Honest markets matter. One of the reasons emerging companies are so successful in the United States is that capital is readily available for growth companies. A primary reason that capital is available is that there is a high degree of confidence among investors globally that companies based in the United States or soliciting capital from U.S. investors will comply with our system of regulatory oversight. As a result, our capital markets are generally perceived as fair, equitable, efficient, transparent, and honest.
In the past few weeks, we have seen Elizabeth Holmes of Theranos sentenced to 11 years in prison for securities fraud and the historic collapse of FTX (the crypto trading firm) led by Sam Bankman-Fried. Nobody will be surprised if Mr. Bankman-Fried suffers the same ignominy of jail time as Ms. Holmes. In both instances, seemingly sophisticated investors ran speedily through glaring “red flags” to invest. Apparently, FOMO can be very seductive.
So what did we learn from these events? First, from the entrepreneurial side of raising capital, it is incredibly important to comply with the regulatory framework. The rules exist to create an honest market for everyone, and without some basic rules, there would be no market. Imagine playing a sport like tennis or basketball without rules. It would be utter chaos. Failure to comply with the regulatory framework clearly has consequences. Second, from the investor side of the trade, due diligence actually matters. With respect to Theranos, none of the science was peer reviewed, and there were no physician-scientists of any serious consequence involved in the enterprise. With respect to FTX, as best as we can tell from what has been reported to date, there was no real board and clearly no outside board members, and only one class of stock with no protective provisions whatsoever. Nonetheless, sophisticated investors (who should have known better) invested.
We should all believe in honest markets and fair and reasonable regulation to ensure that events like the Theranos and FTX scandals are limited in number and remain outliers. We urge everyone involved in the emerging markets ecosystem to listen to their legal counsel if we raise red or yellow flags. Whether you are raising capital for your own enterprise or investing in other enterprises, sophisticated and seasoned legal counsel can make a big difference. We are here to make sure that capital-raising events are accomplished efficiently and in a legally compliant manner. Good legal counsel will help you get to “yes,”… but we can also let you know when it may be best to simply say “no.”
We lead off this edition of MintzTech Connect with an article initially published in The Deal titled “Top Five Ways to Accelerate Growth of Emerging Companies.” The article focuses on a number of simple and straightforward regulatory changes that would benefit the entire ecosystem of emerging companies and would promote start-up and emerging growth companies. We have also included one of our podcasts regarding running an effective board meeting – a topic that should be of significant interest both to entrepreneurs and their lead investors. Finally, our Spotlight is on Ben Zises and his SuperAngel.Fund. In a short period of time, Ben has become an important player in the seed-stage financing world.
Wishing everyone a wonderful holiday season!
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Be safe and be well,
Dan + Sam