Jan. 29, 2015 exposure draft adds chapters on economic growth & income inequality

The exposure draft uploaded Jan. 29, 2015 moves the discussion about the Fairshare Model to a macro-economic level. The first two chapters in Section II deal with how the model fits into the on-going debate about how to spur economic growth, job creation and address growing income inequality.

All are topical subjects. Although the Fairshare Model is not designed to address any of them, they provide a macro-economic context for the micro-economic matters that were discussed in the first six chapters that comprise Section I.

I’ll add two more chapters to Section II in the weeks ahead. One  will deal with the potential for the ability to cooperate to be a competitive differentiator in the decades ahead and the other will deal with philosophic matters.

By the end of February, I’ll start Section III, which will lead off with chapters on valuation.

Karl

Jan 14, 2015 exposure draft of book has two new chapters

A new exposure draft of my book-in-progress is available in the Resources section. Two new chapters have been added, bringing the total to six. Chapter five will be of particular interest because it describes five types of companies that may adopt the Fairshare Model and illustrates scenarios for Performance Stock conversion.

I am grateful to those who comment on my book-in-progress. This crowdvetting process is very helpful to me on many levels.

Karl

 

Intelligence Squared style debate on equity crowdfunding

Link

In June 2013, I participated in a debate about equity crowdfunding that followed the format used in NPR’s Intelligence Squared program.
The two teams argued opposite sides of this question “Will equity crowdfunding and the JOBS Act benefit both entrepreneurs AND investors.”

The moderator was securities attorney Bruce Methven. Howard Leonhardt (Leonhardt Ventures) and Thad Leingang (VentureDocs) argued that the answer was “yes.” Ron Weissman (Band of Angels) and I were on the team that argued that the answer was “no”–that investors would not benefit.

This question hangs over the implementation of tha equity crowdfunding section (a//k/a Title III) of the JOBS Act. I just discovered that the debate is on YouTube.

The order of speakers is Howard (arguing yes), Ron (arguing no), Thad (arguing yes) and me (arguing no). My remarks start at the 16:40 mark.

What is the Problem with a Conventional Capital Structure?

Under the Resources tab is new draft material from my book-in-progress about the Fairshare Model.
There are three chapters for you to contemplate and respond to (I hope).
Chapter four, in particular will be of interest to anyone with securities expertise.

The Fundamental Problem: Valuation
Praise aside, a conventional capital structure has a fundamental problem, an Achilles’ heel. At the time of an equity financing, it requires the issuer and investors to set a value for future performance. For venture stage companies, this is hard to do in a rational manner.

You can test this assertion even if you are a novice about capital structures and valuation. When you meet someone who raised money for a company or who has invested in one, ask “What was the valuation?” Follow that question with “Why did that make sense?”

Chances are that you will see uncertainty and anxiety play across their face. Why? It could be that they don’t know what the valuation is. Perhaps, they know the number but not how to calculate it. Most certainly, they don’t know how to evaluate it, or, they are not confident that it makes sense.

Garden Variety Securities Fraud Hyped as “JOBS Act cited in Fraud!”

The JOBS Act is prominently cited in stories about Daniel F. Peterson, and his company, Real Estate Fund 1, Inc.  On April 24,2013, the Securities and Exchange Commission charged him with securities fraud as he raised more than $400,000 in an offering of common stock from 21 investors.

But the JOBS Act is not the story, fraud is.  The kind of fraud that has existed since the SEC was created.

If the SEC’s action should provoke a public policy question, it should be “How can investors know if a securities offering is legitimate?”  Unfortunately, the question that media coverage encourages is “Is the JOBS Act a bad idea?”  Its sensational, not substantive.

According to the SEC[1], Peterson raised the money between November 2010 and June 2012.  The JOBS Act was signed into law in April 2012, two months before the last money came in!

The complaint says Peterson made false JOBS Act claims, but the material ones don’t make good headlines.  Peterson raised money years before the JOBS Act was passed–$300,000 was raised in 2008 using promissory notes that he had defaulted on.  To escape liability, he persuaded the noteholders to convert the judgments they had against Peterson into common stock in his company.  Other investors apparently bought about $100,000 in the company’s stock as well.

Allegedly, Peterson told investors he was about to raise billions of dollars in a secondary offering with reputable financial firms who had performed enough due diligence on his firm and business plans that they were “structuring..sales agreements and pricing as we speak.”  The complaint says these claims were false; there was no credible secondary offering underway, and he had no affiliation with the financial firms he claimed would underwrite it.

The complaint details false or misleading claims that Peterson made, but guess which one is picked up in the media?  His claim that the future secondary offering “would be made possible by” the JOBS Act.

Headlines and excerpts from three media sources are:

SEC Fraud Case Cites Spokane Man’s JOBS Act Pitch to Investors [2] –Bloomberg News

  • “A Spokane, Washington man sued for defrauding investors used the 2012 Jumpstart Our Businesses Act to tout his plan to raise billions of dollars in capital, according to the U.S. Securities and Exchange Commission”.

SEC aims to protect investors from fraud under new law [3] – Washington Post

  • “The rules aren’t even in place yet, but allegations of fraud are already flying.  The Securities and Exchange Commission is crafting rules to implement a new law that makes it easier for private firms to raise money. But it has been struggling over how to do so in a way that protects investors from fraud.  In a civil complaint, the SEC accused Peterson of telling investors that the law — known as the JOBS Act — would enable him to raise billions of dollars from the general public and generate 10-year returns of up to 1,300 percent for early investors.”

SEC says man used JOBS Act to lure investors into fraud scheme [4] – Thomson Reuters

  • “The Securities and Exchange Commission on Thursday filed charges against a man accused of luring investors into a fraudulent investment scheme by promising big returns under a provision of the 2012 Jumpstart Our Business Startups Act.  Daniel Peterson and his company, USA Real Estate Fund 1 of Spokane Valley, Washington, allegedly told investors that the JOBS Act would let him raise billions of dollars because of a measure that lifts restrictions on general advertising, the SEC said.  But Peterson, 63, did not really have a guaranteed investment product or any affiliation with a financial firm, the SEC said. He allegedly took investors’ money and then used it to pay for rent, food, entertainment, vacations, a rented Mercedes Benz SUV and expenses at a Las Vegas casino, among other things.”

Reporters should try to find out why the investors converted their $300,000 judgment into stock.  What due diligence did the new investors do?

The real story is “What should investors do to determine whether a securities offering is fraudulent?” That is a large and complex question.

Some products offer ways for the consumer to help determine whether they are authentic (i.e. drugs, software, clothing, liquor and cigarettes).  There is no “seal” or authentication code for a securities offering.

Investor education is an obvious way to combat fraud.  What other avenues–proactive ones–should be looked at?  Can securities regulators make a registry of “legitimate” offerings available to investors before they invest?

 

 

Until the 1990s, companies didn’t have “business models”

Interesting article about the expanding usage in the 1990s of the term “business model”.  http://qz.com/71489/until-the-nineties-business-models-werent-a-thing/

My theory is that the phrase became popular as the availability of venture capital grew, and, those responsible for investing it sought to filter deal flow.

Through the 1980’s, “strategy” was used to describe business activity and the deployment  of assets.  However, the blossoming of all-things-electronic—computer and consumer electronics—demonstrated that conditions were ripe for brand new businesses.  “Model” is a lighter word; it can be articulated before committing to activity and assets.

As the supply of potential deals expanded, and, the fleeting nature of success in the nascent technology sector was repeatedly demonstrated, VCs needed two things.  Theories about the kinds of businesses that were likely to find success, and, a quick way to test theories as they shift through deals.

Hence, there were “elevator pitches” about how to find success in rapidly changing markets.  Untested business strategies were better described as models.

In Hollywood, studios are pitched “high concept” and, when one bites, “it’s a movie”.

In Silicon Valley, business model became the equivalent of the high concept; appealing models produced funded companies.