Howard Marks is the co-founder and CEO of StartEngine, the leader in Security Token Offerings and Online Public Offerings. Marks founded StartEngine with the mission to help entrepreneurs achieve their dreams. Marks was the founder and CEO of Acclaim Games, a publisher of online games now part of The Walt Disney Company. Before Acclaim, Marks was the co-founder of Activision Blizzard and Chairman of Activision Studios from 1991 until 1997. As co-founder, former Board Member, and Executive Vice-President of video game giant Activision, he and a partner took control in 1991 and turned the ailing company into the $50B market cap video game industry leader. As a games industry expert, Marks built one of the largest and most successful games studios in the industry selling millions of games.
Marks is the 2015 "Treasure of Los Angeles" recipient awarded for his work to transform Los Angeles into a leading technology city. Marks is also named one of the 500 most influential people in Los Angeles by the Los Angeles Business Journal. Marks is a member of Mayor Eric Garcetti's technology council. Marks has a Bachelor of Science in Computer Engineering from the University of Michigan. He is bilingual and is a triple national of the U.S., United Kingdom, and France.
StartEngine is a leading security offering platform that tokenizes securities for more efficient issuance and trading. Utilizing its expertise in regulated exempt offerings under the Securities Act, StartEngine has helped more than 160 companies raise capital and has over 150,000 registered prospective investors. Based in Los Angeles, the company was created in 2014 by Howard Marks, co-founder of Activision, and Ron Miller. StartEngine is committed to revolutionizing the ways companies raise capital and to helping entrepreneurs achieve their dreams. StartEngine Crowdfunding is a not a broker-dealer, funding portal or investment adviser. StartEngine Capital, LLC is a funding portal registered with the US Securities and Exchange Commission (SEC) and a member of the Financial Industry Regulatory Authority (FINRA).
Hey, everybody. It's me, again, Adam Chapnick, with the Security Token Academy. We're here with Security Token Industry Launch Week, with dear friend of the show, none other than the CEO and founder of StartEngine, Mr. Howard Marks. Thanks for being with us, Howard.
Thank you, Adam.
We love having you on because you have such a unique insight into your part of the business, and you see so much that other people don't get to see. What, right now, are you seeing, that's most interesting?
Well, it looks like what's happened is this. The first revolution in our industry of crowdfunding has been the JOBS Act. This document signed in April 2012 has become a real amazing change in how securities are being sold, and hopefully down the road, traded. It allows the ordinary person to purchase securities in startups. That, in our view, is a great democratization of capital.
The second big revolution in this perfect storm is bitcoin, and it's this whole cryptocurrency and blockchain technology industry that has exploded out of nowhere about a year and a half ago. I look at this as the synergy of the two is providing an incredible opportunity for us and for the whole marketplace.
Great. Okay, so is that manifesting itself in certain things that you're excited about certain protocols, or how are you seeing those two things converge?
Well, the first thing is the whole notion of crowdfunding is using the JOBS Act, which is regulation. It's all about following the rules that the SEC have put in place for issuers, companies who want to raise money, for companies like ourselves, who are funding portals to help them raise the money, and for investors who receive shares in the companies they invest. All of that is done basically following the rules per the SEC, and that's called regulation.
Now, when you look at cryptocurrency and blockchain, they didn't do that. They went a different route outside of regulation. That was okay when it was small, but as they became a multi-billion dollar marketplace, it really created a lot of friction with regulators who feel differently about what the cryptocurrency looks at. They see a lot of this as being securities, and they should be using regulation.
Yeah, absolutely. How is StartEngine approaching that? Are you getting into STOs? How are you guys going to deal with that?
Our view is this: You marry both the crowdfunding world with the cryptocurrency world, and now you have a much more interesting platform for consumers, and here's why. First, you want the consumer to have access to great deals, but you also want them to be able to pay very quickly using cryptocurrencies. That's bitcoin, that's ether, that's all sorts of other cryptocurrencies. Secondly, you want to be able to trade what you've purchased.
Now, the best thing you've seen in the cryptocurrency blockchain world are this notion that you can trade those tokens with other people. Now, that was done on a worldwide basis, freely traded with no regulation, and that's going to change. It has to change, because it's all about investor protection. It's not even a decision that we make. It's the regulators who do it. The regulators have a tough job because a lot of the things were done on a decentralized basis. How do you regulate that?
We found a way to put the two things together. Both the regulators and the people who are interested in Ethereum and decentralization of smart contracts can live together.
Cool. Okay, so now, I know you guys have been talking about dancing into the broker-dealer space. Is that true? What's going on with that?
Yeah, there's a rumor that we've applied to become a broker-dealer, and it's actually a true rumor.
Hey, it's true. You heard it here first.
Well, you know, we felt very compelled that this is the next step for our company.
Okay. What made you decide that that was the thing to do?
Well, we decided we want to be able to build a trading platform, an ATS, alternative trading system, that allows tokens to be traded ... These are securities, security tokens ... traded on that platform. In order to do that, you have to be a broker-dealer. There's no way around it. We felt compelled that we were already registered with the SEC as a funding portals. We're members of FINRA already. This is just the next step.
Absolutely. We see this as a big opportunity, because you issue the securities, and now the shareholders have a place to trade them. They don't have to wait seven years or 10 years with a private equity to holding, which may not be appropriate for them.
Right, so have you guys considered getting into secondary trading, and becoming an exchange as well, or no? Is that maybe down the road?
Well, that's what an alternative trading system is, is a secondary platform.
There you go.
It's not called an exchange, and we have to use our words very carefully, because exchanges, there's only 20 of them in the United States. That's the New York Stock Exchange, NASDAQ. The alternative trading systems, there are about 50 of them today. There are many more being proposed right now. We're one of them.
Terrific. What kind of issuers are you seeing? Is there sort of a trend? You have a unique insight into this. Is there any sort of vertical that seems to be outstripping other verticals? Who's using the tools that you provide?
We analyze this on a monthly basis, and we call it the StartEngine Index. What we publish on a monthly basis is what's going on in the crowdfunding industry. We segment it by industry. The number one, the one that does most capital raised, is in the food and beverage industry, specifically beer, spirits, wine.
Yeah, and then the second largest one is technology companies.
Huh. Any reason why that would be, beer, spirits, and wine would be the biggest?
Well, it's easy to understand. It's a passion business. There are a lot of people who consume the products, and they want to be an investor as well.
Interesting, so they like their drink so much, they want to own a piece of the company.
Well, wouldn't you want to own a piece of Heineken in the early days?
I wouldn't. Maybe as an investor, but not as a passionate user. No offense, Heineken. That's amazing. Okay, so in terms of your prognostication for the future, taking out the Howard Marks crystal ball, where do you see the security token ecosystem, let's say a year from now?
Our view is this. One, regulation is going to be front and center of the whole thing. It's not basically going to other countries, and onboarding investors willy-nilly by saying, "Well, it's not a big deal. We don't know their regulations. We're going to use US regulations on foreign countries." That's really not a good idea. Going back to the US, security tokens in the JOBS Act is a perfect marriage. We're announcing soon ERC-1450. It's our own smart contract. We built it from scratch. The reason we built it, because we want a token that we know for sure meets every single SEC regulation. That is our goal.
Is there any other characteristic of it that makes it different from what other people are using it?
Yeah. The main difference is you can't transfer it at all yourself. It appears in your wallet. You can see it. You can look at it. You can enjoy it, but you can't transfer it.
Is this a stupid question, or how would you sell it in the secondary market?
Well, so if you put it on a secondary market, which is a broker-dealer, the broker-dealer will take care of that transfer to the next person.
Got it. Okay.
You don't do it yourself.
See, the idea that a cryptocurrency's freely transferable is an extraordinary big idea, but it crosses a lot of bounds and barriers when you put a security inside of it. The security itself has problems. It has problems with state regulation, federal regulation, treasury regulation. You can make a huge list of rules that need to be met. Unfortunately, a decentralized smart contract cannot meet all those rules.
One example is if you are an affiliate of the company, which means you're an insider, you're a large shareholder, you're an officer, you're subject to rule 144, which dictates that you can't sell more than a certain percentage of what the market trades, because if not you would overwhelm the market, and that would not be a good thing. Well, the smart contract, they have no idea what's in the market at this moment. The broker-dealer does.
Interesting. Wow, so that's a big deal, ERC-1450. Is that done or is that in process?
Yeah, that is a draft that has been published on the Ethereum request for comment.
Amazing. Okay, that's super cool. I would've led with that. That's amazing. Congratulations. I love it. How do you think that's going to impact what you're doing in this coming year?
The way it's going to impact is we have customers. Customers come and say, "Hey, look, Howard. I need to raise money for my company. It's important to me. I need that money to grow my business, to be able to become successful." We love doing that, so we're going to help them raise money using regulation crowdfunding, regulation A Plus, regulation D-506(c)s, JOBS Act. Regulations, we call them also exemptions, are phenomenal. They really help these companies raise the money they need.
Absolutely. You've shown it.
Yes, and we will tokenize all of this using 1450.
ERC-1450, every time we issue a share, there will be a token issue. Now, the shareholder may not know or care that they have the token. If they do, they can look at it in their wallet. If they don't want to look at it, that's fine too.
They'll appreciate the benefits that it confers, which is that it's compliant, and safe, and all of the things that you've built into it. They don't need to know how.
The best way to explain it, it's a digital stock certificate.
Yeah. Everybody gets that.
The old stock certificates were beautiful. You had them in your drawer, in your file folder. You wanted to sell it, you had to take it, send it to the company, they would pay you money. This is a digital one, which it really is needed, because right now, everything is in book entry, which means that you issue the shares, they record it, the company, or in the transfer agent, and that's it. There's nothing digitally or physical about the share. Now, we gave you a digital stock certificate.
Yeah, terrific. Well, you guys have been at the forefront of the equity crowdfunding movement. You were the first ones there and now you're staying on the forefront by innovating with this ERC-1450 token. We love hearing what you're up to. I hope you'll come back soon and often to keep us posted.
Very much appreciated. We love working with your academy.
Great. Thank you, Howard.
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