Highly Regulated Issue 1

Highly Regulated 1/12/23

Happy alllllllllmost Friday everyone! It’s been a crazy first few weeks of 2023 already for me…and regulations. You’re shocked I know. There has been something about the dreary weather here in California paired with weird news and odd stories that has put me in an even weirder headspace. I’m still super excited about 2023 but I think I underestimated what a weird year it will be.

What I’m Listening To This Week

For the record I’m in the middle of a nostalgic romance with the Pixies. No amount of Drake played within our home can keep us apart at this point.

Highly Regulated Week 2 Playlist

Things You Should Know About So You Sound Smart

Regulated Crypto Is About to Have a Moment…

It’s safe to say that cryptocurrency regulations are super controversial in every neck of the woods, but after FTX and the ensuing mess there, we are seeing a lot more openness from the biggest U.S. banking regulators (people like the FDIC, Federal Reserve, Comptroller of the Currency) in discussing what a regulated cryptocurrency looks like within our domestic banking system. So that’s a big YAY! We just saw some on the record statements that really help set the course of what we can expect to see in crypto regulation this year. Of course, they do hedge their statements with warnings (“It is important that risks related to the crypto-asset sector that cannot be mitigated or controlled do not migrate to the banking system.”)…because they are regulators and that’s their job. (The full statement can be read here in case you’re up for some light reading today.)

The biggest, most important takeaway however from these statements for everyone should be that they don’t put the kibosh on crypto within our banking system. They are ready and willing to consider regulated digital assets, which should help a lot of crypto companies looking to partner with our traditional banking system breathe a sigh of relief. The list of risks will help crypto companies with their own risk management processes and procedures which should then help regulators feel more comfortable inching towards fully assimilating crypto. I talk to a lot of regulators off the record for my consulting and lobbying work and I have yet to meet with someone who straight up says they hate crypto or that it is dead. Almost everyone just wants to see the space regulated and populated by good actors.

Cryptocurrency regulations are quite honestly my favorite to watch because it is the first time in the post-industrial era of the United States that we have a chance to build out a modern financial system. One that is technologically advanced, while considering how human behavior impacts fiscal growth. I am actually really optimistic that we can get this financial system right — as long as we are honest with ourselves as an industry on human behavior and the criminal actions that were facilitated in the past within the space.

Turns Out the SEC Cares About VC Due Diligence

As many of you know I am a huge proponent of proper due diligence in startup investing. I’m an LP in a quite a few funds, as well as a fund manager now, so when I see shotty due diligence being used by funds with my hard-earned money, I get pretty fired up. Feel free to take a look at my recent rant on Twitter.) Now the SEC is fired up too and is looking into due diligence being done by VC funds.

Investing in early stage startups is already super risky, so anything that can be done to mitigate that risk helps the entire ecosystem. I also really want to change the narrative around due diligence with founders. Just because a firm is taking a really hard look at what you’re building prior to writing a check doesn’t mean they’re not founder friendly. It just means they take their jobs seriously. A good investor will be a better partner for your startup than one who doesn’t even know what they’re writing a check for. You want your investors to be able to talk about your company and products deeply.

With all that being said…I actually think this action by the SEC is loooong overdue. If you are investing other folks money and not dilingencing your deals properly, you are breaching duties that the SEC is specifically in charge of protecting on behalf of your LPs. This action by the SEC has a wide range of implications across the startup ecosystem. Founders need to be prepared for deals to take longer now. And LPs like me will be able to push for more insight and transparency into what deals are being done with their funds and why.

Jerome Powell Isn’t a Climate Changemaker

Okay, so maybe not Powell himself, but he stated that the Fed is “not, and will not be, a ‘climate policymaker.’” I think this statement is a direct attack on a lot of climate change-inspired regulations coming down the pipeline with economic arguments attached. I know a lot of investors in the startup space are looking for investments in the climate change arena, but they might soon go bearish based on these kinds of comments.

Maybe Crypto Accounting Could Be Better?

As a surprise to absolutely nobody…the Financial Accounting Standards Board is discussing new disclosure requirements. This is the first time in five years that these rules have been updated and I think we all know it’s not a coincidence that it is occurring in the immediate aftermath of FTX and other crypto accounting fiascos. As soon as accounting for crypto can become trusted and integrated into SEC filings and forward looking statements for companies, I sincerely think that we will be getting back on track and be able to start shoveling ourselves out of this crypto winter.

Stupid Regulatory Actions: 2022 Edition

Like other years, we saw some poorly thought out regulations hit the books in 2022. I asked readers for their submissions of the worst and below are some of my favorites:

New Jersey Hates Microbreweries

In case y’all don’t know a significant portion of my family is involved in winemaking, distilleries, and breweries. My family’s winery in Sonoma is a fantastic tourist destination and has helped a lot of folks become familiar with our brand. It also has been a sales and event space boon since COVID. A lot of alcoholic beverage manufacturers looked for unique ways to make money during and after COVID; so in 2022 when I saw New Jersey limit how many events on-site and off-site that microbreweries could hold, I knew it was basically declaring war on the industry. The ruling also limits the ability of breweries to host food trucks - which just makes no sense. In my opinion any location where alcoholic beverages are consumed should have food available. I really just can’t with this regulation. It’s like New Jersey wants more drunk drivers on their turnpike.

The FDA DeRegulates French Dressing

Yes, this actually happened. I’m leaving this here without comment because I just cannot take this seriously. Sorry lolz.

The IRS vs. Venmo

Thankfully, this regulation has been delayed a year but the IRS asking folks to do 1099-Ks for transactions made on apps like Venmo and Cashapp for any transaction over $600 is now a thing. I actually cannot wait to see the unintended consequences that spring out of this regulation next year. (Spoiler alert. I think we are going to see a lot of good and bad along with pressure from the IRS on these apps to limit or even track money changing hands. I also think this shines a light on the opportunities for founders to build good tax tools for small businesses. There’s a huge area of opportunity to help small business owners who can’t afford to get the same tax advice as Fortune 500 companies in an ever confusing and convoluted area.

JPM Healthcare 2023

This was the first year that I attended JPM’s Healthcare Conference as an investor rather than a founder. No other way to say this other than…the experience has been weird as fuck. Now that I get to see everything happening at a macro level rather than just from the perspective of my own startup, here’s what y’all should keep an eye on and my predictions from the regulatory side of things:

• So many financial platforms popping up for patient payments. Lots of “Buy Now, Pay Later.” Can confirm that I’m seeing a lot of folks building at the payments and healthcare juncture not realizing that healthcare has very unique regulations around privacy and payments. I can almost guarantee we will see regulatory action soon against some of these folks.

• Genetic sequencing is about to get a lot cheaper due to a glut of Illumina competitors barreling towards launch…but if these competitors are of sub-par quality expect the FDA to jump in quicker to regulate bleeding edge diagnostic tests. I’m writing a deep dive on the FDA and diagnostic testing since it’s mostly misunderstood by those in the regulatory space, so I’m curious to see how this all shakes out. I am a big believer in Illumina, their technology, and their amazing leadership but new innovation is always welcome. I really do fear though that getting these products to market sooner than they should be will get biotechs a new round of reactionary regulatory changes by the FDA.

• M&A is going to pick up because, frankly speaking, building a fully compliant biotech company is expensive and the COVID-era investment run is over. Companies are running out of money and looking for the exit…fast. Pennies on the dollar type exits. During the conference every single company I spoke with said financing will be the number one concern they have for 2023. When you see biotechs raise money in any form, their compliance efforts gains extra scrutiny so I predict we see a big pick up in the lobbying efforts of the healthcare sector for more pragmatic regulatory oversight. I also think a lot of companies will try to get out of expensive partnerships and deals by nitpicking how compliant folks have been in this ever-confusing space.

Mail Call

In this weekly section I will pick a random DM from Twitter or Email to answer…Since it’s random I expect some hilarity and unexpected topics to arise.

For today we have…a DM asking “What’s the biggest red flag I should look for when seeking out a co-founder?”

Okay so I pride myself on having made it through what might have been one of the most bitter co-founder breakups known to mankind. Looking back the number one thing I should have paid attention to was the fact that a few of my co-founders were really only doing our startup for monetary gain. Yes, monetary gain is a great driver - but it won’t get you and your founding team through hard times. And there really is no guarantee that you will ever make money. In fact, statistics tell a much different story. As a founder there is a high likelihood that your company will fail and you could lose the shirt off your back trying to get your company to go anywhere.

So answer is…Money as their reason for doing startup. Biggest red flag when looking at potential co-founders.

Pwew, lots in that first go but hopefully y’all enjoyed. I’m still trying out some formats and content flow styles for this newsletter so let me know if you have any comments, feedback, or ideas via email ([email protected]) or twitter (@steviemctweets) and see y’all next week!