Q&A with David Drake: Perspectives on Global SME Policies and Early Stage Equity Developments

Below is the equities.com interview with Mr David Drake, chairman and founder of LDJ Capital and The Soho Loft, and an early stage equity expert with his focus now on private equity advisory, financial innovations and the communications and media propelling all of them into the future. David, you are a thought leader on early-stage private equity for start-ups, entrepreneurs, and small and mid-sized enterprises (SMEs) globally. You write regularly for Forbes, Thomson Reuters and dozen other magazines on these topics. You spent this year traveling heavily, including to the White House for the Champions of Change earlier this summer, and last summer represented the U.S. Department of Commerce as an SME policy expert before the EU Commission in Rome. We are eager to hear your perspective on what is happening globally. Q: What do you see happening in the SME arena globally? David: Thank you for asking. The first part of my European tour just ended and I had a chance to visit Milan, Venice, Athens and Istanbul to discuss SME policies and what banks and institutions are doing to improve capital access, as well as review the European regulatory changes in this area. Its fascinating to watch the developments. I saw during my Australasia tour to New Zealand and Australia in May that banks are slowly and lethargically getting involved in the SME arena, but regulatory changes in Australasia are not yet occurring. I wrote a piece for the AFR (Australia Financial Review) magazine on the report that they are planning on crowdfunding and stock-sharing schemes that is due out in mid-2014. Meanwhile, Italy just became the first nation in the world to pass an equity-based crowdfunding law, ahead of the United States. Even though the law has restrictions, it still has no limit to how much capital can be raised, whereas the pending law in the United States limits it to $1 million per year.

Q: What are your thoughts on Title 2 which the SEC passed July? David: Title 2 of the JOBS Act is monumental; it is a gigantic change to the 1933 SEC Act allowing advertising for private offerings. Personally, I think the fund industry seeking retail investors will benefit the most, including existing brands and broker-dealers, and firms dealing with retail investors.

For instance, this law will allow funds and firms to advertise their offerings to the 3,000 Qualified Investment Buyers. These investors have less paperwork and restrictions, as they have $100 million plus under management. The biggest issue is that there were only 268,000 accredited investors active in 2012, though they invested $22+ million last year. Other numbers show that in 2013, 8.99 million households have over $1 million in net worth, which would qualify them as accredited investors and allow them to be solicited by advertising under this new law. So, I expect to see an explosion of new investors that are accredited. It puts our firm in the middle to facilitate the noise that is occurring and drive the media to the best-of-the-best solutions for microcaps. Q: Do you mean this is the law today? David: The law comes into effect 60 days after its publication in The Federal Register. It is the law Monday September 23 and on that date Regulation D 506 c will allow funds and companies to advertise their private offerings; yet, they have to be compliant. This new law says capital can only be taken from accredited investors but advertising is allowed. It will be a powerful tool for SMEs and startups to raise money. It will allow fundraising to double in 2014, as every fund and firm in the world will take advantage of it. It is one of the reasons TSL is positioning itself as a media buyer for firms raising money. Q: So the law is more important than crowdfunding for small companies? David: As a law, yes, it is gigantic. However for small businesses, crowdfunding is going to reach $5.1 billion in 2013, while equity crowdfunding is about 3% of that. Yet crowdfunding is a marvelous tool for startups and early-stage firms with consumer services and products. Both are marvelous injections into the economy, but we still need to see what impact they will have on job creation, which was the intent of the JOBS Act. Unfortunately, we dont expect equity crowdfunding to be legal before 2014, as I predicted last November in some of my articles. Yet, microcaps should ask how the distribution model of crowd funding can help their reach and capital formation. Q: How can developing countries learn about SME capital access and formation strategies? David: I would think by reaching out to me directly at david@LDJCapital.com for advice. We welcome NGOs, government agencies, fund managers, angel networks and associations to learn more. Reading my articles at www.thesoholoft.com/Forbes will help. We also have industry events to facilitate learning. The technologies we have reviewed are extremely relevant to developing countries, and for universities that want to make alumni communication more efficient. They all benefit from the same technologies, which are readily available. Q: Can you tell us more about your university relationships? David: We have advisers from Cambridge and Harvard and have done events at 80 different universities. I think the capital formation for research is terribly interesting, as some research never gets to see the light of day. Online technology now allows that bridging between researchers thinking about a project and capital of $5,000-$15,000. This will be the great development in 2014-2015. I also just authored a chapter on early-stage financing for a new book Planet Entrepreneur: The World Entrepreneurship Forums Guide to Business Success Around the World in Lyon that we will be selling in a couple of months; stay tuned. And I am writing several research papers with Cornell, Edinburgh University,

Cambridge and Harvard. My book on Crowd Fund Economics will come out at the end of the year. Q: Where are you traveling next? David: Just in the next 45 days I will be in Ireland, Holland, Luxembourg, the U.K., Sweden, Norway, Italy. Ministers and angel networks there are asking me to speak and share what we see globally. It will be very exciting.

EQ: David, you are a thought leader on early-stage private equity for start-ups, entrepreneurs, and small and mid-sized enterprises (SMEs) globally. You write regularly for Forbes, Thomson Reuters and started recently writing for Huffington Post and dozens of other magazines on these topics. You spent this year traveling heavily, including to the White House for the Champions of Change earlier this summer, and last summer represented the U.S. Department of Commerce as an SME policy expert before the EU Commission in Rome. We are eager to hear your perspective on what is happening globally.
How do you see the Italian crowdfunding law impacting early-stage funding? Drake: Crowdfunding for equity still will take some time, but as of today the law is in effect. The delay is in the small details of registering offerings via broker dealers under the EU MIFID Directives. I feel incubators will be able to leverage this nicely in 2014 and angels will use it as a proof of concept. I dont see crowdfunding expl oding in Italy, as the user penetration of online payments and the internet in general, is lower than in the U.K., Holland and the U.S. On an international scale, though, I see the steps taken by Italy encouraging other countries to follow its lead. Based on Massolution 2013CF Industry Report, 3% of total crowdfunding investments this year will be for equity crowdfunding and it will double in 2014. EQ: How important are angels? Drake: This is an age of angels and I cover the Business Angel networks on several continents. We have seen angel activity triple in countries like Turkey, and angels have filled in the capital that the banks and VCs removed during the Great Financial Crisis (GFC). In addition, angels often bring smart and strategic money. We manage 50 events a year in the U.S. focused on angels and VCs, an excellent training ground for startups and SMEs to pitch and raise capital. For instance, angel activity in New York city is bubbling with activity like no other city in the world. EQ: You wrote about private equity trends for 2013 for Thomson Reuters. What trends do you see in early-stage capital this year? Drake: I see more angels getting into the VC world through firms like FundersClub and OurCrowd, while crowdfunding firms start operating more quickly with broker-dealer licenses. As we get closer to 2014, we also will see more broker-dealers syndicating their deals through crowdfunding with the new laws. There is a strong early-stage equity movement right now, with New York leading the way. The buzz and the activity in New York have surpassed anything I have seen in decades. Startups, investors and an eagerness to invest in early-stage financial technology are the trends in New York today. I also see microcap companies turning to our firm, The Soho Loft, for compliance in

advertising mechanism as it becomes law under the JOBS Act this fall. On Monday September 23 it becomes legal in the US under Reg D, 506 c to advertise private offerings. EQ: What do you enjoy most about early stage equity? Drake: I love helping companies and entrepreneurs and being part of their growth, development and aspirations. Recently I helped a firm in New York raise $5 million. There is an excitement you create that people want to belong to. I take on board advisory positions globally that fit with our global distribution. Most companies should leverage board advisers better, and this is something I enjoy helping firms attain, along with communication strategies, investors, strategic partners, business intelligence, media exposure, distribution channels and knowledge. Most entrepreneurs dont know what they dont know. Board advisers make sure you know what you need to know when you need to know it. For example, TSL manages social media strategies, PR and communication for a select few firms that I advise. I am a quick fix to these areas until the firm grows and can hire someone in-house. That kind of thing, advising and sometimes actually offering interim solutions, is what I enjoy most. I do welcome readers to reach out to me directly. EQ: Your firm, The Soho Loft, started out more than two years ago and today has a media leadership on these topics. What is it doing currently? TSL is an event-driven media company. I write financial articles weekly for 30+ publications, my 15-person staff writes up to 10-15 press releases weekly and we coproduce and sponsor up to 300 events globally. We are negotiating with investors to be the communications solution for funds holdings, issuers of broker dealer networks and private companies. You can look at TSL as a funnel to global distribution; distribution is crucial for all firms and we create the content. So we are becoming the preferred media and communication partner for corporations globally. I think microcaps will be the first to appreciate a firm that understands the capital formation and structures that are evolving here and abroad. This month I am co-chairing the gala dinner for the 150 year anniversary of Lincolns Emancipation Proclamation of January 1, 1863 in Washington DC as well as attending the charity for the benefit of the Prostate Cancer Foundation founded by Michael Milken in New York. The largest sponsor, Glenn Myles of First Wall Street Capital, with friend Bruce Lipnick are hosting the dinner. This one is exciting as we have confirmed attendance by half a dozen billionaires and $150,000 already in soft donations. Michael Milken is flying in and his billionaire friends, like David Koch (Forbes Billionaire #6 globally), Leon Black of Apollo Management (largest private equity firm in the world), and Richard LeFrak will be attending. Some of the startups we advise will get to attend and strategically work in this event. About David Drake David Drake is the founder and Chairman of LDJ Capital in New York City and of The Soho Loft Capital Creation Event Series (TSL) covering the Private Company Marketplace and Capital Formation. Mr. Drake is an expert and a thought leader on the USA JOBS Act (Jumpstart Our Business Start-Ups Act) including Reg A+, Reg D 506, Crowdfunding Capital and Onramp IPO. He is a founder and former executive board member of the Crowdfund Intermediary Regulatory Advocates (CFIRA)

and of the leading global trade association Crowdfunding Professional Association (CfPA). He was part of the U.S. Commerce department delegation as the JOBS Act expert at the US and European Transatlantic Economic Council (TEC) forum last July 2012 in Rome and Brussels where he met with European Ministers and national legislators. He writes extensively on these topics and his articles and editorials are published by leading industry websites such as forbes.com, pehub.com, equities.com, cfira.org, crowdsourcing.org, smeworld.com and loftfi.com to name a few. About The Soho Loft (www.thesoholoft.com) The Soho Loft Capital Creation Events (TSL) is a corporate strategy and advisory services company specializing in financial innovation and economic sustainability. Through its global events and media platform it advances diligent mainstream and alternative investing for start-up entrepreneurs and small and medium-sized enterprises. TSL provides visionary leadership and relevant education in the areas of capital formation, crowdfunding, angel networking, non-conventional funding, eb5 green card programs, micro-finance, venture capital, private equity and hedge funds. TSL is a subsidiary of LDJ Capital based in New York USA. Its founder and Chairman, David Drake, is a founding member of Crowdfund Intermediary Regulatory Advocates (CFIRA) and of Crowdfunding Professional Association (CFPA). He played a key role in the passing of the JOBS Act (Jumpstart Our Business Startups Act) in the United States. His advocacy for financial innovation has taken him to the global stage when he joined the U.S Commerce Departments delegation to Brussels and Rome at the Transatlantic Economic Forum for SME Policy last July 2012 where he met with European ministers and national legislators. He is an international speaker and prolific writer on these topics. Overall, TSLs mission is to bring global awareness and develop infrastructure to facilitate innovative capital formation and access and spur job creation. As such, The Soho Loft operates as the leading global corporate strategy adviser on financial and economic policy.