CLEVELAND, Ohio — The commissioner of the U.S. Securities and Exchange Commission is coming to talk with Clevelanders.
Hester Peirce, who grew up in Cleveland Heights, will speak at a public “fireside chat” on Monday at Case Western Reserve University. She graduated from CWRU with a degree in economics in 1993.
At Monday’s event, Peirce will talk about startup capital formation, entrepreneurship in the Midwest and the role of the SEC. A networking reception will follow.
The evening is open to anyone interested in discussing these issues with the commissioner. Registration is encouraged but not required. RSVP for the free event at https://www.eventbrite.com/e/edmonds-e-talk-with-hester-peirce-tickets-80945866265.
Ahead of the event, Peirce talked about entrepreneurship in Greater Cleveland, what needs to be done to help startups, and other issues. Here are highlights from the conversation:
Q: Do you find the passion for entrepreneurship is different in Northeast Ohio than in other parts of the country? Where is it strongest, if there’s a difference?
A: I think there are entrepreneurs everywhere. There’s a passion in lots of places. I think one of the unfortunate things that’s happened in the U.S. is that a lot of the money goes to the coasts so that’s where a lot of the talent then flows.
The capital markets need to work on making sure that people with great ideas in the Midwest, in places like Ohio, are able to get capital to fund those ideas. In many ways, Cleveland is such a great example of a city that really should be a hub of entrepreneurial activity and has a lot going on now.
But we have a history, Cleveland has a history of being, I call it the Silicon Valley of the past. We had a lot of companies which then attracted talent, and spawned new companies growing out of those few core companies.
How can we develop that kind of a core of entrepreneurial activity? One key is to be able to have the capital there, so that it can go to people with great ideas.
I think there’s a lot of exciting work going on in Cleveland. I went to Case so I’m biased. But there is a big biotech community that centers around Case and then you’ve got the Cleveland Clinic, obviously, and University Hospitals. So there’s a good core there. But I think we need to make sure the money is able to find it.
Q: So how do we do that?
A: From my perspective, I’m looking at what I can do in my current job. Part of that is looking at our rules to see whether they’re skewed toward the coasts. And I think they are. One of the ways this is true is we have an “accredited investor” definition that looks at income and wealth. Those things tend to be higher on the coasts because it’s more expensive to live there and salaries are higher.
So essentially what it does is it says that [some] people . . . are unable to take their savings and invest in local companies they think would be successful because they don’t reach that threshold level to be an accredited investor. Can we do something to change our accredited investor definition to make it more geographically fair or more geographically balanced? I think right now it’s a little geographically discriminatory.
That’s one idea. Another idea: We put out a concept release that looks at our private offering framework. And we’re trying to find ways to rationalize it, to harmonize it to make it easier for folks who are trying to raise capital to use. It’s pretty complicated to use.
And right now, if you’re doing an offering in the U.S., it has to be registered with us at the SEC, or it has to fall within one of the exemptions. There are a number of exemptions but each of them has its own peculiarities. And some of them have some problems that could be ironed out to make them easier to use. So we have gotten a lot of feedback on that and so I hope some good ideas can come out of that.
Another thing I think we can do is we don’t have a great framework for regulating finders. Finders are people who are able to connect people who have capital to people who might be able to use it. It might be someone like an attorney. It’s not her business to connect people like that, but she might know of someone who might be a good investor for a particular company. Allowing that person to get compensated a little bit for making a successful connection — I think that’s a great idea.
Those are a few ideas of ways I think we can really improve capital formation in places like Cleveland and the rest of the Midwest.
Q: For a lot of people launching a business, if they don’t go to family or friends to invest in their business, they may turn to banks for startup money. What are you seeing as far as entrepreneurs being able to access lines of credit at banks today versus five years ago, versus 10 years ago?
A: One thing that’s happened is the number of banks is certainly falling in the U.S. And some of that is probably natural to see the competitive landscape shifting and see some mergers.
But there have also been some regulatory factors on the negative side. That includes new regulatory burdens on banks, which makes life really hard for small banks. And that’s where a lot of small businesses go . . . My thought is let’s try to get more funding done through the capital markets rather than through banks. And I think that’s good because the capital markets are really good for funding a dynamic economy where new companies can come in and they don’t necessarily have to have an established relationship with a bank in order to get capital to get up and running.
Bank loans will always be an important part of funding companies. But I’m hoping if we can expand out the options by making crowd-funding more workable, for example, then we might be able to supplement banks and give some other options to people who are finding it harder to get a bank loan.
Q: Back to entrepreneurial passion. Over the years I’ve seen people who are true entrepreneurs who can have idea after idea that fails and they wake up the next day unfazed, ready to try another idea, clean slate, ready to go. This entrepreneurial spirit, what do you think drives it? Is it people wanting to be their own boss or to get rich or just find success with a good idea?
A: I do think it’s a particular kind of person and I’m not that person either, so I always admire people who are like that. You described it perfectly. It’s the person who can have six bad ideas, they fail, and the seventh is a good idea.
I think a lot of it is attitude. That kind of person is what this country is built on. A lot of businesses are started by either immigrants or immigrants’ children because they’re new here and they’re enthusiastic about building something. That is something we want to make sure that our capital markets don’t squelch, where people have all of these ideas and if they can’t get them funded, then they will stop.
This is part of why I love the idea of having these innovation hubs where you can see people are succeeding. Even though you might not succeed for another 10 years, you can see, “Hey, someone else has made this work so I’m going to keep trying until I find something that works.”
One thing I worry about is . . . when I’m working on writing financial regulations, one of the things I’m thinking about is: How is the person who is starting the company going to come and read our rulebook? Are they going to just throw up their hands and go home and say, “Forget it”? Or are they going to say, “The rules are clear. I get what I need to do and I can comply with those”?
Unfortunately we have made it so hard that a lot of innovation that I think would otherwise happen in the financial sphere doesn’t happen at all because people just take their talents and they go to a different sphere that’s less regulated.
Q: Annuities — they’re often extremely complicated. I’m getting more questions and complaints from readers about all sorts of annuities. In my opinion, they’re incredibly under-regulated. Fixed annuities are considered an insurance product. Do you ever see the focus shifting so they’re treated more as an investment product? And what can be done to better regulate variable annuities?
A: We regulate variable annuities but other annuities are typically regulated by state insurance regulators. There has been discussion including at the legislative level about where . . . the authority line should lie with various products. The state insurance regulators feel pretty strongly about making sure they keep things that are insurance well within their space. We do talk to the insurance regulators.
One area where I think it’s really important for us to do a better job is we see some bad actors who cross the line between insurance and securities products. We need to do a better job of making sure that we’re pointing consumers and investors to databases to where they can check to see whether someone they’re dealing with is above board or not.
In terms of our space, with variable annuities, we have a proposal out there which is designed to do a summary prospectus for variable annuities to make it easier for investors to focus on the points that matter most. So that is a work in progress. It is a complicated area and it’s one that we want to work on our area and get folks as clear of disclosure as possible.
Q: I covered some of the big investment scams that go back 20 years, like Frank Gruttadauria and Bernie Madoff. It doesn’t seem like you hear about these big Ponzi schemes as much anymore. It is better regulation or better awareness, or what?
A: Unfortunately, Ponzi schemers are very clever and they find ways of getting to people. We are trying to do a better job educating people. We have videos and things online and I think some of that stuff is helpful.
We also have learned some lessons from Ponzi schemes from Madoff and [Allen] Stanford, which was another big one. And we now have a better whistleblower program than we used to. We get lots of tips, complaints and referrals now and we’re better at processing those. We also have better ability to collect and analyze data, and I think that’s helpful.
One of my big hopes is that we can encourage people in the industry to do a better job of identifying people when they see there’s a problem. With Madoff, there were people in the industry who knew enough to know there was no way they were going to put their clients in with Madoff. We need to make sure those people are coming to talk to us when they see something they think is strange. We’re trying to do a better job of sending that message too.
I think none of us can rest easy. Investors need to continue to be skeptical, and we need to continue to be on the job.
What: A conversation with Hester Peirce, commissioner of the U.S. Securities and Exchange Commission. A networking reception will follow.
When: Monday. The fireside chat is from 5:30 to 6:30 p.m.; the networking reception will be from 6:30 to 7:30 p.m.
Where: Case Western Reserve University Tinkham Veale University Center, 11038 Bellflower Road, Cleveland. Parking can be found in the Severance Circle lot (entrance on East Boulevard).
Reservations: Recommended but not required. Go to https://www.eventbrite.com/e/edmonds-e-talk-with-hester-peirce-tickets-80945866265
Murray is The Plain Dealer’s personal-finance writer. To reach her, call or text 216-316-7064 or email moneymatters@plaind?.com. On Twitter: @teresamurray
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