Can the gatekeepers of capital truly predict the next groundbreaking innovation, or does overregulation stifle potential? This question sits at the heart of today’s pressing conversation with Commissioner Uyeda on The Angel Next Door Podcast with host Marcia Dawood. Entrepreneurs and innovators face a myriad of challenges, but how can regulation strike the right balance between protection and empowerment? This episode dives into the complexities of capital formation, regulatory insight, and the budding entrepreneur's right to risk. Commissioner Uyeda, currently serving his second term at the Securities and Exchange Commission (SEC), brings a wealth of knowledge to the table. Sworn in December 2023 for another five-year term, the commissioner is poised to witness significant rule adoptions and finalizations, especially under Chair Gensler's directive leadership. Appointed as one of five bipartisan SEC commissioners, Uyeda is instrumental in ensuring the regulatory body remains effective and cost-efficient amid a rapidly evolving electronic era. This episode is a must-listen for anyone involved or interested in the startup ecosystem, angel investing, and the broader financial landscape of entrepreneurial ventures. Marcia and Commissioner Uyeda touch on pivotal issues, from the nonpartisanship needed within the SEC to the nuanced differences between fraud and investment losses, as well as the practical concerns of raising the financial thresholds for accredited investors. With an eye towards inclusive innovation and insights that could shape the future of investment policies, The Angel Next Door Podcast shines a spotlight on the delicate interplay between regulatory frameworks and the inherent risk-taking that fuels American ingenuity.
Can the gatekeepers of capital truly predict the next groundbreaking innovation, or does overregulation stifle potential? This question sits at the heart of today’s pressing conversation with Commissioner Uyeda on The Angel Next Door Podcast with host Marcia Dawood. Entrepreneurs and innovators face a myriad of challenges, but how can regulation strike the right balance between protection and empowerment? This episode dives into the complexities of capital formation, regulatory insight, and the budding entrepreneur's right to risk.
Commissioner Uyeda, currently serving his second term at the Securities and Exchange Commission (SEC), brings a wealth of knowledge to the table. Sworn in December 2023 for another five-year term, the commissioner is poised to witness significant rule adoptions and finalizations, especially under Chair Gensler's directive leadership. Appointed as one of five bipartisan SEC commissioners, Uyeda is instrumental in ensuring the regulatory body remains effective and cost-efficient amid a rapidly evolving electronic era.
This episode is a must-listen for anyone involved or interested in the startup ecosystem, angel investing, and the broader financial landscape of entrepreneurial ventures. Marcia and Commissioner Uyeda touch on pivotal issues, from the nonpartisanship needed within the SEC to the nuanced differences between fraud and investment losses, as well as the practical concerns of raising the financial thresholds for accredited investors. With an eye towards inclusive innovation and insights that could shape the future of investment policies, The Angel Next Door Podcast shines a spotlight on the delicate interplay between regulatory frameworks and the inherent risk-taking that fuels American ingenuity.
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Marcia Dawood
Well, Commissioner Uyeda, thank you so much for joining me today on the show.
Commissioner Uyeda
Well, thank you very much, Marcia. It's a pleasure to be here.
Marcia Dawood
So 2023, the end of 23, was pretty exciting for you. On December 28, you were actually sworn in officially for your second term as commissioner at the securities and Exchange Commission. So what a way to end the year. So now that we're beginning 2024, can share with our listeners a little bit about what you see on the horizon this year for the SEC.
Commissioner Uyeda
I see a lot of rule adoptions and finalizations going throughout this year. If you look at, I would say it's probably a cycle of someone's chairmanship. The first part oftentimes it's dominated by proposals, and then the latter part by finalizations of those rule proposals. And I don't see Chair Gensler's agenda really changing on that. He was sworn in, I think, in April of 2021, if my memory is correct, and so he's had, at this point, close to three years, and to develop a lot of different policy proposals. And we have, I think, had almost a near record number, especially if you look at the first 18 months of his tenure. A lot of different things put out there which affect all aspects of the capital markets, whether you're a public company or a private company or a private fund advisor, public mutual fund and ETF, the intermediaries, whether they're the clearing agencies or the broker dealers. So it's been quite a lot.
Commissioner Uyeda
So we've had a lot of his proposals out there, and now it's point where you look. And especially with this year, 2024, being an election year, there are no guarantees. Again, this is not unusual, but many of those who lead, whether it's an agency like the SEC or whether it's various cabinet departments, are thinking, well, let's accomplish what we can this year, because one never knows what the election outcome may be.
Marcia Dawood
Yeah, absolutely. So some of our listeners may not be aware that you are one of five SEC commissioners. Each commissioner is appointed to a term of five years, and to ensure that the commission remains bipartisan or nonpartisan, no more than three commissioners can belong to the same political party. So the president also designates, obviously, one of them to be the chair, which we were just talking about. Can you paint for our listeners a picture of what it's like to be a commissioner, how you interact with the fellow commissioners, and especially when you have a difference of opinion?
Commissioner Uyeda
I've been fortunate to be at this agency since 2006 and have previously served two other commissioners, as well as former chairman Jake Clayton. So I was lucky when I stepped into this. It wasn't exactly unfamiliar territory. And one thing that I've learned over all that time that I've been with the agency is that how much of the agency's direction is solely within the realm of the chairman. And there's something called reorganization plan ten, and it makes the chairman the chief executive officer of the agency, in essence, who can basically direct all of the staff, all of the policy initiatives and directs what comes before the full five member commission. So what happens is the chairman will decide what the order is, the timing. We oftentimes do have a lot of discussions, and some of it is based on things. A lot of it, I should say, is based on external events to the agency.
What's happening in the markets, what's happening with issues that are being raised out there by either market participants, sometimes the media, sometimes people in the health. By and large, all of that gets boiled down to is assigning the staff to do some work on it, do some research, make some proposals, and when the chairman feels it's ready, those get circulated to the other commissioners. So none of the non chairman commissioners have the authority to direct anyone at the agency other than our immediate personal staffs. So there's a bit of a joke. I oversee six people. The chairman oversees nearly 5000. When those ideas come up, whether it's a proposal or rule adoption or interpretive guidance or other things that we need to weigh in on, and I should add, the most common vote we have is our enforcement calendar. Every single enforcement action requires a vote of the commission, and in some cases it requires multiple votes.
Commission when you have more than one defendant or you have different stages, sometimes it's to authorize an enforcement action to go to court, and then it's to accept a settlement, and then perhaps at the very end, decide on finalizing some civil penalties or discouragement. So those items all come to the commissioners. We are not allowed to speak collectively in private. In fact, no more than two of us can actually talk about an issue because there's something called the government of the Sunshine act. So we'll oftentimes either talk one on one, and it might be what you almost, might call almost leaks in a chain. I may talk to one other commissioner one on one, and then go talk to a different commissioner one on one and so on, or sometimes they're communicated indirectly through either our personal staffs or the SEC civil service staff.
Marcia Dawood
Interesting. So the SEC has four advisory committees, asset management advisory committee, fixed income market structure, investor advisory and then, of course, my personal favorite, small business capital formation, since I happen to participate on that committee. So I'm really curious to ask you about how are these committees helpful to you as commissioners, and what can we do to kind of further enhance these benefits and help the SEC?
Commissioner Uyeda
Well, all of those, I found those committees have been helpful. Two of them, the one you're on, as well as the investment investor advisory committee, are statutory, which was directed by Congress. The other two operated under something called the Federal Advisory Committee act. And so both of those have actually expired at this point. So we only have two advisory committees right now. And so you pointed out the fixed income market structure advisory committee, or what we call FIMSAC here. We also had something called MSAC, the equity market structure advisory committee at one point as well, that was also a Faka committee. Now, what I find most useful is, can you explore issues that we might not be looking at right now? And we do, I think, a pretty good job.
I may not always agree with the policy outcomes when the five member commission votes as a whole, but usually there's a pretty decent process. The ideas are out there. We have the common file. People ask for meetings on us. We have a lot of lawyers. Yes, you do. Who are all involved, and a smittering of accountants and economists. But still the lawyers tend to dominate looking at these issues, and I think we get.
So if it's on our plate, we're fairly well focused on it. And a lot of the participants, the public, whether they're trade associations, companies, investors, institutional investors, asset managers, all make their positions known to us. I feel like we've got a pretty good handle on that. There are a lot of other issues, however, that are not on the front burner or subject to the current rulemaking. That's where the advisory committees can be very helpful, because now they're shining a spotlight on an issue that is not getting otherwise a lot of airtime within the SEC. And where I look at the advisory committee as being most helpful is trying to identify things that can be done, especially ones where there can be a consensus, agreed on, that make our regulations more efficient or less burdensome, but still maintaining effectiveness, or in some cases, improving effectiveness. The way I look at our set of rules, I use a two x two matrix, and one is whether or not the rule is effective or not effective, and the other one is whether it is costly or cost efficient to do so. In the ideal world, we have rules that are effective and cost efficient, and that's what we want.
Regulation is, in fact, a value add to the capital markets, we have a lot of rules that are effective, but they're costly. So to the extent we can reduce some of those costs while maintaining the effectiveness and basically move it from the effective but costly box to the effective but cost efficient box, that's what we want to do. And then we have the ones that I think are really the worst ones, which are ineffective and costly. They're not doing anyone any good right now. There's that fourth box of ineffective and not costly, which kind of people just sort of make a whole lot of sense, but it's not really bothering anyone or a big burden. And some of the ones where maybe every 30 years say, oh, yeah, this rule doesn't really make a whole lot of sense. One of those rules, for instance, that I think we probably don't need anymore, but I think there are some rules that say, oh, you need to maintain six copy paper copies of this particular document. It's probably not that difficult to do.
But in today's electronic era, doesn't really make a whole lot of sense anymore, but people can easily live with it and it's not that big of a lift. So that's where I think the advisory committees can really add value, is, hey, here are some things you can do. There's a really good bang for the buck, because what's happened out there in real life, not as some academic legal exercise, here are some things we can do to make the world either more effective and or less costly.
Marcia Dawood
Absolutely. So one of the big things that we've talked about on the committee since I joined in June of 2023 was a lot about the accredited investor definition. Now, you bring a unique perspective because you have prior role with Senate committee on banking, Housing and Urban affairs as Security Council to the committee's minority staff. So you've seen there have been several proposals coming from Congress regarding the accredited investor definition. And so for our listeners who aren't familiar, the current thresholds are $200,000 in income, $300,000 if you include a partner or a million dollars in net worth minus your home, that would make you an accredited investor. So at the ACA, we are, of course, concerned about calls to increase these numbers to inflation and that we believe anyway at the ACA that that would eliminate 50, maybe even 60% of eligible households, severely impacting the capital raising efforts of innovative small businesses, which in turn will result in fewer jobs and less growth. So although the SEC has not recommended such an increase recently, it has received recommendations from Congress and elsewhere to do so. So what is your position on the financial thresholds around the accredited investor definition?
Commissioner Uyeda
I've certainly heard those same suggestions that we just merely index some thresholds that we had. Some of them go back to, I think, 1982 for the 200,000 annual income threshold. The 1 million is also been around, although we did make some changes where we moved to exclude the value of your principal residence from that calculation. But effectively, those numbers have been the same. My view is I'd be very sad if all we did was index those for inflation, because, one, it's unclear to me whether those thresholds we set in 1982 were correct to begin with. So merely adjusting for inflation, to make that, to adjust a threshold that perhaps was not correctly calculated, would not be a good approach. The other part is, we've learned a lot.
Now when we go back to those original thresholds, part of why we did regulation D, accredited investor was we had some case law out there is what did it mean on this exemption from having to register your offering with the SEC for something that did not involve a public offering? So the private offering exception, by doing regulation d and a credit investor, we tried to make it at least easier for people to know whether you're in or you're out of having to register. And we all appreciate principles based rules because they try to achieve an outcome. It's also not good, though, this uncertainty. Should this be registered or should it not? And up until then, there was just a number of basically court decisions to guide issuers who wanted to seek to raise capital. Now, I raise this because this idea that, hey, there can be judicial uncertainty, maybe the SEC ought to do rules. Well, there are frankly very good parallels to what's going on in the crypto market today. Now, I know that's not necessarily the focus of the Angel Capital association, but this is something that has been a traditional role of a regulator. Let's try and bring some clarity and uniformity to the rules and more importantly, make it workable.
So going back to the definition of credit investor, well, we've learned a lot in the four decades plus experience with this. And one of the things is, while wealth or income might be one measure, it's not the only one. And I think we've also learned things in other areas, like, for instance, on crowdfunding, where we've recognized that it's not so much if you're a dollar over $200,000, you could put all of your assets in a single investment.
Marcia Dawood
Right.
Commissioner Uyeda
Diversification. It's much broader. And thinking about why shouldn't someone, if I have $100,000 in investments or a larger number, be able to put a portion of that in private offerings? Why is it that you don't make enough money? Because income, $200,000, it means different things in different parts of the country.
Marcia Dawood
Absolutely.
Commissioner Uyeda
$200,000 means a lot less in certain communities than it does, say, in New York City or San Francisco. And ditto on the million dollars in net worth. So are there other ways? One thing also is by solely relying on things like net worth, you skewer it, for instance, to people who might just had many more years to invest, and that affects risk tolerance. For instance, somebody who has a 30 or 40 year investment horizon, their ability to have been an illiquid investment that might not have a payoff for five, seven years down the road, they can deal with that, especially as part of a diversified portfolio. If somebody is already in retirement who is, say, 80 years old, that may not be appropriate, even though they meet. For instance, the net worth test. Absolutely. There's a lot more sophistication out there.
I know we did at least what I thought was a very good first step to look at people who had a series seven and certain other designations. I remember before that we adopted that rule. Everyone I spoke with said, yeah, it doesn't make sense. Even those who might oppose or really want to narrow the pool of credit. Investor says the logic behind prohibiting somebody who can legally recommend one of those investments because they've done the due diligence and under their, whether it's regulation, best interest, or as a fiduciary investment advisor, who can recommend that, but they can't buy it.
Marcia Dawood
Right.
Commissioner Uyeda
That kind of seems to be very inconsistent. So I thought that was a very good first step. I would love to go back and say, well, are there others? Like, for instance, accountants? If one of the part is that you need to be able to understand financial statements, kind of makes sense of people who invest in, who understand and have been educated in accounting can do that. And that's just, I would say, the tip of the iceberg of, I think, additional ways that you can expand that. But we're trying to capture sophistication. So I think there are a lot of things that ought to be thought about, which is why I would be very sad if we just took this very, let's do a very simplistic adjust for inflation, and that's it. As opposed to let's take a comprehensive look at what it means to be an accredited investor with the appropriate level of sophistication or diversification where you should be able to make these and why there are ways that we could kind of widen the pool without necessarily doing anything to harm investor protection.
Marcia Dawood
Absolutely. And in fact, I read through the remarks that you gave at the 51st annual securities Regulation Institute in January in California. They were fantastic. I'm going to make sure that I put a link to that in the show notes so that people can read it in more detail. You just did a great job summarizing. But those two things about what you just said was what they decided in 1982 really the right ratio of what it really means to say that you are an accredited investor and you happen to have enough wealth in order to do that. And then I love what you just said about the time horizon. Yeah.
Marcia Dawood
If somebody's much younger, they may not hit that wealth threshold, but they should at least have the opportunity. And now they kind of do because they've got the ability to do some equity crowdfunding if they wanted to, if they were not accredited yet. But I think that we have to start educating younger people when they do have this longer time horizon, because it does take a long time for a startup to build and to scale and to do all these great things. So, yeah, I'm going to definitely put that in the show notes. The other thing that we've talked about a lot at the ACA is about how do we expand the levels of sophistication like you were talking about. Is it through accountants? And there's a little bit that's happened so far. You can take the series 65 tests and things like that, but we've put together some virtual courses through the angel university that could help angels. We have the Annabelle Payne ACA university courses, know, kind of run the gamut of everything from the basics all the way up to some advanced angel things like term sheets and cap tables.
Marcia Dawood
So we put a proposal into the SEC to say, hey, we'd be happy to put something together that would say, hey, here's a level of sophistication that we could say somebody now understands the risks. And the thing that drives me crazy about the series 65 test is they really don't explain for a private investment like a startup what the risks are that are really involved. So if we had something like that, what are your thoughts on a proposal like that?
Commissioner Uyeda
Well, I think it's something that's at least worth exploring and talking about what it would look like, whether or not it would reach the outcomes that we want, which is do people understand what they're actually getting into, and this is something where you might have heard this before, but someone said these certain types of investments are sold, not bought. We want people really to be buying them, as opposed to basically being subject to perhaps some less than scrupulous salespersons who are pushing investments and they find somebody, oh, you're an accredited investor, I'm going to offload this onto you. So we want to really, at least the way I look at, there are people who want to buy these because they've got a certain amount of knowledge or interest or others. How do you capture that, that they could understand that the whole point of investing is to take on risk. If you don't want risk, you should be in a bank account, right. Or other very ultra, or there's very little investment risk, like one of our government money market funds that are offered by secaunts.
Marcia Dawood
Right.
Commissioner Uyeda
The whole reason for investing, though, is you want to be able to take risk. And the reason why you take risk is you want to have compounded returns over time. And if you put it in a bank account or in a money market fund, chances are you may not even exceed the rate of inflation. So if we're thinking about building wealth, especially building wealth for the long run, and I know there are all sorts of different investors, some would like to have extraordinary returns over a very short period. But I think for those who think about it, it's still a challenge to pick out the ones that are going to succeed from the ones that are going to fail, especially over a 2030, 40 year time horizon. Just go look at even on the public side. Well, who are the 20 largest capitalized companies in 1980 versus today? Very significant changes. So, yeah, I think it's part of it is like working out exactly how it would look like.
Commissioner Uyeda
But that's what I feel a regulator can do. We can have those. Let's explore. Let's think about it. And that's something that I think we could do more of. We haven't done a whole lot. For instance, we haven't hosted a large number of roundtables. And really, this is where I see the committee stepping into that vacuum right now.
Commissioner Uyeda
We do have our annual small business forum, but I would like to see more about this and how can we achieve these potential changes in policies, or at least final work products that might be able to help us, inform us about what, if any, policy changes ought to be.
Marcia Dawood
And, you know, you bring up a good point that in some cases, and the SEC, obviously, there's so many things that the SEC is dealing know, my husband's a public company CFO, so I hear all about the public side at the dinner table, and then of know, I'm very involved in angel side and all the startup side, and then there's everything in between and all the other things. So we do hear about fraud in certain cases, but when it comes to angel world, we really don't hear that much about it. However, we do have losses, and there are considerable losses. When you talk about the number of companies that actually don't make it. And in a lot of cases, it's not because they were fraudulent, it's just because they tried really hard, they ran out of money or their tech didn't work or whatever the story was. So we're of course, trying to make sure that there isn't fraud, but losses happen. So how do you look at that as far as countering that type of a perception of fraud versus loss?
Commissioner Uyeda
Yeah. Well, there is a very big and important distinction between the two.
Marcia Dawood
Right.
Commissioner Uyeda
The whole point, especially in starter phases of investing, is there will be a fair amount of risk here, and that's not unusual, taking that risk, even losses. I would say as long as you don't have false and misleading statements about what exactly you're doing to attract that investment, then the onus is on the investor to determine, well, what's my risk tolerance? And part of this gets into diversification. You could have someone who says, yeah, I know this really is a long shot, but that's why I'm only allocating to my long shots 5% of my portfolio.
Marcia Dawood
Absolutely, yeah.
Commissioner Uyeda
And the money that I absolutely cannot lose, I've got that in very low risk investments. And so think about it as slices of the portfolio. Here's what I need to be very safe. Here's where I can take willing to take more risk. And then this slice I'm going to take at the other end, I'm willing to go for real long shots. And occasionally they pay off. If one thinks about where Amazon was in, say, 1996, and I remember when Google went public in the early two thousand s, and same thing with Facebook when they had their IPO.
If you bought it when they went public, someone would probably say, those are along the public stocks, much more higher risk than, say some much longer old line issuers. There were a lot of other, the contemporaries who went public at the same time that all failed. They went bankrupt or bought off at cents on the dollar. But there were new business models. Some succeeded, small numbers succeeded. A lot of them failed. Even in failure, though, we tend to learn things, what works and what doesn't work. And I remember when I was in law school, I spent one summer with a pharmaceutical company, and they fully expected a lot of their drug efforts to fail.
That was just the nature. That's why you do a lot of them. And if you're lucky, you're going to get one or two real breakthrough pharmaceutical drugs that are going to make a difference. Most of them will fail, but you also learn things, observations otherwise, and why it doesn't work, what not to avoid, perhaps in the future. And so I see the investment area no different. When people invest and there are failures, you hope there are lessons learned. Why didn't this technology work? Oh, maybe it was, maybe we couldn't get the right distribution to monetize that we had the ideas there. The innovation that is allowed by our capital markets has really made the US, I think, second and none when it comes to creating new ideas.
That's why entrepreneurs from all over the world want to come to the. We are not. It's very important, I think, at the SEC that we're not merit regulators. We don't say this is a good idea. That's not a bad. Yeah, I think I mentioned, I'm a former state securities regulator before I joined the SEC, and I did, I think, mention this in my remarks last month, which is imagine that Massachusetts Secretary of state's office saying, you know what? Apple stock is just too risky for our residents to purchase in their IPO. Again, if someone says, I'm going to allocate a small slice of this to this upstart called Apple, which I think went close to bankruptcy a couple of times before it was today, how do we know as a regulator what's going to succeed and what's not going to succeed?
Marcia Dawood
Right? Absolutely. Oh, excellent remarks here. Thank you for being on the podcast. This has been great. Love hearing what you have to say and love talking about this. And I'll be seeing you more in Washington, DC.
Commissioner Uyeda
Well, thank you very much for having me.