Dream Exchange
Connect with Joe

Full Episode Transcript:
Adam:

Welcome back to Count Me In, the podcast that explores the ways management accountants drive business forward. I'm Adam Larson and my guest today is Joseph Cecala, CEO and co-founder of Dream Exchange, a company focused on building the next generation stock exchange designed for early stage growth companies. This is yet another podcast where I learned a ton, like how the rise of electronic stock training essentially shut down IPOs and equity stock market access for businesses worth less than $50 million. What's more, I learned how management accountants will play a critical role in making these new venture markets actually work. Whether you work at a small business, are interested in investing in small business, or wants to know more about the relationship between equity markets and innovation, this is the podcast for you. Let's get started with Joe Cecala.

Adam:

So Joe, I wanna thank you so much for coming on the podcast today. We're really excited to get talking to you about the Dream Exchange, but before we get there, I just wanted to hear a little bit about your story. I was reading your bio and I just think you've got a really great story starting off as a CPA and to where you are now. Let's start with your story and go there.

Joe:

Sure. And Adam, thanks for having me. I my story I like to say I Forrest Gumped my way through my career, right, I started as a CPA went to law school and became a shingle lawyer doing a lot of small business venture capital transactions. And you know, my accounting career really informed that quite well. I guess the big story of how we're here today is one of my clients, Jerry Putnam, founded a company which became Archipelago, actually the world knows today as New York Stock Exchange, Archipelago in the mid 1990s. It was the first company to actually carry equity security trades using the internet or among the first two. And I got this national market expertise when that was being born. And here we are 26 years later with a lot of legal expertise in capital markets.

Joe:

So several years ago I just decided that a new exchange model was needed to accommodate smaller companies. And we worked on legislation for that. It's still pending in Congress and we're actually building a national exchange as well. So everything that we're doing is born out of those early years of learning what a stock exchange is and does and how one is born, and the mechanics of that and adding the kind of practical business of how to run one to the legal expertise of how to create one. And really the other, I guess the other major portion of what we're doing that's different is that, you know, we're targeting what we call underserved markets. The entrepreneurial market, very small companies that don't really see interest from a stock exchange in the earlier stages of their business life cycle. And we're also especially concentrating in minority markets.

Joe:

The capital group that is financing the exchange and is the majority owner, our minorities, it's a black owned exchange, the first one in the history of the United States. So, you know, and we're in the licensing, we're in the process, we'll be hopefully licensed in about a year. So we're in that process right now, but things are going really well. And that's how I got here, was really starting as a financial professional and moving from financial professional to early stage company, venture capital lawyer. And so I really wanna help those small companies. It's more about the companies through my career I haven't helped or can't get access to capital than it is about the unicorn companies that have an easy time. So that's how we got here today. And hopefully the journey will be easier go in the next six years than it has been for the past 10.

Adam:

I sure hope so.

Joe:

Yeah, me too. So, and then I guess what I would say is the Dream Exchange today as it exists, as it perhaps might inform you know, the audience for this particular, you know, group. We're really concentrating on what are now gonna be known as early stage growth companies. That's actually a coined expression. It is in the Main Street Growth Act. And what that means is those are companies that are very small. They might have a valuation of, you know, 10 or $20 million, but they're gonna be seeking capital you know, for 10 or $20 million. And we're providing the mechanics of a brand new stock exchange environment for those early stage companies to be traded with customized rules and customized reporting and customized attention that the national exchanges really can't provide because the financial reporting and the cost of the coming public and Sarbanes Oxley and DOD Frank and the regulatory environment for very large companies is much easier to absorb the expense of doing that. But how do we maintain the same quality in investor protection in a small market while simultaneously making the cost less so that those smaller companies could get access to capital in a public market that's really the driver behind the meat and potatoes of the Dream Exchange.

Adam:

Wow, that's, there's so much there that I think we're gonna have to unpack a little bit of it. And I know that for me and I know a lot of other folks, you know, maybe we can start with, you know, how do you set up an exchange and what exactly is in exchange? Because we all hear about the stock exchange and stocks being there, but maybe there's a way that you can describe it for us that even a seven year old could understand it.

Joe:

Yeah, that actually, and thank you for asking that because that is, it really is not commonly talked about. Most people talk about the functions of an exchange without actually knowing what it is. So a stock exchange is merely a set of rules by which the buying and the selling of equity securities is conducting. That's all it is. And today those rules are primarily driven by electronics. So trading rules, what type of order, what type of sale, what the rules say about how the market participants have to conduct themselves fairly. Now, most people think stock exchange and what they're actually thinking about is what's called the secondary market, because you, the stock is already a public company and you wanna go and you wanna buy your shares of IBM and you have to go through a stock broker, some very large organization that is carrying trades to a stock exchange.

Joe:

Stock exchange is matching the trades that the order book and the matching engine of an exchange literally matches trades today in millionths and billionths of a second. And that's what people think. They see the Dow Jones averages and they see the New York Stock Exchange you know, set of listing is up or down. The function of the stock exchange is to match trades in a fair and equitable environment. Now, the other function that most people are, are familiar with is the initial public offering market, the IPO market. And they look at exchanges and go, they went public on NASDAQ, or they went public on NYSE. That's the capital formation part of exchanges. Now that's another kind of misinformed use of stock exchange because stock exchanges don't actually take anybody public. Investment banks do. So the investment bank has to make an arrangement so that when a company files publicly and sends its registration of its shares to the SEC, they can also take a registered share of stock to a stock exchange and apply to be listed on the exchange.

Joe:

Merely getting registered shares with the SEC does not automatically entitle you to a listing candidacy on a stock exchange. So stock exchanges are the final, I guess, line of governance between the general investing public and registration at the SEC. So you can be a not so good public company and get a registered share of stock and still not be eligible to have your company in the marketplace. So it's the stock market and that's where everybody's going to choose from the menu of available stocks that have been vetted by the NASDAQ or by New York Stock Exchange. And once you've been vetted by one of the larger exchanges, well, clearly the value of the stock is higher because you can go to a market and match your trade with somebody. Whereas if you're just an over the counter stock registered with the SEC, it's really like an exercise in digging in the yard for the bone because those are, there are about 10,000 over the counter stocks just nobody knows about them.

Joe:

But the public stocks listed on stock exchange are the celebrity companies. They do have secure environments where they're checked by the exchanges for the veracity of their financial reporting and you can get in trouble with an exchange too, if you're a public company listed and you don't play by the rules. So a stock exchange environment is extraordinarily valuable to capital formation, is eligibility to get to the exchange, makes a marketplace where the trustworthiness of the information of the company and the liquidity that would come from both the initial offering and a secondary trading of the stock, because you're going to the market. It's like if you're shopping for tomatoes and you're walking around fields of farms, you're gonna have a tough time finding tomatoes. But if you go to the grocery store, if you go to the market, they're gonna have already vetted the tomato grower, and they're gonna have looked at it all, and it's gonna be a quality of product that you get at the marketplace that you can't get just walking through farmer's fields. Same thing with stock exchanges. So those are, there's a lot of companies out there, but the vetting process and the trustworthiness of being able to come and list on a stock exchange adds value to the company's capital formation. And it adds liquidity after it's been formed. Cause people will buy and sell your stock.

Adam:

I think I'm beginning to understand a little bit as we go along here, which is great, but as you were talking about that, and then as I was hearing you speak a little bit about the Dream Exchange, when during your first answer, it seems like the Dream Exchange is there for those non unicorns, those smaller companies who may not have as big of capital but still want to be exchanged and wanna make money on it. Right?

Joe:

Yeah, that's exactly the purpose. So we did a lot of research. I'm a data guy, and you know, and I have to take a little responsibility for this because in the late 1990s when electronic stock trading became the norm stock exchange's business model and investment bank's business model was driven by whether the company that was coming to the exchange would have a lot of volume, because now you're talking about millions and millions of trades happening in a very electronic short period of time. So the business model for making money doing that is now driven by high speed electronics. And there was a unwanted side effect, and that was that very small companies don't generate a lot of trading volume. So investment banks and exchanges tended to not pay attention to those companies. And at one time, $50 million was the more than the average public offering, initial public offering.

Joe:

So if you could be at $50 million, there were between, you know, some of yours as little as 300, some of yours as high as $950 million in under public offerings. And since 2000, we haven't had as many 50 million and under public offerings in 22 years as we had in any one year before the year 2000. So the combined number of small companies going public for 22 years does not eclipse the small public offerings in any one year before that. And the primary cause there are other causes, but the primary cause is this shift in the business model, there's just, you can, for a billion dollar IPO, you'll generate more trading volume in seven days than you will for a $50 million IPO over the course of an entire year.

Adam:

Wow.

Joe:

So if you're, if you're in the business of making money when transactions conclude, you have no interest in that market. So that unintended consequences, public market capital formation for small companies really was no longer workable. And so the Dream Exchange idea, which is encapsulated in the Main Street Growth Act, which is to create a brand new type of stock exchange called a venture exchange. And in those exchanges, we can now customize rules that will allow very small companies to maintain the trustworthiness of the public markets, but also have access as they did for many, many years, decades, in fact, before the advent of high speed electronic trading. And we believe that the importance of that is, it's just, there's a myriad of reasons. First and foremost is that the best ideas come from these very small companies in their earliest stage. And wealth creation comes from those very small public companies.

Joe:

And I mean, I'm a child of the seventies and the eighties. So it was commonplace, Hey, can you get in early on a new IPO? Did you hear about the new IPO? And a lot of people invested their dollars and saw wealth creation because they got in early. Well, today that early public market isn't really available to the broad American investing public. So you're at the very tail end, you're at the end of the life cycle where a company's already worth a billion or 2 billion or $5 billion and the wealth has been harvested in the private markets. Well, the problem with that is we're only getting, you know, 200 total IPOs a year where we would have 800. So it's not that the companies aren't there, it's not that there isn't valuable ideas, it's just that the access to the public capital markets generally is not available.

Joe:

And that's not to say that private investing and venture capital investing aren't doing a great job. They are. The difference is they can't do it all. And to make customized rules to kind of be a throwback to allow for wealth creation, investor participation, and early stage company participation has to have a overall capital market change in the model. So the Main Street Growth Act has provisions in it creates a brand new type of securities, it's called Venture Securities. And it, there's a new type of company called an early stage growth company. I'm very proud of the fact that that's one of my contributions to that law. I coined that expression.

Adam:

And this act is an act that's currently in front of the US Congress. I just want to clarify for the audience.

Joe:

Yeah. So actually in just a one minute kind of Main Street Growth Act history. So this is a law that was introduced in 2000, well, originally in 2016, then again in 2018 and in the 2018 Congress, this is a law that got, and we lobbied heavily for this unanimous consent first of the House Financial Services Committee, 56 to zero. And I don't know, I mean, I pay attention to some of the news, but trying to get the two parties in Congress to unanimously agree to anything is like trying to get them to agree that water is wet. They just won't agree. But this was one where the capital markets and wealth creation and the ability to serve constituents and job creation was something that became so apparent to Congress. It actually passed unanimously through the House and the Senate. The only reason we're talking about it as a prospective law today is if you recall at the end of 2018, the government was shut down and any legislation that would've passed that year and this would've passed was taken out. And then we've been waiting ever since. It's now moving again. So the bill is again, in the House of Representatives and in the Senate, it's in Jobs Act 4.0. There's very good possibility that'll pass this year. And these new exchanges is an industry that doesn't exist today. It will be born in the coming years. And there's gonna be a tremendous amount of opportunity for people who learn about it in its infancy.

Adam:

It sounds like we're, we're bringing this exchange and the idea of getting your organization out there at an IPO. And I'm probably using the wrong terms, but it seems like we're bringing diversity actually into this, this market because I feel like there's only a certain amount of people who are making a lot of money on the other exchanges, but this is like, hey, everybody can kind of do this.

Joe:

Yeah. You're not using any incorrect terms. Okay. The fact is that, in fact, this is both sides of the political aisle have have said this to us. They look at it as the democratization of capital markets where anyone with a good idea and that is willing to comply with the rules can go to the capital markets and appeal to the American investing public to invest in their idea in a secure public stock exchange environment. And again, we're not against anyone, but for example, like proud regulation crowd funding was passed and people say, Oh, I'm gonna go crowdfund my investment. Well, when you do that and you raise as much as 5 million as the cap, you raise $5 million crowdfund, you now own a private security and it can't be resold. The 1933 Securities Act starts off very hopelessly. It says you may not use interstate commerce to sell securities, period, full stop.

Joe:

So how is it done? There's only two ways it's done. Either you register the shares publicly to sell them, or you find an exemption, one of about 18, by which you can resell your shares. Well, that's a very complicated legal process, and you better have a good Rolodex of investors because you still can't solicit the entire general public. You own a private share, you're stuck with it. Well, when you're in a stock exchange environment, you don't even know who's buying your shares, you go to that environment and other people look at the same information about your company, and they're able to make an informed investment decision, and you can sell your shares for any reason or no reason at all. And as long as they're complying with the law, there's a secondary market where those shares become liquid. And that's the concentration for small companies that's really needed today.

Joe:

And it was 50 years of our country's stock exchange history where the small company, 50 million and under normalized, and it was a lot of tens and twenties and thirties that comprise that market. And it's all but disappeared. And we intend to be the pioneers reintroducing that to a secure environment so small companies can go get the capital they need to expand and to run their operations and grow and to become the public company. The, you know, the unicorn before it's identified as a unicorn starts somewhere. And that's what we're concentrating.

Adam:

Do you think people will start at the Dream and then go to the other ones as they get bigger?

Joe:

That's exactly we call it the ecosystem.

Joe:

So the ecosystem is first and foremost an educational environment doing somewhat of what we're doing right here, helping to get the terminology in simple terms out into the public. That's the first part of the ecosystem. What are my options? Then there'll be a lot of companies that arrive at the Dream Exchange in its venture exchange. We're also creating a national exchange, and the goal is to get the venture exchange listed companies to graduate to the National Exchange. And to restore the ecosystem, because this isn't just small companies. So at one time we had close to 13,000 public companies in the United States, and right now we have about, we have half of that total and really only about 3,500 listed companies of any meaningful note. So we've reduced the number of overall public companies by 75%. So the investment choices are much, much smaller. So the ecosystem is broken down. We're not repopulating new companies with new ideas into the capital markets. So we're losing ideas. And this is the most important part of everything, and I'll take the time to say this because it's behind the purposes of everything we do.

Joe:

Ideas and the imagination of the American business spirit has been what's made the country powerful and great. There was a guy recently who said, you know, we won the Cold War by using Coca-Cola and rock and roll. The Soviet Union collapsed because they just couldn't withstand the wave of popularity of American culture and our small companies they're cool, they have great ideas. They have medical technologies, biopharma technologies, manufacturing technologies, you know, and those are, I'm calling it technologies, but you know, the Midwest manufacturing base has, we think about 7,000 eligible companies in the southeast corner of Wisconsin for the Dream Exchange.

Adam:

Wow.

Joe:

So the, there's a vast number of small companies and the mechanics and the pragmatic nature of those operations, making milestones for their ideas, we have to get them money or we dry up the source of capital and the ideas that we would've been investing in no longer are part of the fabric of the American business culture. So we're not creating the new Apple computer. It's only being created if by chance they meet the right venture capitalist and they get introduced to the large VC or private equity group that can carry their idea forward. What about the 10 guys who may have had a better idea and just couldn't have the Rolodex or relationships to properly capitalize their company and move forward? So the Dream Exchange is intended to create a broader audience so that more ideas, more good ideas help us survive as a country financially.

Adam:

Wow. I mean, I hope everybody's been learning as much as I have as you've been talking through this, but, you know, we have to bring it back the conversation back to the accounting and finance professional. And this will probably be, you know, we'll probably wrap up a conversation here. How is this gonna affect, you know, the CMA the certified management accountant who is, you know, is out there trying to be the best 
CFO or, you know, be the best data analyst, you know, how is this gonna affect the accounting and finance professional as this comes live?

Joe:

I've been teasing about this for years. I've dubbed the Main Street Growth Act, the Accountants Full Employment Act. The fact is with the approach that we have, a lot of small companies are primarily focused on internal financial reporting management reporting for purposes of making milestones, making sure the business is functioning properly, and then tax reporting. And what we're doing is elevating the importance of that information in the small capital market. Because a lot of these companies, they're gonna start out with, they don't have you know, financial accounting professionals. They don't have a full department of external reporting professionals. They have their internal accounting. So there's gonna be a bridging of the gap between internal and external of these small companies where we're creating minimum reporting requirements that are really gonna be the labor of the management account.

Joe:

They're gonna be the labor of the existing accounting staff to understand how to bridge the gap between the milestone reporting. You know, do we have enough inventory to make the next milestone have we calculated its pricing, You know you know, LIFO or FIFO to make sure that we get there. Right? So this is far more important to the small company in the small public company environment than whether or not they did accrual accounting for estimations for whether or not they had you know, an arbitrage of an oil and gas contractor, an insurance rep. Who cares? These are, these are pragmatic accounting decisions that need to be reported, because that's what the small company investment revolves around. Will they make their milestones, will management make it, And if they do, how big can the growth of that small organization be? Because if I invest today a dollar, I wanna get a dollar 10 or 20 or $2 back.

Joe:

No one invests a dollar to get 99 cents back. And in the small environment, whether the company has good data, whether that data is proving that they're on a pathway to success becomes the job of the internal accounting function. And we're creating customized reporting so that those internal accounting functions can become easily and seamlessly part of the financial reporting for the small company that will come to the Dream Exchange to be listed as a venture company. So it's Virgin territory today. This is an industry that doesn't even exist. And the more we, we'll probably be holding some symposiums in the next year to talk to the very audience that's on this podcast because we want to get feedback about the ease with which we can make the reporting requirements inexpensive. So that's the other factor, which is, you know, Sarbanes Oxley, Dodd-Frank you know, 1934 securities filings those types of filings are geared towards a lot of financial accounting and financial reporting requirements for which we'll have.

Joe:

But the bridging of the gap is gonna really be that accountant sitting in the chair that's really running the show today, we wanna add to the reporting without adding to the burden of expense and time. And there will be added staff eventually, but it'll be worth it because if you can get to a public capital market, adding another one or two staff to make sure you're doing all the compliance will be worth it for that small company. The added expense versus getting millions of dollars of public capital clearly makes the expansion of some of this reporting worth it. And we don't wanna go too far past it. So weighing the accountants who will weigh in on this will be the ones that are doing the job today. What requirements are necessary, what requirements are, you know, kind of there for show. So we're much more pragmatic. We only want the ones that are necessary. So that's from their belly button looking at this situation that is the expansion of employment and responsibility if they wanna learn this new market. And I think it's very valuable to learn it. There are thousands of companies who are going to need that service and need it internally. They're gonna be hiring people internally to do it.

Adam:

Well, Joe, thank you so much for your explanation and for coming on the podcast today. We will put links in the show notes so you, you guys can want to get in contact with Joe. Please do so and you wanna know more information go to the Dream X website. Thank you again, Joe for coming on.

Joe:

Thanks so much for having me out.

Outro:

This has been Count Me In, IMA's podcast providing you with the latest perspectives of thought leaders from the accounting and finance profession. If you like what you heard and you'd like to be counted in for more relevant accounting and finance education, visit IMA's website at www.imanet.org.