, you can go on Kickstarter, maybe raise two or three million, but you can’t raise 20. Very few projects have raised that kind of money. But in equity crowdfunding, as of today, hundreds have. So equity crowdfunding offers more access to capital than reward crowdfunding.

Howard Marks (00:37:26):
It aligns the shareholders very well with the mission of the company. They can in turn, become the big, loud voice for the marketplace and be helpful. So in a way, I think we align … Our model is fair because it aligns the interests of both parties. The company needs money, the investors need equity so they can get an upside in their investment down the road. By doing that, you have the ability to have a lot more success for your company.

Robert Leonard (00:37:58):
StartEngine specializes in regulation, crowdfunding, and Regulation A+. what are these two regulations and why did you choose to focus on them?

Howard Marks (00:38:09):
So I decided to focus on equity crowdfunding. There are three regulations in them. One is for accredited investors, and some people call it Title II of the JOBS Act. It’s complicated stuff, but it basically says that if you want to raise money from wealthy people, you can do it online now and publicly, before you had to be private. Now, there’s two other things in the JOBS act that are phenomenal. One is called regulation crowdfunding. That rule said you can raise up to a million dollars on a crowdfunding platform, like StartEngine, from anybody. Now, there’s some limitations. Someone can invest more than 5% of their income across their investments in a year, things like that, but they can invest a minimum of $2,000. For sure, that’s pretty good, and they can use credit cards. That was written in the rule, which is unbelievable.

Howard Marks (00:39:09):
Now, the other rule is called Regulation A+ and that says you can raise up to $50 million, five zero, 50 million, but you have to take your offering and go to the SEC and they review it. So it costs you about $100,000 in legal fees and you have to audit your company, that costs total, about $100,000, maybe a little bit more. That’s still a pretty good rule and the nice thing about it is you can have investors invest up to 10% of their net worth, or income, or net worth outside of their home. So if they have a million dollars, they can put in $100,000, but let’s say most people, let’s say they have $100,000 dollars in savings, they could put $10,000 in, into this deal. So, both regulations are great.

Howard Marks (00:39:56):
Now, on March 15th, something new is happening, there’s an upgrade that was voted in. on March 15th, the Security Exchange Commission announced that by March 15th, they’re raising the limit of one million for regulation crowdfunding to five million. That’s a major, major, major move. It’s an enhancement. The 50 million goes to 75 million. Now, why would that be a big deal? Well, a lot of people did not take equity crowdfunding as seriously as they could have because they said, “Oh, if I can only raise a million, that’s not enough, I need more.” We’ve raised money for 600 plus companies over $300 million. I mean, we’ve done great with this, but a lot of companies were in the middle between one million not being enough and $10 million is too much for them and they can’t get it right, they’re too early, but they needed three to four million. There’s a sweet spot there.

Howard Marks (00:40:55):
With this new enhancement, this solves the problem. So equity crowdfunding, with regulation crowdfunding, it’s very easy to do. When we bring in a customer, it costs them nothing. They don’t have to spend a single penny. They have to spend money on getting their financials reviewed. They may need some legal advice to clean up their company, whatever. It’s thousands of bucks, it’s nothing, it’s really not a lot of money and they can raise up to five million a year using this regulation.

Howard Marks (00:41:25):
So I thought, “Hold on a second. This is even better, the gift keeps giving. The gift of the JOBS Act is even better now.” I’m, myself, so enthusiastic and pumped by this new regulation upgrade, that I think it’s going to help the equity crowdfunding business grow even faster.

Robert Leonard (00:41:49):
The SEC is also rewriting or tweaking the rules for being an accredited investor too, aren’t they?

Howard Marks (00:41:56):
Well, you could argue that they made a very small change. What they did is they said, “If you are a financial expert … ” So for example, you’re a CPA or you have a license to sell securities, you work for a broker dealer, you work for E-Trade, you can invest, like an accredited investor. That’s it, you’re talking about not even a million people, not even.

Robert Leonard (00:42:23):
Is it that few? And the reason I say that is because I personally thought that that was a pretty big change because I have a license that’s very similar to the CPA. It’s the CMA and I think that would also qualify me. I don’t have the necessarily net worth yet to be an accredited investor, but I think with some of the licenses that I have accounting-wise and being in accounting, a lot of my friends are CPAs, so that made us all accredited investors.

Howard Marks (00:42:45):
But then how many people are CPAs and CMAs and how many people are brokers? Okay, so maybe 2 million people, but we’re still not covering … We have 350 million people in this country. There’s probably 30 to 40 million people are active investors, so that doesn’t cover them. I mean, you’re covering, yes they made an effort. They went forward with a proposal and they did less than what Europe does. Europe says you can be a sophisticated investor if you have investing experience, without a license, but here they were very specific. You have to have one of these licenses.

Robert Leonard (00:43:19):
Yeah. I think it’s a big number, but I think you’re right that relatively speaking, in terms of the whole population, it’s not big. When you think two million people, you’re like, “Wow, that’s a lot of people.” But when you think about 350 million, it’s really not much.

Howard Marks (00:43:32):
When you talk about the American public, where they have this concept of savings, $10 trillion of savings and all of the money that the American consumer represents, the accredited investor is a tiny piece. It’s not that much.

Robert Leonard (00:43:48):
You mentioned that people can invest with credit cards. How do you think about that? Do you think that’s dangerous?

Howard Marks (00:43:54):
Well, it’s interesting that you say that because a lot of my friends that I play golf with, always have this question for me. It’s like, “Hold on a second. How is someone able to use their credit card?” Well I say, “It’s built in into the rule.” “Okay, but I don’t understand.” So that basically, if they are from the financial world, they will say, “Well, that means they’re borrowing the money because they have to pay their credit card in a month or over time.” I think that’s one of the innovations. I think the innovation of credit card is significant because it makes it very accessible. You don’t have to go in and enter your bank information. You can just put your credit card and it makes it a very fast purchase. Apple Pay, simple, people do that. It fits, I think in the world of satisfying a market out there, which is the consumer. How they pay, typically is with a credit card, that’s how it works. So I think in adding securities, shares, buying shares to their credit card is logical.

Robert Leonard (00:45:00):
I think in terms of the process, that makes sense to me but what concerns me about that is that people are going to rack up credit card debt. I think it could be potentially dangerous, the idea … I like how it makes it easier, but it worries me a little bit that somebody I know could just buy shares in a relatively illiquid, and we’ll get to how it can be more liquid in the future soon, but a relatively illiquid security with debt, specifically high interest debt.

Howard Marks (00:45:25):
Yeah. I understand what you’re saying. I mean, a lot of people have margin accounts and those are not cheap. I would say our average investment, it’s around a thousand bucks. So typically, that’s not going to take you out. It’s still in the reams of reasonable.

Robert Leonard (00:45:45):
That’s a really good point. What is the process for a company to raise capital through a platform like StartEngine?

Howard Marks (00:45:51):
It’s pretty simple. They apply, they go online, they go to startengine.com, they type in a few things, they tell us who they are and then we get on a call. I have a bunch of people who, at our company, talk to …

Howard Marks (00:46:03):
I have a bunch of people who at our company talk to entrepreneurs all day long, and they talk about the process. They need to learn how equity crowdfunding works for themselves. How are they going to raise their money? Then we need to make sure that it’s a good fit. They’re able to go on our page and the company is formed and a lot of different little details that we go through our own review. We review every company carefully. We have to do that. If it’s a fit, we onboard them. We have a team that does just that. They go in and they onboard companies. They talk to the CEO. They talk to the CPA. They do all the things they need to do to get them by.

Howard Marks (00:46:40):
If we rewrite the page for them, we also help them … We’re kind of like a mini agency inside of our company, help them with their marketing. Then they go live, and they didn’t have to put up much money at all. They have their financials, get it reviewed. It costs a few hundred dollars, and then they may have needed an attorney to make sure that their shares, their issuing are correct. They have the shareholder vote. They have the board resolutions. These are things that typically you go through, anyway, when you raise money, and we make sure it’s all done right. That is key. It’s done right so that when the investor comes on our page, they make the decision whether they should invest or not.

Robert Leonard (00:47:25):
Does a company have to be at a certain stage in order to start?

Howard Marks (00:47:29):
We have not found any correlation regarding the stage of the company, frankly, for success. What we have found is three things that are important, and I think your listeners would understand it. First, you want the CEO of the company to be willing to put themselves out there. That’s important, to put themselves out there. They’re going to go out and solicit, and they’re going to talk to all their friends and family. They’re going to go on Facebook, on social media. They’re really loud. The second thing is a compelling offering, something that people relate to. It’s exciting. It’s something you believe in. A third is a well-defined audience. Who are the people you think should invest? When all three come together, the campaign is a success. We’ve seen it. It’s amazing. It works.

Robert Leonard (00:48:17):
You mentioned the due diligence that you guys are doing at StartEngine, but what other due diligence should individual investors be doing before making an investment in a company raising capital through equity crowdfunding, and how do you go about valuing a business like this as an individual investor?

Howard Marks (00:48:34):
Well, I think the investor needs to go on the page, read it, and then look at the comments, because guess what’s happening? The entire investment community is writing things on the page, commenting, the same way as you would see on Wall Street Bets, where people are making all these comments. Well, it’s the same thing here on StartEngine. People are making comments, and guess what? Sometimes they come up with stuff that we had no idea, and we may have to either get the CEO to correct information. I mean, it’s really amazing how the crowd has a voice. People call it the wisdom of the crowd. They have a lot to say. So we think even though we’ve done our due diligence, we did our work, you and I know that’s not the end all of everything. I think when you add the crowd to it, now you get the real story.

Robert Leonard (00:49:24):
We’re going to talk about the secondary market in just a second. But putting that aside, how can investors in these private companies get their capital back? When there is a liquidity event, how long is it before investors receive their share of the returns?

Howard Marks (00:49:39):
Typically, a liquidity event happens between five and seven years after the company has raised the capital. So that’s a pretty long stretch. I’ve had one deal that took me 20 years to get out, and I didn’t get out in a very good way, meaning I had to sell my shares back to the company for a song and a dance. I think this idea that the consumer has to go through five to seven years is pretty harsh, and you said it several times on this conversation. You said illiquid shares. You said no market for it. How do you get your money out? It’s a big question, and you would argue, “Hold on a second. If the Security Exchange Commission is permitting equity crowdfunding, what are they thinking? How are those investors going to realize their returns? How long do they have to wait?”

Howard Marks (00:50:35):
Well, if you look at today, the average is probably seven years for private equity to become sold. So what is an exit? Going public on the NASDAQ, New York Stock Exchange, or being sold to another company. The shareholders receive either stock or cash, and they keep going. If they receive cash, they can reinvest in another deal. If they receive stock, they can sell it on the market if it’s public. So that’s what people call exits.

Robert Leonard (00:51:05):
It seems more companies are choosing to stay private for a lot longer than companies historically have. We’re seeing a lot more unicorn private companies these days like Airbnb, Facebook, Uber, all these companies that took a lot longer to go public than historically companies have. With companies waiting so much longer for IPOs, how does this impact equity crowdfunding?

Howard Marks (00:51:26):
If you go back into the old days of Silicon Valley, Intel when they went public raised $10 million. Okay, so now you get the picture. Today if you want to go public, you have to raise $2 billion. It’s a whole different story, and we’re only talking about 40 years later. $2 billion, it’s reserved for the very few, only the very few. You’re talking about a couple, 300 companies a year go public. In fact, right now, most companies, if they want to go to the public markets, they don’t even go public. They do these reverse mergers, also called SPAC. They do these reverse mergers with existing companies that are designed just to raise money, and they’re not even going public on their own. So you wonder what happened.

Howard Marks (00:52:13):
Well, I’ll tell you what happened. Regulation came in and made it very expensive and very hard to go public. So unless you’re a big company, like an Uber, Airbnb, your prospects of going public is very, very low. You can’t find a bank who will take you out on the public market, and even if you did find one, you can’t raise much. If you did raise some money, what happens the minute you go on the market, you get shorted by all the hedge funds, and your stock goes to penny stock. Now you’re in a different zone. You can’t raise anymore money. It is really harsh. Small companies unfortunately do not belong on the public markets. It is unfortunate. I say that because I believe in the public markets. It’s just the way it’s been. That’s the nature of the beast today.

Robert Leonard (00:53:01):
So how does this impact equity crowdfunding and specifically individual investors who are potentially betting on a future IPO to get their liquidity event from an equity crowdfunded investment?

Howard Marks (00:53:13):
Well, it’s a factor that I think is a problem, frankly. I would say it’s a big problem. The idea that you invest in a promising company and you have to wait seven years is a problem. It’s not necessarily the way it should be, because consumers may not have the strengths or the wherewithal to wait seven years or longer. So I would say that’s one of the, I think, issues with equity crowdfunding, is lack of liquidity. I would say that’s a big issue.

Robert Leonard (00:53:46):
That’s an issue that StartEngine is trying to solve, and that’s with secondary market, which I’ve mentioned a couple times so far throughout this interview. I mentioned in the intro that I’m an investor in StartEngine through the platform. So I like the business in general, but this concept of a secondary market is arguably the most exciting thing to me about the business. Tell us a bit about what the secondary market is that you’re building with StartEngine.

Howard Marks (00:54:13):
So we’re in year five for StartEngine. Three years ago, I saw this problem that we are talking about, and I needed to solve it. I believe that lack of liquidity is a hurdle for equity crowdfunding. The idea that we’re going to grow into the future of finance without providing people access to liquidity, I think that’s a problem. That’s a big problem, probably the number one problem. Most people were saying to me, “Oh, no, no, Howard, the number one problem is fraud.” It turns out that’s not the number one problem. Fraud has not been a factor in our industry. So I went my classic Howard Marks move, went to start reading about how do you create a stock market from scratch? How do you do that?

Howard Marks (00:54:57):
Well, I read that in the regulation, in the JOBS Act, it said that the shares are freely tradable for regulation and crowdfunding after one year and for Regulation A, by the way, tradable. Okay. So then I went to my attorneys. I started talking, and they didn’t have necessarily a solution for it. They said, “Well, it could go on the NASDAQ. They have a small capital market for NASDAQ.” I said, “Yeah, but they have to go public, and they have to have quarterly financials. It’s too expensive. It costs a million dollars a year. These are small companies. Maybe they raised a million. They’re not going to spend a million a year.”

Howard Marks (00:55:33):
So I found a regulation called the ATS, Alternative Trading Systems. That is also known as dark pools, and what it is is 20 years ago, the Security Exchange Commission decided that they want to create markets that can compete with the NASDAQ and the New York Stock Exchange. Those markets typically work after hours. So when the market closes, then these other markets are open, and they’re owned mostly for institutional investors. So it’s not for the consumer. The people who are listening to your podcast are not going on a dark pool to invest or sell shares. It’s typically institutional investors, hedge funds, and broker dealers. That’s what’s going on.

Howard Marks (00:56:19):
So there is a thing called the aftermarket. There is a thing. So I said, “Well, why can’t I use this to create a market for regulation crowdfunding and Regulation A?” So I challenged my lawyers on that idea, and so we filed a proposal with the regulators. The proposal was to create a marketplace. Took us three and a half years. Last April, April 2020, we were approved, and I can tell you it happened on my birthday, on April 16. So on my birthday, I get the only stock market for equity crowdfunding approved, and I’m thinking to myself, “I can’t believe this. This is unbelievable. This is amazing.” So we were prepared for it. We didn’t know we were going to get approved. So now we have to scramble and build it, right? We built it and launched it end of October 2020, and that is the beginning, I think, of a new opportunity for our whole marketplace.

Howard Marks (00:57:26):
I talked to you several times about the future of finance. What is the future of finance? Well, today finance is what? The big banks that take out the big companies public, and the small companies, they don’t even talk to them. Then if you go to mid-market, these are broker dealers that are smaller than the Goldman Sachs and the Morgan Stanleys of world. They’re only interested when a company does at least 10 million in revenue minimum, but most companies don’t do that. So then if you go down the food chain, it’s like the big pyramid, and at the bottom of the pyramid, that’s everybody. The five million small businesses in the United States are the bottom of the pyramid. The midsize broker dealers are not interested in them. So I saw this as a huge blue ocean.

Howard Marks (00:58:14):
I said, “Look, if equity crowdfunding handles just the five million small businesses in our country, just that, I don’t know. That seems pretty big to me. I don’t know about you, but that seems big, five million companies. What do I need? If I had 1% of the market, 50,000 companies. I mean, the big brokers, they work with dozens of companies, if not 100, and I would do 50,000. That’s pretty big.” So you see, I’m looking at scale. I’m looking at the scale of what we’re building here. But the missing component was the liquidity, this idea that if you go on StartEngine to invest in the company, you can trade.

Howard Marks (00:58:58):
Now, think about this, Robert, this idea that you can go on StartEngine to do equity crowdfunding, to invest in a company, and a year later, you can trade, is spectacular. To me, that’s an amazing idea. That takes, in my view, equity crowdfunding to a whole new level. Now the missing piece has been solved. We have the missing piece, which is we can issue the shares. We can allow the investors to trade. Think about that. What are we doing here? We’re replicating Wall Street for small business.

Howard Marks (00:59:37):
Now, hold on a second. Why has that not existed before, Wall Street for small business? Because they’re not interested in it, but the biggest industry in our country, the biggest market, the biggest economics are small business. We all know that. Big business are important, but they’re not everybody. 70% of all jobs in our country are small business. So come on. Really? Now you’re telling me, “Oh, the banks are right. They should work with the big companies,” but they’re forgetting the most important part of our economy, 70%.

Howard Marks (01:00:09):
Now, something I’ll tell you that you may have not thought about. The stock market, New York Stock Exchange and NASDAQ, represent 10% of our economy in terms of the wealth. Real estate, 10% of all the real estate of our country is in REITs that are on the stock market. Okay? 90% are not. They’re on limited partnerships. 90% are private. Same for companies. 10% of the wealth, Apple, Facebook, Amazon. Those are big companies, trillion dollars, right? But the five million small businesses, what do you think that’s worth? 100 trillion. So 90% of the economy is locked in private hands. My job is to unlock that.

Robert Leonard (01:00:52):
Yeah. I mean, I really don’t have a ton to add, because I agree with it so much. Like I said, that’s probably the most exciting thing to me about StartEngine, the business, is this idea of the secondary market. I really like it. Only StartEngine is traded on your secondary market right now. Why is that? You mentioned that it’s almost like a seasoning period. Companies have to wait a year or so. Is that why?

Howard Marks (01:01:15):
We are at the beginning, and we need to bring as many companies we can on our trading marketplace. Like it was at the beginning when I started, equity crowdfunding was impossible to convince companies to come on, because they were afraid, “What will happen? It’s a new way of raising money. I don’t understand it.” So now they go and do something different. They’re like, “Okay, Howard, I raised money on equity crowdfunding, and you want me to trade?” So I’m convincing companies. We’ve signed a bunch of companies already that have publicly announced they will trade, but not many. I don’t know when this podcast will become live, but hopefully by the time it goes live, we will have several companies on it. Our goal is to have thousands of companies on it, but we have to start somewhere, and this is how we started.

Robert Leonard (01:02:09):
Is the goal to eventually have all of the companies that raise on StartEngine to be able to trade their shares on the secondary market, assuming that they’re issuing common stock, not convertible notes, bonds, or preferred?

Howard Marks (01:02:21):
That is absolutely right, Robert. So here’s the idea. When you come on StartEngine to invest, you can trade.

Robert Leonard (01:02:28):
Is there any cost or a reason why a company raising money wouldn’t want to trade?

Howard Marks (01:02:35):
There are some costs involved, and there’s a thing called blue sky. I don’t want to go into too much of detail, but every state has a different rule about how you should trade. They’re not unified, and we found a way to do it through another regulation. We’re able to do it, and so it costs a company about $10,000 to trade. Then they have to pay maybe every year another couple thousand. So it’s very reasonable. They don’t have to do quarterly financials. They can just do what they normally do once a year or twice a year, depending on the regulation they used. It’s very reasonable, very reasonable as a means to provide liquidity. Typically, if you want to go on the national markets, it costs millions of dollars to do it, lawyers and accountants and bankers, and it’s insane. So if I say to you, “Look, $10,000, you can do it,” that doesn’t seem so bad. We haven’t raised the bar that high.

Robert Leonard (01:03:35):
I’m thinking about the founders of these companies, and I could be wrong, but my guess is that they probably like this idea of the secondary market, because oftentimes founders have a lot of their personal net worth stuck in these companies. If they’re not public, they often don’t really have much choice in terms of getting any cash out of the deal or their business if they need it, whereas it sounds like as an owner, they could potentially sell some of their shares maybe on the secondary market. Is that something that’s possible for owners? I know there’s regulation around being an over 10% owner of a company in public markets. Is there anything like that in the secondary market?

Howard Marks (01:04:10):
Yes. So we do permit companies, officers, insiders to sell, but we put speed bumps on them. The speed bump is to protect the other investors. So you don’t want an insider who knows something to change the marketplace. So we protect that with the right speed bumps that will slow down the sale of any significant amount of shares to a very small portion. Basically, just as a nutshell, for example, we’ll allow someone who’s an insider to not trade more than 1% of the last 30 days, for example. So it’s small, but it’s still liquidity. Gives the entrepreneur and the original investors some form of liquidity. If they’re patient, they can sell some over time. Obviously, if they want to sell their business, they can always do that. There are plenty of buyers out there that may be interested. That’s another option, but I think what we’ve built here allows entrepreneurs to achieve their dreams, because they don’t have to sell. They can still keep building their future while having some access to liquidity. I think it’s the best of both worlds, frankly. I think it’s great.

Robert Leonard (01:05:24):
Yeah, I think there’s probably quite a few founders that want to keep their business, but they ultimately sell because of personal reasons. They need the cash for X, Y, and Z.

Howard Marks (01:05:33):
That’s right, and it puts a lot pressure on these founders, on these entrepreneurs. If we can relieve that pressure slightly, allowing them to sell and disclosing that to the investors, to the shareholders that they sold a portion of their shares, that’s great. I think access to liquidity for founders, insiders is a big innovation. I think access to liquidity for the investors is an incredible innovation, and I think if you put the whole thing together, the idea that you can now be a small business and do what the big guys do on the stock market I think is incredible.

Robert Leonard (01:06:11):
What’s interesting, too, is as I think about this, founders, I think sometimes they make decisions in their business based on sometimes their personal life. It’s like, “Maybe I know that this probably isn’t the best decision in the long-term for the business, but I need to sell this in the next one to three years so I can get some liquidity out.” So they’re making short-term decisions because they personally need it, whereas it’s not necessarily in the benefit of the company long-term, because they need the liquidity. But now it sounds like founders are going to be able to think a lot more long-term, because they’re going to have access to liquidity.

Howard Marks (01:06:44):
They can have access to liquidity. They can think long-term, which is better for the business, and they don’t have to have pressure from their existing investors, because if the investor is getting a little antsy, saying, “Hey, what’s going on? Is your company … Can we get some liquidity?” “Hey, just go on the secondary market to sell.” “Oh, okay.” Conversation’s done. It’s a big innovation.

Robert Leonard (01:07:08):
Those speed bumps that you guys put in place for the founders selling shares, is that something that you guys, you and StartEngine as a company, have chosen to do, or is that required by the regulation and law?

Howard Marks (01:07:20):
That is something we chose to do. There are regulations around insider shares called Rule 144, and they exist on the stock markets, but they don’t exist for our market. But we believe that we have a responsibility to make sure that it’s a fair marketplace. So you mentioned insider shares, but if you think about the stock markets, typically you have a lot of things going on, including the insider selling shares, which exists. Rule 144, you disclose it. It’s now public. They file with the SEC. They’re selling shares in the company. The company’s traded publicly. Some people see this as a negative, so they sell their shares. Other people say, “Okay, this is good that the founder has some money off the table. Now they can focus more on the business.” So we decided to put these in place because we wanted to create a marketplace that gives confidence to investors.

Robert Leonard (01:08:18):
Is there insider trading with equity crowdfunding on the secondary market?

Howard Marks (01:08:24):
I think technically, it’s possible. We will monitor that. I think if you look at the stock market today, and a good example is the GameStop stock that went crazy, the idea on the stock market, New York Stock Exchange, NASDAQ is you can short shares, which means you can borrow shares, sell them, and then bet that they’re going to go down and then buy them later and give your shares back to whoever you borrowed from. That’s called shorting shares, and sometimes you short more shares than there are shares on the market. That’s called naked shorts, and then you saw what happened with GameStop. When the share price went way up, it created a-

Howard Marks (01:09:03):
You saw what happened with GameStop, when the share price went way up, the short squeeze, people went crazy, the price went way up, the regulators got scared, everybody got scared because they thought people will lose their money. Well, you know what? That exists today in the stock market. So are all the options, puts and calls and all of the different instruments that you hear about, probably, there’s more money in options than probably in stocks, which is strange but okay, that’s the way it is. We decided, for our marketplace, to keep it simple. It’s peer to peer. Now, what does that mean, peer to peer? It means, there are no market makers in the middle, there’s no shorting, there are no options, there are no derivatives. It’s, basically, an investor buying shares and selling the shares to another investor, we call it peer to peer. And that type of marketplace, I believe, is what originally existed long time ago and I think it’s refreshing to see a marketplace that has that type of behavior.

Howard Marks (01:10:03):
One example is, we show the order book, what’s the order book? All the people are trying to place orders before the market opens, all the people who are selling shares before market open, we show that in complete transparency to everybody. That’s a big innovation, you can’t do that. You go on Robinhood to invest, you don’t see the order book. You know who sees the order book? The hedge funds, they see it. The market makers see the order book. That’s why I think it’s not a fair marketplace, it’s not fair for everybody. I believe our marketplace is fair. Now, people can criticize us all day long and say, you’re this tiny market, you’re nothing, you’re a blip in the ocean. True, that’s true today, that might not be true tomorrow.

Robert Leonard (01:10:47):
Every company has to start somewhere. And I think the order book and the market history data is really cool. I’m looking at it right now, I’ve actually spent quite a bit of time looking at it. And right now, there’s a bid at 9:25 for 28 shares, I can see this right in the order book and the market history I could see on Friday, this past Friday, at 2:36 30 chairs traded at X dollar. So, it’s really cool that you’re able to see that data.

Howard Marks (01:11:11):
And we made it so that every investor has the same information. Now, you could argue that an insider has different information and that’s why we have speed bumps. And that’s why we disclose when they sell their shares, so that people know. So, in a way, creating a fair market share means, in a way that everybody has the same information and the rules are clear for everybody.

Robert Leonard (01:11:35):
I’m really, really curious to see how the lack of financial products, derivatives, bonds, options, all these different things, in this market impact it. And I’m curious to see if over the long-term, 5, 10 years, if this secondary equity crowdfunding market becomes popular, I’m curious to see if the broader financial market learns anything from this and implements it to the larger market. And I think it’s going to be tough just because of how much money there is in the bond and options and derivatives markets and there’s so many people that make so much money from there but I’m curious if this is a case study that we can use to impact the broader financial markets.

Howard Marks (01:12:12):
Well, you saw Robinhood screaming loud, recently saying, hold on a second. We need to change how things are done. There’s this notion that you buy shares and it takes two days to clear it and that two days is a systemic risk opportunity, so you have to cover it with capital. And so, Robinhood had to put $3 billion of money up and stop selling the GameStop shares and now, everybody’s saying, hold on a second. You’re in on that, you’re in on it with the big guys and all of this is because of regulation. And the regulation is such that, it creates these dilemmas, to naked shorts. The idea that, you can short more shares than exist, the idea that, you need more capital if something explodes in price. In our marketplace, our trades are instantly cleared, exactly what Robinhood has been asking for. Except, it’s 2021 and we do it.

Howard Marks (01:13:12):
By time the market goes to instant clearing, I think, we’re talking about 10 years from now. That’s an opinion, I may be wrong, maybe they have plans to do it earlier than that but it’s not today. And we have instant clearing, so you can sell and buy and sell and buy stock in companies and not worry about whether during the round trip, when I’m selling and the money comes or doesn’t come, what happens? The whole market crashes and you’re out, these are called systemic risks. In theory, they’re theoretical risks. They’re not necessarily there, the risk is there in theory but it doesn’t mean it happens. In our marketplace, we took that out. We made it really, really convenient and we believe that as we grow and again, our goal is to have a lot of companies on our marketplace. We hope every company that raises money on StartEngine will be trading, that’s what we hope. That’s up to the company to decide. We think we’re bringing something new to the table that, I think, is refreshing and I think it’s going to benefit entrepreneurs and investors.

Robert Leonard (01:14:21):
Charlie Munger talks a lot about incentives. And when I think about the broader financial markets, I have no idea how long it’s going to take for that instant clearing to take place in those markets. But I think the big hurdle there is, how many people are incentivized by trades not clearing right away. How much money is made by those market-makers in the middle? And I think that’s going to be a huge hurdle for the broader financial markets to overcome. When people are making billions and trillions of dollars, it’s hard to cut that out.

Howard Marks (01:14:50):
I think the study will come up one day. Right now, I’m told that studies show that market makers add value. I don’t believe that. I think they don’t add value, I don’t believe it. I think, over time, if you’re a freaking trader, it erodes, it takes money out of the market, instead of putting it into the market. That’s an opinion. That is me saying something out of, know, I would say, research and paperworks and studied it. It’s just intuitive to me that people say market makers matter because they created liquidity. But if you have a market of five main investors, each trading between themselves, that’s liquidity, I call that liquidity. The fact that a market maker can say, at 2:00 PM, I can step in and buy the shares if no one’s in there, I think it’s ridiculous, when there’s just so many people. At 2:00 PM, there will be a buyer.

Robert Leonard (01:15:50):
I completely agree. And again, it goes back to just, there’s so many people in the middle that make money, I think it’s just hard to cut out. And I forget the exact saying but there’s a saying that, basically, if you want to study for something, if you need a specific result from a study, there’s enough money you could pay to get a study to provide that result. And with incentives being what they are, I wouldn’t be overly surprised if that isn’t how these types of studies for market makers are being made.

Howard Marks (01:16:14):
I think you’re right Robert, there’s too much money in play today in these markets. And conflicts of interest, they’re all over the place. The fact that the big brokers own the DTC, which holds all the shares. The fact that the hedge funds are borrowing money from those big brokers. Everybody has an incentive in everybody. There’s a lot of cross ownership in the stock market and the financial industry. So, that’s how it is. Is it going to change or not? Well, regulators are looking into it. I think, every time there’s a scandal, every time there’s a debacle, every time there’s a big financial crisis, things change. Guess what happened? Why am I here even talking to you?

Howard Marks (01:17:02):
The reason I’m here talking to you is because in 2007, 2008, the great recession, where the financial markets collapsed. People came to Congress and said, look, we’re small businesses. We need another way to capitalize ourselves. The big guys are not allowing us to do it, so we want something new. We came up with this thing called crowdfunding. Think about this Robert, that happened only because of that financial crisis. And we are here recipient of that benefit, today. Now, it’s true it’s 10 plus years later, so what? It now exists.

Robert Leonard (01:17:42):
You mentioned that it’s up to the company, whether they are available to trade on the secondary market. Is this something that you’re going to require these founders and these companies to publicly make known in their offering when they’re raising capital on StartEngine? So, as investors, are we going to know ahead of time, whether they’re planning on trading on the secondary market or is that a risk that we might have to take as investors?

Howard Marks (01:18:07):
That is correct. My goal is to inform investors ahead of time, at the time of the offering, if they’re going to be trading or not. Now, it’s possible that we don’t mention that they’re going to trade, they can elect to do it later, yes. And that could be one of the questions an informed investor can do on the page and say, hey, are you going to be trading or not? And guess what? If you’re not going to be trading, I’m not going to invest. I don’t know, if I was an entrepreneur and I got a lot of those messages, I would be starting to wonder, maybe I should allow the trading and why not?

Robert Leonard (01:18:43):
For 10,000 bucks, why wouldn’t you?

Howard Marks (01:18:45):
Yeah. Why not? No reason not to. So, I think, your point is pretty valid. It’s going to be natural that, as time evolves and this marketplace becomes more mature, equity crowdfunding will be trading as well. And I think we’re the pioneers here, we’re the first. And we hope to set the standard, that an equity crowdfunding investor who makes an investment in a risky startup, with the understanding they could lose older money, at least, can have some idea that, eventually, in a near future, there is some form of liquidity. There’s no guarantee of liquidity, by the way, when we talk about liquidity without a market maker, it’s only good if there’s someone else on the other side buying or selling. But so what? That’s good enough, I think. And some will benefit from that liquidity and others will sell, some will buy and let the market decide, at the end of the day.

Howard Marks (01:19:48):
The price will be made based on the appetite. To the extent there are more buyers than sellers, price goes up. To the extent there are more sellers than buyers, the price goes down. Doesn’t not seem logical? It seems pretty obvious to me. We built it so that transparency, that system makes sense.

Robert Leonard (01:20:10):
Yeah, me too, completely. And I think you’re right, I think you make an important point is that, just because there’s the secondary market doesn’t mean there’s necessarily liquidity. I think it’s still a relatively illiquid market in comparison to the broader financial markets and the stock market but I think it makes equity crowdfunding a lot more liquid than it was previously. So, it’s still not necessarily super liquid but it’s definitely more than it was previously. And, obviously, your team and you at StartEngine are a lot more experienced than I am and a lot smarter about this stuff than I am. But as an investor and a user of the platform, I think it’s a really good call, I think it’ll add a lot of confidence to investors, if they can know ahead of time as to whether or not those shares are expected to trade on the secondary market.

Howard Marks (01:20:51):
We agree with you. We believe so. Again, there’s a transition period of time right now. We launched it recently, we believe it’s the future of finance. The future of finance is this, democratization to access capital for everyone, not just the elite and allow investors to be early in great new ideas. Yes, there are risks but so what? That’s part of the whole world of investing. And giving access to great new ideas early with some form of liquidity, which will power entrepreneurs to achieve their dreams, we’re creating a whole new economy here and we believe that’s the future of finance.

Robert Leonard (01:21:40):
There’s currently a limited trading window of just 1 to 3:00 PM. Why is that?

Howard Marks (01:21:44):
We’re experimenting right now. We’re trying to figure out the right window. We have the flexibility to have a different window for every company and we are going to try to figure out what is the right amount of time, some things are trade. It would be nice, one day, to have 24/7, what’s wrong with that?

Robert Leonard (01:22:06):
That’s super popular with cryptocurrency. So, I think if an equity crowdfunding market can be 24/7, I think that would be a huge, huge advantage, at least, from my perspective. As we wrap up the show, I want to briefly touch on your relationship with Kevin O’Leary. I was actually honored to have him here on the podcast, back on episode 58. On that episode, he actually briefly mentioned partnering with a crowdfunding platform. I don’t think he mentioned the name at the time, I’m not sure if the deal had been fully finalized yet but he had briefly mentioned to me that he was getting really involved in this space. He eventually joined StartEngine as a strategic advisor. How did you get Kevin to join the team and why did you specifically want Kevin?

Howard Marks (01:22:48):
Well, I play golf was one of his agents and I’m a big fan of his because I think on Shark Tank, I think Kevin O’Leary is the smart investor. He always gets the best deals, I think. And he has a demeanor that is very straightforward, he doesn’t beat around the bush, he’s really clear to the entrepreneurs on what his intentions are. I like it, I liked his persona. And so, I needed a way to explain to the general public, in the United States, what equity crowdfunding was all about. And, to me, Kevin is one of those people who can simplify things, down to the basics, better than most. He has that knack, that the ability, to communicate in a way that I think people resonate. So, yes, he came on board, we had one meeting with him.

Howard Marks (01:23:48):
He immediately understood what we we’re doing, immediately got it and was on board, on the spot. So, we closed our deal. The day we closed our deal, the market went down 2,000 points, that was in March of 2020. 2,000 points, that’s a pretty big drop for a marketplace. I think everybody was pretty surprised, frankly. It hasn’t recovered since, a lot but just then, I think, it was a great moment to sign a deal because we were in, no matter what happened to the marketplace, we were in because we believed that Kevin can help us communicate in a way that we couldn’t do it before ourselves. And so, we’ve been placing ads on the television, on different networks, on social media. It’s been a great response, I think, it’s helped us tremendously. So he, as an advisor, as a spokesperson for our company, is great.

Robert Leonard (01:24:45):
I think he provides a lot of validity to the idea of equity crowdfunding as a whole as well because on Shark Tank and just in general, he often calls out people for not necessarily the best businesses or the best models or just all these different numbers that he says, this is not real or right or good. And if he’s backing equity crowdfunding, he believes that this is something that’s real and true and going to stay for the long-term, I think.

Howard Marks (01:25:10):
Well, some of his companies actually came on StartEngine and raised capital and very successful. So, I think, it’s more than just being a believer, he’s actually using equity crowdfunding for his own businesses. And I think that’s a great thing, you can’t ask for a better endorsement than that.

Robert Leonard (01:25:30):
Takes it even a step further. What advice would you give to an aspiring millennial entrepreneur or aspiring equity crowdfunding investor, listening to the show today?

Howard Marks (01:25:40):
In terms of entrepreneurs, my best advice is, you should pursue your dreams. It is difficult, it’s a long journey, it’s uncertain, it has a lot of risk. But if you think about it, the idea of risk, as an entrepreneur, has not been properly priced. Risk, when you buy options or sell puts or buy puts or options, are priced, entrepreneurship is not priced. And I think it’s under priced. I believe that the idea of entrepreneurship has a lot more potential than people realize. And now that you can access capital using equity crowdfunding, we’ve made the lives of entrepreneurs a lot better, a lot better than it was before. So, I think, the main ingredient that’s left, for you the entrepreneur, is your grit. I call it, the intersection of passion and resilience, you need both. That cocktail is critical to your success. And now that we can bring capital your way, I think it’s made entrepreneurship even better than it was before.

Howard Marks (01:26:51):
Now, for the investors in equity crowdfunding, I can’t provide any advice to them because I’m in the market as a equity crowdfunding platform. But I think there’s a lot of literature out there, there’s a lot of information for investors to read. I think, follow our company, follow what we’re doing and see if it’s an area you’re interested in. I call it alternative assets. What we do is not national markets securities like NASDAQ, New York Stock Exchange, we’re an alternative investment. Some people look at alternative investments like real estate and gold and oil and gas and collectibles and I think startups belong in a portfolio of an investor, as any alternative investment, including real estate belongs in the portfolio of an investor.

Robert Leonard (01:27:46):
Howard, thank you so much for joining me today. It’s truly been an honor and this has been one of my favorite episodes, to date. For everyone listening, that wants to learn more about you, equity crowdfunding, StartEngine, where’s the best place for them to go?

Howard Marks (01:28:05):
Well, the best place is to go to startengine.com and see what this all looks like. And you can sign up, it’s free and if you’re interested, you can invest. If you’re interested, you can follow companies. You don’t have to invest and you can follow the dreams of hundreds of entrepreneurs.

Robert Leonard (01:28:25):
I’ll be sure to put links to the platform and a bunch of other interesting equity crowdfunding literature in the show notes. You guys that are interested can go ahead and check that out. Howard, thank you so much.

Howard Marks (01:28:36):
Thank you Robert, it has been a pleasure.

Robert Leonard (01:28:39):
All right, guys. That’s all I had for this week’s episode of Millennial Investing. I’ll see you again next week.

Outro (01:28:45):
Thank you for listening to TIP. Make sure to subscribe to We Study Billionaires by The Investor’s Podcast Network. Every Wednesday we teach you about Bitcoin and every Saturday we study billionaires and the financial markets. To access our show notes, transcripts or courses, go to theinvestorspodcast.com. This show is for entertainment purposes only. Before making any decision, consult a professional. This show is copyrighted by The Investor’s Podcast Network. Written permission must be granted before syndication or rebroadcasting.