Securities Industry Commentator by Bill Singer Esq

October 14, 2021

Now we take that one step from the sublime to the ridiculous. FINRA actually believes that it is somehow furthering its regulatory mission when it publishes a Regulatory Notice about FinCEN's issuance of priorities that don't change anything because nothing is actually effective. Wow -- talk about meaningful regulation! Of course, this comes from a self-regulator that proclaims: "We Play a Big Role." Indeed you do. The thing is that FINRA doesn't quite appreciate the irony of its claim. In truth, FINRA is "play" acting. Sadly, FINRA is merely hitting its marks and dryly reciting its lines in a second-rate drama amid a dwindling audience after receiving poor notices from the critics.
Former Poseidon Concepts Corporation Executive Vice President of U.S. operations, Joseph A. Kostelecky, pled guilty in the United States District Court for North Dakota to one count of wire fraud and one count of securities fraud. As alleged in part in the DOJ Release:

[F]rom approximately November 2011 to December 2012. Kostelecky admitted that, in his role, he caused Poseidon to falsely report approximately $100 million in revenue from purported long-term contracts with oil and natural-gas companies that were Poseidon's customers. Kostelecky's misconduct included fraudulently directing Poseidon's accounting staff at the U.S. corporate headquarters in Denver, Colorado, as well as its field office in Dickinson, to record revenue from such contracts and then assuring management that the associated revenue was collectable, when he knew that the contracts either did not exist or that the associated revenue was not collectable. After Poseidon reported a partial write-down of uncollectable accounts in its financial statements, resulting in a drop in the company's stock price, Kostelecky fraudulently caused the issuance of a public filing falsely reporting that he had purchased a substantial number of shares of the company, when in fact he had made no such purchase. Kostelecky admitted that when the inflated revenue came to light at the end of 2012, Poseidon's stock price plunged and the company was forced into bankruptcy, causing over $886 million in shareholder losses. Kostelecky further admitted that he perpetrated the scheme to inflate the value of the company's stock price and to enrich himself through the continued receipt of compensation and appreciation of his own stock and stock options.
A jury in the United States District Court for the District of Wyoming convicted Justin Herman and Charles "Chuck" Winters Jr., of conspiracy to commit securities fraud, securities fraud, conspiracy to commit wire fraud, and multiple counts of aggravated identity theft; and also acquitted Ian Horn of the charged fraud crimes but convicted him of making a false statement to the grand jury. As alleged in part in the DOJ Release: 

[H]erman and Winters conspired with Robert "Bob" Mitchell, who pleaded guilty earlier this year, to pump and dump NuTech stock. A "pump and dump" is a form of securities fraud where the conspirators manipulate demand for a stock and the stock's price, and then sell their worthless shares of the stock to the public at the artificially high price. In this case, the conspirators bought control of a publicly traded shell company called EcoEmissions Solutions Inc. and changed the company's name to NuTech Energy Resources, whose stock was sold under the ticker symbol NERG. The conspirators released information online to create a false image for NuTech as a company located in Gillette that was operating gas wells in Wyoming using a patented technology. In reality, NuTech had no business, no revenue, and no paid employees in Wyoming or elsewhere. 

As part of the conspiracy, Herman and Winters used altered, backdated, and forged documents to acquire 13 billion free-trading shares of NuTech common stock. The conspirators then artificially inflated the market price of NuTech common stock by manipulative trading and by releasing to the public false and misleading information about NuTech's business prospects. When the market price increased based on this false information, the conspirators turned around and sold their worthless NuTech shares to unwitting investors in the public market, including investors in Wyoming and around the world. 

Ian Horn is a Florida-licensed attorney. As part of the investigation, Horn was subpoenaed to testify before the grand jury in January 2019 because his name appeared on documents related to NuTech and because the money used by Mitchell and Herman to buy control of EcoEmissions was transferred through Horn's bank accounts. The jury found that Horn lied during his grand jury testimony about NuTech-related email communications that he falsely claimed he had lost and could not access even though he still had access to his email and was forwarding relevant email messages to Herman in December 2018.
The United States District Court for the Eastern District of New York entered a Consent Order for permanent injunction, monetary sanctions, and equitable relief against defendants Craig L. Clavin and his company Lighthouse Futures, Ltd. The Order requires that the defendants pay restitution of $345,000 and a civil monetary penalty of $25,000; and imposes permanent trading and registration bans and a permanent injunction prohibiting defendants from further violations of the Commodity Exchange Act (CEA) and CFTC regulations, as charged. The order provides that the restitution obligation will be offset by any restitution paid in the related criminal case. As alleged in part in the CFTC Release:

[F]rom at least 2015 through approximately May 2019, the defendants falsely represented that they were running a successful commodity pool, that the pool would participate in the commodities markets, and that the pool was exempt from registration with the CFTC. The order also found that the defendants made material misrepresentations to commodity pool participants, including falsely claiming that the pool generated returns of 10 to 14 percent from 2015 through 2019. According to the order, the defendants solicited at least $345,000 from pool participants, which they represented would be used for trading commodity futures. In fact, the defendants did no trading and used pool funds to pay Clavin's personal expenses, including items such as travel, meals, the purchase of patio furniture, and debit card purchases, and to pay purported profits to some pool participants in the manner of a Ponzi scheme. The order also found that the defendants sent investors fraudulent pool reports and annual summary statements showing false trading profits.

The order also found that Lighthouse illegally operated as an unregistered commodity pool operator and that Clavin acted as an unregistered associated person of Lighthouse, which Lighthouse unlawfully allowed Clavin to do.
The SEC adopted amendments to purportedly modernize filing fee disclosure and payment methods. As asserted in part in the SEC Release:

The amendments revise most fee-bearing forms, schedules, and related rules to require companies and funds to include all required information for filing fee calculation in a structured format. The amendments also add new options for Automated Clearing House (ACH) and debit and credit card payment of filing fees and eliminate infrequently used options for filing fee payment via paper checks and money orders. The amendments are intended to improve filing fee preparation and payment processing by facilitating both enhanced validation through filing fee structuring and lower-cost, easily routable payments through the ACH payment option. 

Investor Protection in the Age of Gamification: Game Over for Regulation Best Interest? (Remarks at "SEC Speaks" by SEC Investor Advocate Rick A. Fleming)

Welcome back to Day 2 of SEC Speaks. It is good to be with you all, and I look forward to seeing everyone again in person soon.

Of course, like all the speakers at this conference, let me remind you that the views I express are my own and do not necessarily reflect the views of the Commission, the Commissioners, or my colleagues on the Commission staff.[1]

Let me start by recognizing the staff in the Office of the Investor Advocate. They recently were honored with the prestigious Chair's Award for Investor Protection, and I appreciate Chair Gensler's acknowledgement of their efforts to serve investors. It is my privilege to hold the official title of Investor Advocate, but each team member in our office works hard every day to advocate for the best interests of investors.

As you may recall, one of those team members, SEC Ombudsman Tracey McNeil, substituted for me at this conference last year, so the last time I addressed this gathering was in April of 2019. And as I reflect on the intervening 2 1/2 years, it is hard to describe the sea changes that have occurred at the SEC and in our markets over that period.

One significant event since I last spoke here was the adoption of Regulation Best Interest or "Reg BI" two months later, in June of 2019.[2] As I said at the time, Reg BI seemed to be a step in the right direction because it included several improvements over the suitability standard for broker-dealers.[3] However, the rapid evolution of the broker-dealer business model now leaves me wondering whether Reg BI was worth the effort after all. Although well-intentioned, recent events expose what may be a significant flaw in Reg BI.

This brings us to another major development since 2019-that is, the so-called "gamification" of retail stock trading. This is not a precise term, but it refers generally to the use of technological tools to make trading easier and more exciting. Broker-dealers, as well as some investment advisers, now utilize a variety of digital engagement practices, or DEPs, to connect with a broader array of retail investors, particularly younger investors who grew up with similar design features in other online apps and games on their devices.

Although they have been used in other contexts, "DEPs" in the securities industry sprung into the national consciousness at the beginning of this year, when unexpected and unprecedented retail trading in a number of public companies attracted media and Congressional attention.[4] The Commission continues to study the market events of January 2021 and is appropriately considering the implications for rulemaking in a number of areas.

On the bright side, the events in January confirmed a positive trend our office has been tracking during the pandemic-a growing interest by retail investors in investing in the stock market. In part, this may be a reflection of historic stimulus payments coupled with pandemic-inspired lockdowns, but broker-dealers have encouraged this trend by reducing or eliminating commissions,[5] selling lower-cost fractional shares, reducing or eliminating account minimums, and yes, by making it more fun to trade.

These developments have lowered the barriers to entry for investors, particularly those of limited means. In response to a survey conducted by the FINRA Investor Education Foundation in the fall of last year, younger and less experienced investors reported that two developments -- market dips that made stocks cheaper to buy and the ability to invest with small amounts - were among the top reasons they entered the stock market during the year.[6] These lower barriers to entry, in turn, create greater access to the financial markets for all investors, including those from disadvantaged communities. I note that the SEC's Investor Advisory Committee, on which I sit, recently recommended that we at the Commission devote greater resources to helping financial services firms expand and improve their ability to encourage investment by under-represented communities in a variety of ways, from investor education and direct outreach to strategic marketing of financial services to these communities.[7]

Technological tools have also given broker-dealers the opportunity to think more creatively about ways to educate and serve their customers. Using DEPs, well-meaning brokers can require customers to engage with important educational content before making important decisions, and they can imbed warnings to help investors avoid making foolish decisions such as incurring unnecessary taxes. So, as we turn now to some of the downsides of gamification, I hope we can enhance investor protections without undermining investor participation in the markets or constraining the positive uses of DEPs.

With that said, my primary concern with gamification is its potential to induce trading that is more frequent or higher-risk than an investor would choose for herself in the absence of DEPs. In my view, to regulate this new generation of online brokers effectively, we need to fully understand the scope of DEPs in the industry and how they influence investor behavior and decision making. And, to its credit, the Commission has begun this process by issuing a recent Request for Information and Comment on the use of DEPs.[8] In the Request, the Commission sought information on a number of topics related to DEPs, including behavioral prompts, differential marketing, game-like features, and other elements or features designed to engage with retail investors on digital platforms. As the Commission and public begin to digest the numerous responses to the Request, I want to highlight a significant issue that the Commission must consider as part of this - how does the use of DEPs intersect with Reg BI?[9]

As most of you know, Reg BI generally requires that, when broker-dealers make recommendations of securities transactions or strategies involving securities to retail customers, they must act in the customer's best interest and not place the broker-dealer's interests ahead of the customer's.[10] Under Reg BI, any broker making a recommendation to its customer needs to comply with four component obligations: a disclosure obligation; a care obligation; a conflict of interest obligation; and a compliance obligation. Combined, these obligations enhance the broker-dealer standard of conduct and attempt to align with retail customers' reasonable expectations of how their brokers should act in the customers' interest. However, these important investor protections are not triggered by just any interaction between the broker and its customer-there must be a recommendation. As the Commission noted in the adopting release, Reg BI was not intended to "apply to self-directed or otherwise unsolicited transactions by a retail customer" (emphasis added).[11] So, when a retail customer independently directs their broker to make a trade without any related recommendation, the broker does not have to consider any of the component obligations in carrying out the trade.

The concern I have is that some DEPs, using artificial intelligence, sophisticated algorithms, and game-like features, may blur the line between solicited and unsolicited transactions. DEPs may subtly nudge investors to trade specific securities or, perhaps more likely, be designed to increase a retail investor's trading activity generally, even when not appearing to recommend a specific security. In my view, it appears that the use of certain DEPs, by gamifying securities trading for retail customers, could significantly influence these retail customers' investment decisions in ways that were not fully contemplated when the Commission adopted Reg BI with its important distinction between solicited and unsolicited trading.[12] This leaves open the possibility that investors would not receive the benefit of Reg BI protections even though they are being influenced to engage in securities transactions.

When Reg BI was adopted in the pre-gamification era, I observed that the utility of Reg BI would ultimately depend upon how it is enforced by the Commission and FINRA.[13] In my view, for Reg BI to remain a relevant and useful regulation in this era of gamification, the Commission should make clear that "recommendations" include instances where a broker-dealer utilizes DEPs to nudge investors in a way that reasonably could be viewed as encouraging trading, and the Commission should use its enforcement authority to back up its position.

This is easier said than done, of course. With such a vast array of DEPs that continue to evolve, applying the facts and circumstances to determine whether any particular DEP or combination of DEPs arise to the level of a "recommendation" will be challenging and could consume a lot of Commission resources. And litigation in a gray area like this is always risky.

But, investors need the protection of Reg BI in this new world in which they are being pushed or pulled by the platforms they utilize to access the markets. To me, it appears the DEPs are being used in ways that make the distinction between solicited and unsolicited trades almost meaningless, and brokers' obligations under Reg BI should not turn on whether the customer technically initiates the trades after the broker has used subtle techniques to influence the customer to engage in active trading, trade on margin, trade options, and engage in other risky practices. In the end, then, if Reg BI proves to be inadequate to protect investors, I believe the Commission should go back to the drawing board so that its critical investor protections no longer rise and fall on whether the broker-dealer made a specific recommendation.

Before wrapping up, let me briefly open up one more can of worms related to this issue. And that is, what is the difference between an investment adviser and broker-dealer as we approach the end of 2021? For years now, I have struggled to explain the difference between a full-service broker and an investment adviser because in my view the Commission has allowed brokers to do virtually everything that an adviser does, notwithstanding the fact that brokers are excluded from the definition of an investment adviser only if their advice is "solely incidental" to their brokerage business. But now it seems that most if not all of the on-line discount brokers are influencing investor behavior with digital engagement practices, which further blurs the line between providing investment advice and traditional brokerage service. At some point, if the Commission fails to brighten the distinction between advisers and brokers, it will make little sense to regulate the two with such distinct regulatory models.

Thank you again for the opportunity to share my thoughts with you this morning. I look forward to the remainder of the program.

[1] The Securities and Exchange Commission disclaims responsibility for any private publication or statement of any SEC employee or Commissioner. This speech expresses the author's views and does not necessarily reflect those of the Commission, the Commissioners or other members of the staff.

[2] See Final Rule, Regulation Best Interest, Exchange Act Release No. 86031 (June 5, 2019), 84 Fed Reg. 33318 (July, 12, 2019) (File No. S7-07-18), (hereafter, "Regulation Best Interest Adopting Release").

[3] See Statement Regarding the SEC's Rulemaking Package for Investment Advisers and Broker-Dealers, Rick A. Fleming, Investor Advocate (June 5, 2019), available at (hereafter, "Reg BI Statement").

[4] See Game Stopped? Who Wins and Loses When Short Sellers, Social Media, and Retail Investors Collide: Hearing Before the H. Comm. on Fin. Servs., 113th Cong. (2021),​calendar/​eventsingle.aspx?​EventID=​407107.

[5] The Office of the Investor Advocate continues to study the impact of zero-commission trading, which typically involves compensation to the broker-dealer through "payment for order flow." This type of compensation may be less transparent to the retail investor and may raise other concerns, such as the movement of retail trading away from traditional stock exchanges. Our office also continues to evaluate the impact of selling fractional shares to retail customers.

[6] See FINRA Investor Education Foundation, Investing 2020: New Accounts and

the People Who Opened Them (February 2021),

[7] See Investor Advisory Committee, Recommendations regarding Minority and Underserved Inclusion

in Investment and Financial Services (March 11, 2021),

[8] See Request for Information and Comments on Broker-Dealer and Investment Adviser Digital Engagement Practices, Related Tools and Methods, and Regulatory Considerations and Potential Approaches; Information and Comments on Investment Adviser Use of Technology To Develop and Provide Investment Advice, Securities Exchange Act Release No. 92766 (August 27, 2021), 86 Fed Reg. 49067 (Sept. 1, 2021), available at (hereafter, "DEP Request for Comment").

[9] The Commissions' recent Request for Comment does call attention to this general concern, and notes that whether the use of a DEP may be a recommendation depends on the relevant facts and circumstances' surrounding the broker's use of any particular DEP. See DEP Request for Comment, supra note 4, 86 Fed Reg. at 49075 (The use of a DEP by a broker-dealer may, depending on the relevant facts and circumstances, constitute a recommendation for purposes of Reg BI. Whether a "recommendation" has been made is interpreted consistent with precedent under the federal securities laws and how the term has been applied under FINRA rules.)

[10] See Regulation Best Interest Adopting Release, supra note 2.

[11] See Regulation Best Interest Adopting Release, 84 Fed Reg. at 33335.

[12] See, e.g., DEP Request for Comment, supra note 4, 86 Fed Reg. at 49078 (Do broker-dealers consider the observable impacts of DEPs when determining if they are making "recommendations" for purposes of Reg BI? How does the fact that a DEP might impact the behavior of a statistically significant number of retail investors affect this determination? What statistical concepts, tools, and quantitative thresholds do broker-dealers use in making this determination?").

[13] See Reg BI Statement, supra note 3.

Banner Year in the Markets Solves Capital Raising Woes: Headline Clickbait and the Real Story of Access to Capital (Remarks at "SEC Speaks 2021" by SEC Advocate for Small Business Capital Formation Martha Legg Miller)

Good morning, and thank you for spending time today with the SEC learning about the breadth of work underway at the agency. One thing is certain: you should be clear by now that the views expressed are the speakers' own thanks to copious disclaimers throughout this conference.[1]

For most of us, the pandemic has increased the time we stare at screens, whether laptops, a home computer monitor set up, or mobile devices. Each morning I am greeted by a flooded inbox containing highlights of newsclips I flip through before starting the day. It's no secret that the art of writing a headline, and inducing us to click to read the full article, is now algorithmic science, meshing search engine optimization and behavioral cues to drive eyeballs to articles. Those familiar with the journalism industry know that authors generally do not write their own headlines, instead turning the articles over to copy or section editors to craft alluring titles. The practice dates back to physically laying out spreads in newsrooms, only committing to headlines once you knew how much space with which you were working. Algorithms and social media have further changed the headline writing game, still with limited involvement of the authors.

If you're taking in news by simply scanning the headlines-particularly those about capital raising activity-you've likely missed the story for some splashy titles. Today I'd like to delve into the story and facts behind the headlines about how entrepreneurs are raising capital from investors, deconstructing some of the big numbers we see in large print. To keep this conversation lively, I've taken liberties with some real headlines and had a bit of fun, with them admittedly now reading more like an Onion lead-in than a Reuters or AP distribution.

"Fashion Faux-Pas: Entrepreneur Pitches in Suit Instead of Logo Tee, Brandishing Major Red Flag for Investors"
The visibility of a small handful of entrepreneurs-hardly representative of the majority of founders-has created an archetype of the "model entrepreneur." If I asked you to shut your eyes and picture an entrepreneur, too many people would envision a 20-something white male, wearing a hoodie, perhaps who dropped out of an Ivy League institution to build a revolutionary company with seed funding from a few prescient angels who spotted genius a mile away.

This headline is exciting! The person who takes wild risks, dropping out of college, or quitting their day job, evokes the David vs. Goliath urge to root for the underdog. Yet, the stories beneath the headline do not support this notion. Let's tackle the real story from two angles.

"Entrepreneurs Should Quit Their Day Jobs; Paychecks are Irrelevant"
Many assume that unless an entrepreneur is focused on their startup 100%, they're not truly dedicated. The reality for most entrepreneurs is that sticking with their day job before their side hustle has been de-risked is not only a smart financial decision, but often a necessary one. Our Office regularly hears from minority and women entrepreneurs who talk about building their companies while maintaining a stable income stream to support their families, pay off student debt, and avoid taking on too much dilutive capital too early. Their decision is a smart one. Entrepreneurs who keep their day jobs while building their businesses are 1/3 less likely to fail than those who quit and go all in from the beginning.[2] Wharton Professor and author Adam Grant attributes this phenomenon to building a balanced risk portfolio, with the stability of the full-time job affording entrepreneurs the freedom to be more creative in their side hustle.[3]

This is compounded by the reality that the average startup founder is not actually a 20-something. The average age of the highest performing startup founders is actually 45.[4] Even among notable young founders, their entrepreneurial success peaks around this same age, with Amazon achieving its highest market cap growth rate when Jeff Bezos was 45, and Apple introducing its most profitable innovation, the iPhone, when Steve Jobs was 52.[5]

"Who Needs Diversity? The Market Will Intuit Solutions for All"
It is also easy to buy into the narrative that if there is an unmet need among customers, the "market" will recognize that gap and deliver a solution. The reality is that problem-solvers only set out to solve the problems that they personally understand. Put another way: I can appreciate the challenges that you face, but I cannot fully understand or know them-much less solve them-unless I live them.

This is often the story with underrepresented entrepreneurs who see a need that majority entrepreneurs and investors have not experienced. For fans of Guy Raz's How I Built This, you may be familiar with the story of Tristan Walker's company Bevel.[6] As a black man, Tristan battled embarrassing razor bumps from shaving. After surveying the market, he discovered that many men of color with coarse or curly hair shared the same struggle, which could be solved with a single-blade razor system. He began pitching a direct-to-consumer solution to investors, only to be repeatedly dismissed with "if this were really a problem, the incumbent players would have addressed it." After a disheartening number of rejections, he finally secured funding, ultimately building a wildly successful brand that subsequently sold to Proctor & Gamble, making Tristan the first black CEO of a P&G subsidiary. His story demonstrates the importance of people who live the problem developing the solution.

While we have seen rising levels of entrepreneurship among underrepresented founders, they still struggle to connect to investors who see past the need to fit within the archetype of the hoodie-clad, 20-year-old drop-out.[7] While many sophisticated investors recognize the perils of pattern-matching, it is critical that we empower diverse investment decision-makers who can support solutions to problems that they too face. Our Office's recent Emerging Fund Managers series[8] highlighted the importance of new, diverse voices among capital allocators who value ROI potential differently.

"Capital Is Easy to Come by, with the Right Idea"
With record-breaking valuations and investments this year for a small handful of technology companies, it is easy for the headlines to overshadow the reality facing most entrepreneurs that capital raising is still hard. The challenges are blurred by two misleading headlines: technically savvy founders are fluent in securities lingo, and our capital markets are flooding all startups with funding.

"Fluency in Securities Legalese an Indicator of Product-Market Fit"
For this audience, fluency in securities laws is job security. Now take the most technically sophisticated entrepreneur, whether a biomedical researcher commercializing a pharmaceutical patent, an app developer pioneering novel code, or an industrial innovator scaling a cleantech solution. We should, of course, expect them to be experts in their product category; that is their competitive advantage. Yet great entrepreneurial insight does not translate into fluency in 80+ years of layered securities laws. When our Office meets with brilliant entrepreneurs across the country, consistently we have been asked to help make the language of capital raising and the menu of options more accessible so that basic compliance is not a game measured in 0.1 hour increments.

In response to requests for support,[9] our Office is iteratively launching new educational content. We took a nod from our colleagues' wonderful work with and started with our Cutting Through the Jargon glossary, which demystifies much of the lingo used in capital raising. Today I am excited to announce that we are beta-launching our new Capital Raising Navigator, an interactive digital tool that helps entrepreneurs narrow their options for raising capital based upon their expressed needs, from how much money they need, to whether they know their prospective investors, to where they plan to raise. It is part of a suite of evolving content we are creating on that is directly targeting a gap in accessibility of how to comply with our rules. I encourage you to take a look, and importantly, share feedback with us on what other resources are needed.[10]

[Ed: Illustration omitted]

Sneak peak of Capital Raising Navigator

"Flush with Capital, Private Markets are Booming for Everyone"
If you stopped at the headlines on capital raising, or didn't recognize how skewed they are by a handful of outsized deals, you might assume that once the rules are clear, the rest of capital raising is easy going. If you take a cursory glance at the numbers behind recent headlines, you'll see increasingly large funding rounds raised by companies before they go public. The aggregated capital raising figures back up this headline, but they miss the story. The late stage "venture" (and I intentionally use that word in quotes) capital raising game has changed in recent years thanks to the increasing presence of crossover investors investing in pre-IPO companies. These non-traditional investors-such as mutual funds and others who historically invested solely in the public markets-have dramatically changed the dynamics of capital raising pre-IPO. The following figures illustrate the magnitude of these crossover investors' impact:[11]
  • Crossover investors only invest in 5.3% of venture deals by count, but make up 36% of venture deal value. In other words: they invest in a tiny portion of deals but have an outsized impact.

  • The median venture round without crossover investors hovers just below $3 million. The deal size involving crossover investors swells to a median of nearly $60 million, an almost 2000% increase.
The story beneath the headline is that the private markets have not changed as much as the public market players have created a new game. The sheer check-writing capacity of crossover investors has enabled a small percentage of private companies to raise hundreds of millions of dollars. However, the vast majority of companies are not basking in a unicorn valuation, but instead are fighting for investor visibility and savvy capital to scale.

"Entrepreneurship and Innovation Are a Waste, as 9/10 Startups Fail"
Much has been written about the challenges of survival among startups. It is the very reason that the most sophisticated angel and venture investors build diversified portfolios: they aim to have a small handful of companies "return the fund," with the others being a wash.[12] For investors in early-stage companies, the construction of a diversified portfolio is essential, a point we more broadly underscore throughout the SEC's investor outreach.[13]

To fully appreciate the dynamics of startup building and innovating, we need to dig further into the story rather than just skimming the headline and concluding: innovation=bad, startups=bad, and (most critically) failure=bad. We need to deconstruct the headlines about who succeeds and the importance of competitive failures.

"If You're Not First, You're Last"
If I were to poll the audience on who has the best competitive advantage: first movers into a new product category, or follow-on market entrants, most of you would probably assume the early bird gets the worm, corners the market, and dominates. The headlines you see likely have skewed this perception. However, when measuring across hundreds of product categories, a classic study found that first movers are 6x more likely to fail-a 47% failure rate-than second movers-an only 8% failure rate. For those scratching your heads and wondering "yes, but I bet the first movers who do survive capture greater market share," wrong again. Even for the first movers who survive, they capture on average only 10% of the market share for their category. The second movers capture 28%, almost 3x as much.[14] Take as a tangible example of this phenomenon the devices you're using to tune in right now, whether an Android or iPhone mobile device (second movers to the Palm Pilot and Blackberry), or any number of laptop models (most dominant manufacturers of which are second movers).

We need first movers, and plenty of second movers, to drive innovation forward. To build successful companies, startups need savvy investors who bring industry experience, customer connections, and strategic guidance for the companies to scale and thrive. However, the accessibility of professional angels and venture capitalists are outside of many entrepreneurs' personal and geographic networks, which can dramatically impact survival versus failure prospects. Developing solutions to bridge social and professional networks is a game changer for building more companies that succeed.[15]

"If Companies Could Stop Failing, Innovation Would Improve"
Looking at cohorts of first and second movers pushing innovations across sectors, the benefits of competitive market forces should be clear. In the race to develop vaccines against COVID-19, we enlisted a myriad of approaches by many pharmaceutical companies to deliver not just one, but multiple solutions to solve one of the greatest healthcare challenges we have seen. Taken as a whole, the broad scale effort was a resounding success, with the fastest delivery time of a new vaccine in history.[16] Here we take the big picture view, measuring success by the innovative outcome: delivery of an efficacious vaccine. Few take the view that the endeavor was a failure because not every involved pharmaceutical company found success individually.

Investing in the startup ecosystem likewise demands a big picture mindset. Competition among startups breeds success. That competition among companies pushing each other to develop a better solution is the cornerstone of our capital markets.

Headlines used to sell papers; now they sell clicks. In an age of information overload, it's all too easy to consume the headlines and skip over the stories. When scrolling Twitter or your news feed, none of us has time to click on every story. However, as we look ahead to decisions about how our laws and regulations should evolve, it is critical that we continue to read the story, not just the big print. Failure to do so leaves behind a whole cast of characters who are underrepresented, and often unseen, by what fits in a two-line summary.

Our team is laser focused on the stories of the underrepresented entrepreneurs-the people we don't see in headlines-who are solving problems for our future. I hope you take away from today an urge to click the headlines you see on capital raising, to ask questions about the entrepreneurs you don't see represented, and to delve deeper in creating solutions that serve the needs of innovators, creators, and problem-solvers and the investors with whom they work. Thank you for joining me today, and thank you to the team at PLI and the SEC for bringing this year's event together. Most importantly, thank you to the incredible team I am fortunate to work with every day: Dean A. Brazier, Jr., Colin A. Caleb, Jenny J. Choi, Julie Zelman Davis, Sebastian Gomez Abero, Sarah R. Kenyon, Jessica W. McKinney, Amy Reischauer, Jenny Riegel, Malika Sullivan, and Todd VanLaere.
= = = = = 

[1] This speech expresses the author's views and does not necessarily reflect those of the Commission, the Commissioners, or other members of the staff.

[2] See Adam Grant, Originals: How Non-Conformists Move the World, Viking (2016).

[3] Id.

[4] See Pierre Azoulay et al., "Research: The Average Age of a Successful Startup Founder is 45," Harvard Business Review, (Jul. 11, 2018) available at

[5] Id.

[6] See Guy Raz, "How I Built This: Live Episode! Walker & Company: Tristan Walker," NPR, (Sept. 30, 2019) available at

[7] See Office of the Advocate for Small Business Capital Formation, "Annual Report for Fiscal Year 2020" (2020) at 56, highlighting that founders are 21% more likely to be funded by investors of the same ethnicity than of a different ethnicity, available at

[8] See Martha Miller, Director, Office of the Advocate for Small Business Capital Formation, Opening Remarks at the Diversifying Opportunity in Venture Capital Series (Mar. 31, 2021) available at

[9] See supra note 7 at 66, recommending "Education to Ease Challenges of Offering Complexity and Friction."

[10] To share feedback with our team, email

[11] See Cameron Stanfill et al., "Analyst Note: Crossing Over Into Venture. A Look at Crossover Investors' Impact on US VC Dealmaking," PitchBook, (2021) available at See also United States Securities and Exchange Commission Small Business Capital Formation Advisory Committee meeting transcript (Sept. 27, 2021) available at

[12] Investments being a wash is the result of investments exiting through a minimally profitable acquisition, surviving as an unscalable "zombie," or dissolving and liquidating assets. See Brad Feld and Jason Mendelson, Venture Deals:  Be Smarter Than Your Lawyer and Venture Capitalist, Wiley (2019).

[13] Beginners' Guide to Asset Allocation, Diversification, and Rebalancing, available at

[14] See Gerard J. Tellis and Peter N. Golder, "Pioneer Advantage: Marketing Logic or Marketing Legend?" Journal of Marketing Research, (May 1993) available at; see also Fernando F. Suarez and Gianvito Lanzolla, "The Half-Truth of First-Mover Advantage," Harvard Business Review, (Apr. 2005) available at

[15] See supra note 7 at 68, recommending "Regulatory Clarity to Bridge Networks between Founders and Investors."

[16] See Philip Ball, "The Lightning-Fast Quest for COVID Vaccines - and what it Means for Other Diseases," Nature (Dec. 18, 2020) available at
Sometimes you're wrong. Frankly, we're all wrong sometimes. In a recent FINRA arbitration, we have a registered representative who was wrong. To his credit, he owned up to his error. He made a mistake, as we all do. He was willing to pay for the damages he caused but apparently he was unwilling to overpay. Such is the stuff of failed settlements and the roll of the dice in litigation.
At issue in today's blog is a FINRA expungement arbitration involving a non-customer inquiry filed by UBS with FINRA as a customer complaint. Other than that, UBS did everything it was supposed to but for the fact that it did nothing it was supposed to.