Joe Mullings 0:08
David, thanks for joining us here at OSI 2022.
David Weild 0:11
Thanks for having me, Joe,
Joe Mullings 0:12
I'm excited about this your, your insights into a much needed alternative financing in the medtech emerging tech marketplace?
David Weild 0:21
Well, it's, it's really been that, you know, decade long effort to try and improve the toolkit that entrepreneurs have to raise capital so that we can restore upward mobility, innovation, the kinds of things that sustain ultimately US leadership, the tax base, strong military, all this stuff is related. And obviously, in an industry like medical devices, medical tech, it's got enormous social impact implications.
Joe Mullings 0:50
And how does for our viewers, how does the Reg A crowdfunding compare to our classic VC, IPO market PE on that post commercial side of things, and the advantages, potentially to the entrepreneur?
David Weild 1:03
Well, it's an alternative source of capital. As I like to tell people, the most expensive capital is no capital at all, when you're in pre approval, pre commercial commercialized technology companies. And so I see this as sort of a compliment, right, it actually increases the access to capital broadly. And we're spending a little bit too much time as looking at it as being competitive to venture capital. And in point of fact, I think that the smart venture capitalists and the smart strategic investors are going to realize that this is another tool to augment access to capital actually create some leverage, if you will, to their returns increase the probability that these deals will actually see their way through to some form of a larger exit, whether it's a sale to a strategic or it's a sale to the public markets, I mean, a bonafide public offering listed on a major stock exchange.
Joe Mullings 1:58
Do historically VCs have been very worried about having uncle Mori in the crowdfunding continuum, and having to deal with those shareholders as the VCs come in a little later. Is that a valid concern?
David Weild 2:11
I think it's a I think it's way overblown. I think that I may flip that a little bit. I think some of the concern is how do you manage a large shareholder base with lots of people that have lots of opinions. And so, you know, part of that is communication. And you know, they will also at the same time, emerging technologies like blockchain that allow you to track and communicate with investors. And as we develop those technologies a little bit better, the whole investor relations piece of the equation can be significantly improved upon. But I, you know, I think, look, people don't understand this, generally speaking, but the ultra large cap stocks, they actually start having bigger retail base is like the Microsoft's of the world, because they're, they're, their brands so eclipsed that you drive this network effect. And a lot of retail investors want to invest in companies that they understand or that they are familiar with. And so you actually see, as companies get beyond sort of 2 to 5 billion in market value, that the percentage of share of the shareholder base that's owned by retail actually increases, which is counterintuitive to most people.
Joe Mullings 3:21
Explain what the crowdfunding, the Reg A where it came from? Why just now it's coming into the purview of the markets, at least in the med tech industry. Because you were part of that initial and the creation of the initial JOBS Act, is that correct?
David Weild 3:36
I, I had been dubbed, father the Jobs Act. And I went on after I left NASDAQ was vice chairman of NASDAQ for a number a number of years and I ran the listings businesses globally. And so I, I didn't like what they were doing the market structure because I had sort of bore witness to this loss of listings, if you go all the way back to the internet bubble, and then that period, which was the correction, which I like to call the bubble Rubble, there were a lot of short sellers that were ganging up on micro cap companies and driving them below the buck, the dollar limit, which is where you start to get delisted. And at the time, you know, we had 1000s of companies that were at risk of being delisted. And it was a recessionary environment. And we went to the SEC and said, Look, people need to keep money in these companies, they need to stay listed. They need to keep people employed, otherwise, we're going to exacerbate this entire recession. So we need relief here. And the SEC was actually pretty remarkably responsive. And so they gave us a moratorium for quite a period of time. And we were able to save a lot of listed companies and a lot of jobs as a result. But as a result of that, you know, I had been observing that the shift to electronic market structure which was low commissions and and low trading spreads, actually destroyed the economic incentives for brokers to get back out and remarket stocks. And, that's really important for smaller companies, because smaller companies trade what academics say or call asymmetrical order book stocks, there's a big seller, and no buyer on the other side, right. And it's not until you get to really large capitalization stocks, that we ended up with symmetrical order book stocks, where you've got tens of thousands of orders on either side of the market, the natural case for, you know, the, the, you know, the Medtronic, see Abbott's the the Intel's, you know, you could go right down the list. And so what what happened in a funny way is in our, in our sort of quest to save investors money on transaction costs, we flipped the market on its head, and we went to hyper efficient markets, which made already liquid stocks, more liquid, but destroyed support and liquidity in the entire echo system for smaller capitalization companies. So what we've been trying to do is, is create a bigger toolkit that entrepreneurs can use to access capital to support companies. And so now there's this convergence of direct marketing technologies coming to bear right on online. So you can get very, very refined about who you chase around who you from an affinity marketing standpoint, qualifying investors, that gets better and better and better blockchain and other technologies where you can do a better job of actually communicating to people and not being hidden behind the wall of a Wall Street firm. And, and then obviously, taking down the cost of accessing capital through crowdfunding on his way into interesting case in point, I'll digress, but, but what is not commonly understood by, by lawyers, securities commissioners, is that when we took away the ability of, of public investors to invest in early stage companies, we limited their upside, right, and these are non accredited investors. But also, it was really discriminatory against poor people. And I'll tell you why it's that poor people, people generally start businesses with money from friends and family. And if your friends and family are poor, you could be black Einstein, in the middle of, of inner city, Baltimore. And the likelihood of your being able to finance your startup is probably lower than the likelihood of you're getting struck by lightning. So I went around in the wake of the Jobs Act, and I spent a lot of time it's actually very interesting to the black community I spoke at I was at the White House for the I Have a Dream summit during the Obama administration, I spoke to the National Black Chamber of Commerce, I spoke for Jesse Jackson at the Rainbow PUSH coalition. Because what we were able to do was to create a toolkit that would apply to people's hopes and dreams and aspirations and give them access to capital. So from a sociological standpoint, it's really pretty transformative. And instead of going away from it, I think we should go whole hog into it, the biggest you know, you, you don't succeed without great failure. And a lot of our ability to learn and to become better entrepreneurs is that constant trying, it's, you know, you learn by doing and I think anybody that's of a certain age, that's been in the workforce understands, that doesn't matter how much book knowledge you have, whether you're studying law, in, in, in law school, business, in business school, it's not till you get out there, and you start to do it, that you really hone your skills, and you start to be able to bring something to the table. And it's just like that with entrepreneurship, you've got to get up there, you got to try and failure. And embracing failure is actually very beneficial to the economy,
Joe Mullings 9:02
As long as it's not catastrophic failure in the beginning, in the beginning stages, a lot of these entrepreneurs, right, they have the least experience they're ever going to have at that moment in time. So So
David Weild 9:13
You're so right. I mean, it's you cannot have one size fits all markets, you can't have one size fits all disclosure cost, because what you need to do for the large cap to protect the economic system from the catastrophic failure of a company that's a trillion dollars in market value is very different from that company that's raising 5-10-15-50 million dollars. Right. And so, I mean, I like to say if you, you could, you could take all of the you could take 5000 plus $50 million IPOs, which still aggregates the less money than one apple, okay, and you could light a match to it, it'd be much less harmful to the economy than the loss of one apple.
Joe Mullings 9:56
And I agree with that, and what I'm going to and I want you to take me through this is. So I'm sitting here today as an entrepreneur, I'm looking for my I've got a half a million into my company from friends and family. I'm here for a $5 million round. Before I saw that you were going to be the keynote here. I did my homework. I said, Huh? Crowdfunding, I don't know much about it. What are the basic blocking and tackling of crowdfunding that either people don't realize or are incorrect about, they read a headline, and therefore have said not, this is a dangerous platform. So I'm a beginner here, take me through what the crowdfunding does versus classic financing?
David Weild 10:37
Well, I mean, classic financing is usually broker intermediated. And the problem if the, if the stock trades is that brokers have an incentive to earn the next selling concession, so the actual brokers will typically flip this stock and put pressure on it. So creates an aftermarket support nightmare many times. And so going direct to investors has a higher likelihood of actually getting people that are really interested through affinity marketing, who will become sort of passionate advocates for the company. And so you created an entirely different shareholder base of advocates. And it has the potential to get better and better as the marketing science improves, right. So that's really one of the probably the most important differences. I also would tell you that crowdfunding is a funny term. It's there, it's reg CF crowdfunding under the Jobs Act, Title Three, which is up now he's going from a million to $5 million in size. And that's really public Startup Finance, I would tell you that the irony of it is, is that it was a it was a bill that was sponsored by Patrick McHenry, in the US House of Representatives originally, and it started out at $5 million. And then they cut it back to a million because they got cold feet, about marketing to retail investors. And I said, there's two layers of protection for investors. One is just capping them to how much individually they can put in, right, so that if your cap, that's a $5,000, you know, on some level, even if you don't have a lot of money, it's not catastrophic, right. And then there are these other other kinds of controls that you can use to help mitigate risk and get non accredited investors into markets. But crowdfunding largely defined is also things like regulation A+ you can use that by going to the crowd. But it's not called it's called Regulation A+ but it's a form of crowd funding, if you go direct, the same thing if you go and do general solicitation of private placements, to not to accredited investors, right, which has no limit in terms of proceeds that you can raise, and you can go out and generally advertise a deal to those accredited investors. And so that's 506. C, under Regulation D. And so we've got three different types of of exemptions from the traditional public registration, that have different sets of requirements that give people this massive toolkit to really start to experiment with direct marketing.
Joe Mullings 13:07
How does how does the person decide that I'm going to go Reg A+, or I'm going to go right to the venture market? Or I'm going to go IPO? What what what do the what do the three and when they start, they're in their pathway there? What is the advantage for that interim step, the Reg A+ or the crowdfunding?
David Weild 13:28
Well, I, I think a lot of it is stage of development. I mean, you you need to put market one of the things I you know, if I was a strategic investor, you know, like an Abbott, like a Medtronic, you know, I would start to think about how do I kind of average down my my, my position costs in some level, some of that may be by taking leadership, these brands are so valuable, you know, three M, the venture funds, you people look at those as markers to say the technology has been validated. Right. And so I think showing up on cap tables, it's actually going to help in the general marketing of to the, to the broader crowd and developing markets. And I think you'd be surprised at if, if the venture and strategic investor community really got behind and started to develop some of this marketing and lent their brands to these cap tables. I think that they would be surprised at how quickly in the medical device sector access to capital could grow.
Joe Mullings 14:31
And what is the risk though to the investor who goes all in on the crowdfunding? Does that? Does that limit options later down the road in regards to pathways to finance or revenue or even IPO?
David Weild 14:45
Well, I don't think if it's Regulation A plus I mean, for example, you don't need to trade regulation a plus or any any any kind of a public offering. You can restrict it contractually. You can incubate it till it gets the net Next level, if you look at what venture capitalists do in Silicon Valley, and particularly in the tech space where they've created a lot of a lot of later stage funds, they, you know, we used to do an A, B, C round. And when we had greater aftermarket support, we go and do a traditional IPO. And notably the medical device sector, and I was running strategy for top 10 investment bank. And so we went through all the various industry sectors. And the fascinating thing about medical devices, is it had the smallest average IPO size. A lot of these companies were single products, so they were doing massive numbers of $25 million IPOs. And they were getting supported in the aftermarket. And of course, the ability to support them has gone, right. So in some respects, you could argue that the you know, the Jobs Act has the greatest potential for the medical device industry because of what the companies are and where they are. Right. If I look at life sciences, which I would I say to some degrees, maybe more advanced in embracing elements of the Jobs Act, one of the one of the parts under the title one, which is emerging growth company designation, you know, we basically permission people to go out and, and market pre IPO. And as a result, we're able to then go to traditional investors in those verticals like some of these investors are here at Deerfield Orbamed. And they've done a large number of crossover investments pre IPO, they show up in the cap table, they have public money, that then they're going to defend the public market stock. So they're doing exactly what I just described to you that lending their brand names effectively to the cap table. And I can't tell you as an investment banker, how much confidence it gives everybody I mean, I was I have a gentleman on our platform, we spent 30 years at Eli Lilly. And we sent him a deal that was being banked with one of our associated firms in in Switzerland. And they're all MD PhDs. And Baxter travenol all was on the on the cap table. And the first thing he said was, Oh, they've got a technical lead, that Baxter travenol in this deal. And so immediately, he assumes that there is actually something there, and he's going to dig down and do more homework. And it also makes it easier, for instance, to broaden around by going out to the family office market.
But I, I think that look, I mean, I would look at reg CF as being really kind of very early stage startup capital, I would. It helps Augment, you know, friends and family and allows you to do it legally, right. And one of the things that investors or companies frequently do, they go to their friends and family, but they use a platform, and they tell them, their friends and family, they they put the orders and they actually show the growth that creates momentum, it brings from the crowdfunding platform, you know, another 30 or 40% of capital into the deal from people, they start to chase the momentum. And so a little bit of that is the signals, again, that we send to the public market, these are markers for something's going on, that's worth taking a look at, do you want to join on and put a little bit of money into it. So that's very early stage. I think 506 C, as a way to kind of augment and raise generally general generally advertised private placements is, is worth looking at and exploring to do larger rounds. And then Regulation A plus, which I think is very interesting because of the amount of money that's being put in to the systems to support Regulation A, you know, marketing that the beauty of Regulation A is that you can mark it to anybody. Okay, so you're really not restricted. And, you know, a lots of little investors actually add to once it does trade doesn't need to trade to liquidity after market activity, lots of passionate advocates for the company adds to the you know, the brand imprimatur, many of these investors may be doctors. So you end up with advocates for the technology and people that sort of credential eyes, the company. So it's a it's very similar to years ago when we used to use Merrill Lynch and Morgan Stanley retail Prudential securities, which is the firm that I was at, we had 8000 retail brokers. And we'd say that for certain types of companies just having that research distributed at a time when people actually brokers were brokers and they actually picked up the phone and talk stocks doesn't happen much anymore. It helped market the company created brand visibility, so it wasn't just important aftermarket support. It was important to commercialization.
Joe Mullings 19:50
You've used the word branding a few times in our session today, awareness, marketing to the smaller investor. Is this opening up a brand new vehicle and a brand new pathway where the best marketed company, and it's no different than what we see on the public markets, the best marketing company may in fact drive the best valuation, just on an attention awareness perspective, of course, assuming that financials are sound. But if you become a marketing machine for these technologies into mildly educated marketplace, is there any liability there? Where it's more hype and less tech?
David Weild 20:32
Look, there's there of course, you know, you know, you there's Justice Brandeis, who was famously once said it was on the Supreme Court. Sunlight is the greatest disinfectant, right? And so, you know, we use disclosure and diligence and in in our documentation to basically be fair, we put risk factors into our documentation. But as a practical matter, I mean, these are smaller offerings, and is not a lot of, you know, for the plaintiffs bar a lot of a lot of juice to squeezed from the turnip as Rick Ketchun who is a partner of mine, and the former seat chairman and CEO of FINRA, the financial regulatory authority, once said to me when we were having breakfast, so you, you know, you're, it's, it's, I think that the risk of litigation is a bit of a red herring, and it's overblown. And I think that the potential upside is so much greater for this industry, by embracing and it's kind of hilarious. Over the years, you know, I've met many, many different directors of the Division of Corporation Finance at the Securities and Exchange Commission. And after they've been in the post, and they've made regulatory changes, they'll almost inevitably come to their the same conclusion, which is shocking to me, when we, when we amend securities regulation, or pass something new, how long it takes for the market to really start to adopt that regulation. And, and the journalists run around and say, well, this hasn't been a success yet. And a lot of it has to do with you've got, you know, the plaintiffs bar, you know, telling their clients, you know, you don't want to be the pioneer, because you don't know what can go wrong. And it makes everybody markedly risk averse about things that, frankly, are not likely to happen. And I find it incredibly ironic, when I hear this kind of stuff come from the venture industry, who are end and end strategic investors who are by their very nature, risk takers, right? They, they analyze these things, they take them apart, they look at what is a real risk versus a fabricated risk. But when it comes to securities markets, they just listen to securities lawyers. And I can tell you that nine times out of 10 securities lawyers way overplay it.
Joe Mullings 22:40
What before we wrap up? What did I ask you about this market, this product, this platform for entrepreneurs, specifically in the med tech industry that we should have chatted about?
David Weild 22:51
Well, I do think it's just like any other discipline, you know, you need to embrace it, and I and you need to talk to experts, and you need to do your diligence on those experts, you know, the marketing people try and understand, you know, how they're getting, you know, how they're, how they're successful, where they fail what the costs are associated with. But also understand that once you your your stock does trade, you may not want it to trade. But if it does start trading, you know, that that's the sort of the first day of the rest of your professional life, right. So I find that most entrepreneurs give short shrift to how life is going to be and what they need to do in the aftermarket. And, you know, if you're using electronic marketing to raise a crowd, you probably if you're a public company want to understand what your electronic marketing budget is, which is not significant to sustain visibility, and how you kind of continue to feed it. By the way, when you're dealing with retail, they respond to things very differently than institutions do. institutions will do the deep work and the analysis and put valuations on things. And consumers pretty much are touched emotionally by the story. And it's very short snippets, sometimes it's increasingly video, I mean, alternative means and, you know, and so steady streams of information and being able to develop that connectivity is is absolutely critical, but also, the, the sort of side benefit of that is that you're, you're educating the patient, and you know, consumer population for your goods, the doctors and so on and so forth. And so to the extent that you can have somebody that that actually has a personal experience, you know, in clinicals or otherwise, and you know, you have to obviously manage the, the the FDA requirements and whatnot, but I think that that stuff is very powerful. And it's just a different, it's a different market, different media needs to be treated differently. And, you know, every venture capitalist in this space, every strategic needs to develop a level of expertise, because it's your friend. It's is an incredibly leverageable tool. And if you're a patriot, and you want this country to succeed, you really need to help be part of the solution in terms of driving greater access to capital. You know, I'm going to go out, and I give the keynote to this conference tomorrow and I'm going to make an appeal to people that want to be allies. You know, we want to continue to improve public market structure in this country for entrepreneurs because we're competing, we've got 330 million people in our population, we've got a country on the other side of the globe, that has stolen our technology, right pilfered, our technology has a billion more people. And so we have to be better. And to be better, we have to have the toolkits to basically sustain innovation. I mean, this is ultimately, I think capital markets are done properly, remove an existential threat to the well being of all of our children, and the next generations. And so this is why, for me, this is so important, you know, you have to contextualize it in the greater scheme of things. But the side benefit of this is in the medical device industry, the medical technology industry is we have breakthroughs, and we save lives.
Joe Mullings 26:17
Well, it's been incredibly fascinating. And thank you so much. I know our entire community is looking forward to hearing your message and the opportunities and platforms that you've read. It's great to share. Thanks, Joe. I'm Joe Mullings LSI 2020, be well
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