Joe Wallin, a longtime startup attorney in the Seattle region, was recently floated as a potential nominee for the Securities and Exchange Commission by the Angel Capital Association in a letter to President-elect Donald Trump, as reported by The Washington Post.
So who is Joe Wallin, and what would be his philosophy on federal securities laws, particularly as they relate to startup investing? We caught up with Wallin this week for this episode of the GeekWire podcast, talking about his moment in the national spotlight, how he views the regulatory climate for startups under the Trump administration, and what he would change in the (admittedly unlikely) event he’s tapped for the SEC role.
Listen to the podcast below or download the MP3, and continue reading for highlights.
On his nomination
Todd Bishop: What are your qualifications to be the SEC commissioner?
Joe Wallin: It’s going to be one of those interviews.
TB: No, I’m curious. Obviously, they were serious about nominating you. Would you seriously take the nomination if Trump did it?
Wallin: For sure, because when you’re asked to serve, you’re going to do your best to serve if you’re capable or desirous or able to do it. Look, I think the SEC is a really interesting creature and there’s lots of places in the law and the regulations where its decision impacts, directly, startups in the ecosystem and investors. I think a voice for startups within that organization would be a great thing.
On the startup climate
Wallin: I haven’t seen a slow down in investment transactions. I haven’t seen people saying, ‘I’m going to wait. I’m going to wait and see.’ We did get some. We got the qualified small business stock benefit that became permanent. That’s a really positive thing for investors and founders of companies.
TB: What is that?
Wallin: This was something President Obama touted, I think, in his first State of the Union Address or big economic speech early in his presidency, but the ideas was ‘hey, to induce people to invest in early stage ventures, let’s give them a tax break such that if they hold the stock in those ventures for five years or more, they can sell those shares of stock and exclude up to $10 million completely, entirely from federal income tax. That became law on a temporary basis, I think, in the very first Obama economic stimulus bill. The bill was passed on September 27th of 2010 I think, and then it expired on December 31st of that year. Then the Congress renewed it for another year. Then we went through a period of one-year renewals, but now it’s a permanent tax break.
If you invest in an early stage company that qualifies, and this is a company that has less than $50 million in assets before and after the investment. It’s not a services business, so it can’t be a doctor’s office or a lawyer’s office. Software businesses are going to qualify. If you make these investments, you hold the stock for more than five years, you can sell stock and up to $10 million of the gain can be completely, entirely free from tax. Big deal.”
Wallin: Hopefully we have positive pro-startup, pro-economic growth immigration reform. It certainly does not make any sense to send people back to their home countries after they come and they pick up their computer science degrees and Master’s degree from Stanford. To have those people, instead of taking jobs at startups, they take jobs at bigger institutional companies because they think they have a better chance of getting through the maze of the immigration law. Clearly the immigration law doesn’t make sense on a lot of different levels.
TB: It doesn’t, you’re saying.
Wallin: If you look at the top 100 most valuable Silicon Valley-based tech companies, more than half or just about half are immigration-founded companies, I think. It’s a very big number of these companies, right?
TB: Right. Sergey Brin and Larry Page. At least if you look at their heritage.
Wallin: Yeah. We were all immigrants at one point in this country. Immigrants come with fire in their belly. We should thank them. We should say thank you.
On what he would do at the SEC
TB: On the SEC, would that be your first step to essentially start getting rid of regulations?
Wallin: No, I don’t think so.
TB: I don’t know if you knew this Joe, but it’s a job interview.
Wallin: No. We need regulation in a lot of different places in our economy, right? We absolutely do. We have to protect the sanctity and the integrity of our financial markets. We absolutely do, but there are places where we need to be a little more intelligent about what we do. Maybe we should just not do anything for a while. Maybe we should repeal some of these laws, repeal some of the regulations, and then just sit and wait for a few years and see how things develop.
Wallin: Think about it. If companies like Uber complied with the law, we wouldn’t have Uber. We wouldn’t have Airbnb. We wouldn’t have a lot of the super innovative companies, but that doesn’t work in every context. In some contexts, there’s this flat out criminal prosecution, find yourself in jail somewhere. Not a fun thing to think about. I think it does slow down innovation.
TB: There could’ve been companies that might’ve been created if not for these onerous regulations that you’re going to repeal in your first 100 days as the new SEC member.
TB: No. I doubt it. But I do think there are things that can be refined, improved. I don’t think it’s black and white.
TB: If you could change one thing, what would it be?
Wallin: It’s a good question. Okay. I like the idea of going back to the original purpose of section 201 of the Jobs Act.
TB: Okay, and that is?
Wallin: Section 201 was going to be one of the more dramatic improvements to the law, and it was going to allow companies to generally solicit over the internet or just generally solicit, advertise that they were selling securities.
TB: Looking for investors.
TB: On eBay basically.
Wallin: Sure. If you’re a venture capitalist, you can advertise, “hey, I’ve got 10 billion dollars to invest, come see me companies,’ but if you’re a company looking for money, you generally can’t do that and haven’t been able to do that since the 30s or something. 201 of the Jobs Act originally said, ‘hey, as long as you take money from only accredited investors, we’ll allow you to generally solicit.’ Then in a hearing, a congressional hearing, one of the members of the committee said, ‘hey look, I’m concerned that if we don’t have some additional verification requirements on who’s accredited, not accredited people might get pulled into these matters and lose their money, and that’d be unfair.’
John Cook: Yeah. They worry that it becomes a big Ponzi scheme or a scam.
JC: Where did that end up?
Wallin: The committee hearing of the Jobs Act at the hearing said, ‘we’ll throw in a sentence that the SEC will impose reasonable verification requirements to ensure people are accredited.’ That’s what led to the requirements and these regulations which say, ‘if you generally solicit your offering, you got to go and collect your investors’ personal tax returns or personal financial statements that actually verify that they’re accredited.’
TB: That’d screw the whole thing up.
Wallin: Yeah, you just basically killed the whole thing. Nobody wants to do that. Let’s just say a very, very small fraction of people want to do that.
TB: You could ask for money over the internet, but then you’d have to take all these steps to verify.
Wallin: Right. You got to go do the verification steps. A lot of the angel groups just simply will not entertain what’s called a 506c offering be they don’t want to go through the hassle of verification. I think there was probably a more reasonable verification approach that was possible there, but that’s not what became the law.
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