Terminal Value

Addressing the Crisis of Small Cap IPO’s with Joe Cecala

Janine Bacani

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We have Joe Cecala with us today with Dreamex. Dreamex.com that’s D-R-E-A-M-E-X.com. And what we’re going to be talking about is addressing the crisis of small caps IPOs. And what a lot of people might be wondering is, well, what is the crisis of small cap or small capitalization IPOs? And the crisis is that you don’t really have any small cap IPOs anymore. Basically what’s happened is that the path to exit for most startups is to get acquired, which ultimately results in intellectual property consolidating in a smaller and smaller number of mega companies. The usual suspects are Amazon, Microsoft, Google, Apple, the list goes on. But this is actually not very healthy from an innovation perspective. And so that’s one of the things that I brought joe wants to talk about today. So Joe, go and introduce yourself. 

Great. And that was a great introduction for this topic. So. Yes. I’m Joe Scale. I’m the founder and CEO of the Dream Exchange. We are a new stock exchange information. We’re actually starting two different types of exchanges. One is the conventional national market exchange, direct competitors with New York Stock Exchange. But as it relates to this problem, we’ve been working for ten years on the creation of a brand new type of stock exchange called a venture exchange. They don’t exist. And that’s primarily what I’ve been working on for the better part of my 15 years of my last professional years of my career. 

Well, when you say venture exchange, what does that mean? 

So a venture exchange is brand new law. It’s actually not law yet. It’s a bill that’s been working its way through Congress. It’s actually been through the Congress in 2018 and unanimously passed. And we wouldn’t be talking about it as a proposed law today, except they shut the government down at the end of 2018. So it wasn’t signed in the law. But the name of the law is the Main Street Growth Act. And in that law it creates venture exchanges, a brand new type of stock exchange specifically designed for entrepreneurial and small cap companies. And it creates a new type of security called a venture security, which is the type of securities that will be permitted to be traded on this new type of stock exchange really to get in the marketplace of the $50 million and under IPO market. So that’s the market that has died. 

Yeah. Well. And I think there’s a lot of dynamics that go in there just because I’m certainly not an expert on securities laws. But just from what I understand. Doing a public offering is rather expensive between all the underwriting you have to do. Between the compliance and regulatory costs and then of course. You have to pay your cut to Goldman Sachs or whoever your investment bank is. Whether it’s a debt or an equity deal. And so I think that by the time you add all that up. If you’re talking about something that’s under 50 million, I think in a lot of cases it’s just not ROI positive. So it feels like the problem you really need to solve is how do you put something together whereby smaller entities can raise capital in a less burdensome manner.

Right, yeah and you would think because the reporting requirements, the underwriting requirements, getting investment banks to be willing to underwrite, you would think that that would be the primary problem. But there’s actually many ways, alternative ways to going public, that the costs of doing so are not so onerous, that it isn’t worth it to do it. The problem is that the cost is there. The problem is it isn’t worth it to do it because the costs outweigh the benefits. So with the venture exchange legislation, we’re addressing the primary lack of interest in doing that by investment banks and by stock exchanges.


So one has to understand, how does a stock exchange make money and what would interest them in this marketplace. Because prior to 2000, between 70% and 90% of all IPOs were 50 million and under, and there were anywhere between 400 and some years, as many as 850,000,000 under IPOs per year. Now we have four. So where did the market go? Why did it die? And the stock exchanges and large investment banks make their money today on high speed electronic volume based trading. So if you’re a $50 million IPO, the volume you’ll have in a year to interest an investment banker and exchange is eclipsed in three days of trading by a billion dollar IPO. So why would they bother? It isn’t just that they can’t make underwriting fees and they can’t run a book to sell shares in a $50 million company. They now have to see that the unicorn nature of the company is worthy of the public markets. And that’s a market structure problem. So what the Mainstream Growth Act does is it allows exchanges to change the market structure and to allow for a bit of a longer relaxed reporting requirements so that the reporting costs can be phased in over time for the emerging company. So it isn’t that there’s no reporting. It’s just that on day one, the company that comes to a venture exchange doesn’t have to be fully compliant with Sarbanes, Oxley and DoddFrank and all of the rules that are good laws. It’s just that in a smaller setting, you don’t really need that level of protection for the investor until they start to grow. So the exchanges are going to be designed to protect the small entrepreneurial company and the small company investor alike, where bid offer sizes are controlled by the exchange, so there’s not as much spread. And the trading allowances, like the high volume trading activity, isn’t as focused on that. We can also have alternatives to continuous auctions. You can have a periodic auction. You might be your shares only trade once a week. The other really interesting thing is that each exchange is a silo so you’re not subject to volatility across all exchange marketplaces. So if you list on our venture exchange that’s the only place that the shares can be bought and sold so we have control of what’s happening on that exchange. So that as the indexes and major market moves are occurring if your poor little stock is caught up in major market moves has nothing to do with your small company. You’re not actually caught up in global economic cycles. You’re focused on a smaller set of discreet investors who want liquidity. This is the entrepreneurial activity here. Once those private investors have made their investment you’re right. How did you get out? We have to sell to Amazon. There’s no other way to get liquidity from a successful small company than to sell the big co maybe you can sell to a big VC or private equity firm. Maybe. But if you have this alternative which has been the alternative for 50 years in our country, which is I will go public. The American investing public wants to invest in my company so I have a longer runway to increase my valuation, expand the company, create prosperity and then eventually be able to exit the big co a better premium. Maybe they’ll get gobbled up but they have a longer runway with more capital and they’re not beholden to the venture capital firms so tightly because they have an alternative they can go public and they can appeal to the American investing public. So it’s a very interesting widely accepted need that we have in the United States to offer this to the venture capital market as well as the entrepreneurial market alike. 

Yeah well there’s a couple of things you said that I just want to unpack for anybody who’s listening that may not be familiar with some of the dynamics that happen in markets. Like for example one of the things you’re talking about is the way that a lot of brokerage houses will make their money. And so in the old days what would happen is brokerage houses would make it through trading commissions. So in other words if you wanted to set a stock traded cost like $50 which of course seems ridiculous now but now the way that brokers’make money is they put a tiny tiny, tiny fee on every share that gets transacted. So their natural incentive goes to try to transact as much volume as humanly possible instead of putting fees on individual transactions. And when you were talking about having a siloed exchange I think the place where that can create some value or can maybe not create value but at least reduce volatility is one of the things that happened. It was principally in the early 80s, 90s there were a number of hedge funds who figured out that there were pricing anomalies between futures markets and between various stock exchanges and so what they would do is they would go long and short either futures options or other different products and essentially lock in a guaranteed profit. And that resulted in a whole bunch of volatility. Well, if it was a small change, it would result in price discovery. If it was a big change, you’d have things like the stock market crash in 1087. The principal cause for that was that there were a lot of people who were trying to risk mitigate by going short futures to the SP. The problem is that if everybody goes short futures of the SP, the Arbitrators now are going to go, are going to see that the futures are going down. So they’re going to lighten their positions and you create a selfreinforcing cycle. 

That’s exactly in 1987 that was really at the birth of the SMP futures pit at the Chicago Mercury. There were probably three people standing in that pit before 1987. And from my 87 to the S and P futures are, you know, it’s the risk mitigation place in the world. So you’re exactly right. And by siloing we actually create a commodity market for the small cap stock marketplace. So there is no marketplace right now. There is no liquidity, secondary liquidity for the small cap companies. So you’re stuck. Which also is a deterrent to raising capital because the ultimate question that the investor has is how do I get out, how do I exit? And this becoming a viable alternative again, restoring it to what it once was, but in a new market structure that allows for protections to both investors and the entrepreneurs, it’s going to become a huge marketplace. There’s going to be thousands of listings in this venture marketplace coming up. 

Well, and I think that’s actually really constructive because the other option previously was the Over the Counter market known in the industry as the pink Sheets are the people. This is like in boiler room and whatever, the people who’d be calling everybody up on the phone trying to get them to invest in these chintzy stock or the penny stocks. Well, the way that these things would normally work would be that there would be a huge bid ask spread and the bid asks spread is going to be OK. If you have a broker, what’s the price they’ll sell it to you for? What’s the price they’ll buy it to you from? So you might get big gross story pitched and you might buy this thing at Share and go, okay, great. Except the problem is the broker will only buy it back from you at Share. So now it has to go up by 50% just for you to be able to get your money back. To say nothing of the fact that over the counter markets tend to have a very low liquidity float. Which means that if you have a significant stake, you could need to wait multiple days in order to be able to get flat. 

And the other primary problem is the over the counter market is a broker driven market. Yes. So with an actual exchange, a self regulatory organization that is an exchange, the companies that pink sheets historically have been well, they started out as companies that were out of compliance with the SEC regulations. So you had the dogs that were in there, and then basically you were trying to sort through which dogs had fleas. So in our marketplace, the listing candidates have to go through exchange due diligence and be regulated by us as an exchange, as a candidate to be listed. So the trustworthiness of the business organizations that come to us will be a much higher gradient of security than what you see today in OTC markets. There are a few good companies in OTC markets, but there are over 10,000 over the counter securities that are registered, trying to sort through 10,000 companies that are not on an exchange, not being regulated. It’s a very difficult process unless you have a broker you really trust, and then you can’t hold your OTC stock in an ordinary brokerage account very often. So with venture securities, you’ll be able to own and buy and sell right. Through the ordinary exchange mechanisms that you trade apple, IBM, and Amazon. So it builds trustworthiness in the liquidity marketplace. So the shares will be more liquid, the valuations will be better. You’ll be able to use the marketplace much like the large exchange marketplace, but with customized rules to protect everybody. 

Yeah. The other one, that’s usually a gap. With OTCs, you don’t necessarily have audited financial statements.


Yeah, exactly. My ethos is I’m ultimately a value guy. So, for example, I’m going to want to know things like what’s your earning? What’s your EBITDA, what’s your revenue growth rate look like, what’s your operating cash flow look like, what’s your return on assets? If you don’t have audited financial statements, it’s very difficult to reliably calculate those ratios. 

Yeah. And then they’re out of compliance because you don’t know how much actual trouble they’re in. Whereas with our exchange, the minimum number of years audited financials to list on our exchange will be two years audited financials, which is one full year less than the national exchanges, which is significant because as you’re a startup, maybe you haven’t had that third year, but you’re ready. And two years is plenty of time for a start up to have fully attested audited financial statements. So that’s our market. 

Got it. All right, let’s kind of turn the conversation a little bit. If somebody’s listening to this, they’re really interested and they want to learn more about how are the ways that you might pursue this, say, as an entrepreneur or potentially as an investor. Because since you’re talking about small caps, potentially microcaps, typically they have a higher growth curve, and that’s where you have a greater opportunity for capital appreciation. And so this is obviously going to be appealing to certain types of people who have an appropriate risk appetite and or for people who have entrepreneurial ventures that may be looking to raise equity capital. Where do people go to learn more? What are some of the key things for people to keep in mind right now? 

Right now, our website is, like a great resource. There’s a lot of information there. One of the other things is to actually look up the Main Street Growth Act. It’s a little technical, but once you begin to see what the securities are and how they’ll trade, you’ll have a much better understanding. We haven’t published our rulebook, so we’re in a four phase development process. We’re first applying for a national market license. We’ll be a fully automated electronic exchange. Our trading technology is actually quite superior right now, directly competitive with Nasdaq, NYSE, all the other seven exchanges. Then we’re going to be creating rules for primary listings on that exchange, large company listings. The third and fourth phases are the Venture Exchange Electronics, and then the Venture Exchange primary listings. So this is over the next 18 months, the two year process. But what can they do to get ready now? And the key is, right now, I would say, depending on the size of your company, if you’re a very, very, very small company, what you should be looking at as a guide is Regulation A, regulation A plus in terms of discovering what the checklist is for your reporting requirements, and you can actually contact the exchange. We’ll help with this. We have executives here who are willing to coach people through preparation for this marketplace when it’s born in the next year to 18 months. So we’re doing a lot of these type of podcasts and getting the word out so that we can actually coach people through. So when we open the floodgates, there’s a flood and not a trickle. So that would be, I would say, if I were recommending any educational process come to the exchange, email us info@dreamx.com. We get back to people. We’ll help you understand what the rules are eventually going to look like. But if you’re not interested in doing that right now, the best thing to do is look at Regulation A and Regulation A plus, section Three B exempt securities offerings because while they’re exempt in a very limited way, they’re currently able to be traded. And all of those securities, every single one of the Regulation A plus securities will be eligible for the venture exchanges once more.

Okay, got it? 

Yeah. That would be the primary place I would look. You can raise as little as $5 million in your offering. You can raise up to $75 million in your offering at that trading tier. And that’s what we’re focusing on. Five to $75 million offering valuations may be all over the place. It may be  $100, it may be $200. It may be a $300 million valuation depending on what the capital they’re raising is. But all those key metrics you just went through, you’ll be able to pull all those as an investor so the small investors will be able to then segregate in our marketplace into the industries they want. So as an investor, this is what I’d be looking at. What is the primary industry group you want to put your risk capital in? If I were doing it as a future accumulated portfolio of venture companies, I would be researching if it’s bio pharma, if it’s communication technology, if it’s agriculture, whatever industry I would look at, what is the Holy grail going on in that industry right now? So as the venture exchange companies are in your menu, then you have an easier time sorting through because there’s going to be a lot of companies to sort through when they hit our exchange. The primary educational tools is what I was going to say as a company reggae as an investor, get your industry so you can be ahead of the curve predicting what markets are going to get new and exciting over the next few years.

It sounds really intriguing and appealing, just kind of for me, thinking about me. One of the things that I keep thinking about is, on the one hand, mega cap companies haven’t had such a great run lately as at the time of this recording. But if I think about it from a, you know, corporate structure perspective, you know, if you have a, say, an innovative company that gets absorbed into somebody like Microsoft, it is very hard for that innovation to continue at someplace like Microsoft because now they have to compete for capital against business segments that have like 85% gross margins and like 40% operating margins. They’re competing for capital against ridiculously profitable core segments. Whereas at least the way that I would think about something like a venture exchange like this is that it’s basically a way to have exposure to venture capital, like upside, but without having the venture capital firm overhead. Because, for example, if you try to put money into someone like Blackstone, now you have all the Blackstone overhead and you’re also outsourcing your decisionmaking to whoever their current management is. Not saying anything against Blackstone management, but I’m just saying that all these companies structures have overhead. The bigger the company, the more overhead they have. If you’re going to self manage your portfolio or if you’re working with a competent private wealth manager. I’m saying competent because most private wealth managers are not wealth managers at all. They’re not asset managers at all. They’re salesmen. Only thing they do is they just gather assets, pitch it into some kind of managed fund and then take a percentage. That’s all they do. But I think it’s providing an opportunity for people to gain exposure to that. Because if you look at, say, a company like google. The people who got in at the 50 million raise level are the ones who earned the overwhelming majority of all the returns, 500 million% returns is at the very beginning.

We talk about it in these terms. It’s about wealth creation. So the earlier the stage of the company, historically people say, oh, there’s just so much more risk in the early stages, there’s so much more risk and commensurate with oh, there should be that much more reward. But what you just said is important for another reason that the developing technologies that get swallowed, and they often do get swallowed, some of them are swallowed and deliberately shelves. Okay, well that’s actually not forwarding the best ideas into our fabric of our society. So

wealth creation really should come from using our money to support the most imaginative and innovative ideas. And then those people who have that should be able to have the entrepreneurs and employees should have wealth creation as well as their investors. But where you run out of time with a VC, or where you run out of time if you’re financing with that, you should be able to sustain yourself to growing and not have as heavy a hand.

Tesla Motors is a perfect example of this. They weren’t profitable till last July. Okay, so why weren’t they? Why did the largest retail auto manufacturer in the world get away with supporting their market cap that long and not turn a profit? Simple. They were the first real company to make a fully electronic vehicle available in a price point to the retail marketplace ever.

If you have that idea and you have that innovation to the investor, it doesn’t matter whether he’s getting a dividend right now. He knows that the future is you’re first. He’ll keep supporting you. The market cap continued to expand because they were winning the game.

Now what if you’re really tiny? If it weren’t for losing money, most small cap companies wouldn’t exist at all by definition. In fact, a lot of small companies that are really closely held, sometimes their accountant is driving their financial statements into let’s not pay taxes, let’s organize financial statement write offs to make sure that we’re not profitable. So we amortizing and depreciating and putting in enough creative accounting techniques to make sure that they’re in the compliance of the tax club, but they’re not paying taxes. Well, that has nothing to do at that early stage with the value of the idea. When they arrive at our marketplace, I think very early on, especially the venture marketplace, we’re not going to have minimum requirements for EBITDA over years. We are going to have some pretty stringent regulation on the truthful reporting that is contained in the securities filings. But if you could have gotten in on, like you just said at the early stage of that 50 million offering because you saw it and recognized it, had the Holy Grail, the idea was there. Well, those are then both worth the risk. The reward potential is high enough to ke that available to everybody. So we all join the risk, spread the risk into the marketplace, and then we’re cultivating the best ideas so we’ll only survive better when the more creative ideas get to grow and aren’t shelved just because they’re competitive to the big coast. So it truly is a cultivation of American ingenuity in the capital markets, which is how we got here. It’s why we’re here today. 120 years of capital market innovation. We had horses and buggies in 1900, right? Okay. The American capital market system has created global innovation and we’ve financed it and created mega fortunes for millions of people. And now it’s fewer and fewer and fewer people harvesting wealth in a much smaller group of both private equity venture capital and mega public companies. Yeah. So this is like a breaking open the dam for innovation and American capital investing and smart investors will be in early on a lot of our listings. 

Yes, because I think I’m reiterating some of your points here. But a couple of things that really appeal to me about this idea is number one is I think for something that is truly innovative and disruptive, it creates a path to unfold that value without needing to get swallowed up by a larger company because typically the innovation gets buried. I think that is probably far and away the most important point. I think the secondary point is that for individual investors, because of course, if I’m putting save money from my IRA and I’m not going to sink all of it on one company, I’ll spread the eggs out. Right. I’ll spread the eggs across in multiple baskets knowing that some of them will flop. Good part is I can’t lose more than I put in. So if I put $10,000 in, I’m not going to go down by more than $10,000. Right. Basically, as long as they allocate an amount that I can recover from losing toward the venture funds, I don’t have to worry about it. Well, then if you make a high enough number of semi intelligent beds, one of them is likely to hit and it only takes one of them hitting. Because that’s the thing people think, okay, the SNP makes an average of an 8% gain. Yes, that’s average over all the mega caps. But if you’re talking about the because every enormous Google out there at some point was worth nothing. And so Google went from nothing to a trillion dollars over the course of about 20 years. Okay, well, if you happen to have say, just $1,000 in when it’s raising $5 million, that 500 million% return will be pretty good. 

Exactly. That’s the point. The point is that smart investors get to do two things. One is they get to make a smaller investment in a liquid market because some of those investments people are knocking on the door to make it a private investment. And usually your private investment minimums are going to be ten or 15 or $25,000. So now you have more than that. Yeah, listen, if it’s a really small raise and it’s a half million bucks, it’s small. If they’re raising five or $10 million in a private placement, it’s going to be a quarter million dollar minimum. So you have risk concentration in the privately held stock that’s illiquid and without a known exit. With this marketplace, you get to diverse invest, be your own venture capitalist if you will decide across a broad array of marketplace investments what you want to kind of place your bets on and then manage your own VC portfolio like you just suggested, you’re your own venture capitalist. If you’re harvesting wealth from one unicorn out of 20 investments, you’re in great shape. You’re no longer worried about the fact that your complete downside was $10,000. You may harvest a ten on one investment and you won’t care about the other night, just like a venture capitalist doesn’t. Okay. But the point is that the marketplace itself makes the risk adverse investor more able to spread and diversify in a secure, trustworthy, fully compliant, exchange driven, reporting compliance marketplace where there’s secondary liquidity. The key is you also have the opportunity to sell for any reason or no reason at all. So the poor entrepreneur who’s going, oh, this guy made a quarter million dollar investment five years ago, he wants his quarter million dollars back because his kids are going to college. Well, he’s now stuck with a secondary liquidity problem. He’s got to find a new investor at the same or better valuation. He’s no longer in the lab. And this is a similar thing, but he’s no longer in the lab to the extent that he’s going to have to manage his public company reporting and keep his stock price steady and do those activities investor relations. But it’s for the purpose of instantaneous liquidity. It isn’t for a negotiation hoping some new guy comes along to rescue him. It’s a great marketplace. I love what I do. It’s a tremendously valuable thing to the American fabric. Restoring the small and mid cap exchange marketplace is going to make American investing so much more exciting. There’ll be competitors. We’re not going to be the only venture exchange right now. I’m one of the people who’s really authored a lot of what’s in the Mainstream Growth Act, so I know quite a bit about it. And the only other exchange that’s intimating interest in a venture exchange is the Nasdaq right now. And I think it’s because exchange capital formation as an industry has just gone away. So as people are more familiar. I’m a throwback. I was there in the 80s and the 90s in that marketplace. So I know the excitement that’s going to build for this marketplace and as it’s built, I think it’s going to be a really fun journey that we have over the next ten years. 

Outstanding. I happen to agree. And what my corporate background has taught me is that if Nasdaq is trying to do this in parallel with their core activities, that Nasdaq will have more money than you, but you’ll have more focus than them. And so, generally speaking, I found that focus beats money. Not always, but in a lot of cases. 

Well, actually, they’re not even focused on the smaller tier of the marketplace. Their focus is actually on pre existing public filings. So they’re looking at companies that have made it to Nasdaq and then had to delist, and they were kind of problem children and the trading volume was too low. But they’re good company and they don’t want to get rid of them, but they’re not profitable on the national exchange. Well, they want to venture exchange for those guys. They’re not actually out talking to the people we are talking to. We’re talking to incubators and angel investors who have got five great unicorns, and we’re sniper shooting at those companies right now to develop them so that by the time we get open, we start with brand new listings nearly immediately. 

Got it. It sounds really awesome. I’m really looking forward to seeing how this shakes out. Definitely throw your website one more time and let everybody know what socials they can find you on.

Yes. So our website is D-r-e-a-m-e-x. dreamex.com. And you can email us. There info@dreamex.com. We’re on Instagram. We’re on LinkedIn. We’re on Facebook. We also have kind of our own little social media site. It’s called dreamxconnect.com. So if you go to Dreamxconnect, you can actually come in as a put your profile there, either investor or small company. And we have a message board where you can privately message other companies with other investors, with strategic partners, with consultants. Sojournsconnect.com we have about 2000 identities in there right now. So those are our social media and our website. And yeah, get in touch with us. We’re very amenable to the conversations. Everybody here got us what we’re doing. 

Outstanding. Outstanding. Which I really appreciate your time today. 

Yeah, great interview. I’m sorry, you put a nickel in and I can go, so I never know whether we’re going long or not. But I appreciate the interview. This was actually really good. 

Awesome. Well, Joe, best luck, and hopefully we’ll be having a follow up conversation a year about the amazing success of Dreamex. 

Yes. Awesome. I hope to see you at that conversation. 

All right, talk to you later.

Thanks. Talk to you later.

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