October 7, 2020

Episode – 09

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Josh Lawler – The Deal Flow Show - October 8, 2020 Reply

[…] Josh LawlerEpisode #9 : Digital Assets, Blockchain, and More! […]

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Josh Lawler Securities Attorney on Digital Assets, Blockchain, and More!


Description:
Josh Lawler is a Partner of Zuber Lawler. Josh’s practice focuses on securities law, mergers & acquisitions and technology transactions. His M&A clients include public and private companies, private equity groups, fundless sponsors, family offices and high net worth individuals.
Josh is a premier counselor in respect of commercial transactions, M&A and finance in the cannabis and psychedelics space. Drawing on a bioscience education, Josh applies an understanding of scientific, commercial and regulatory matters to craft innovative solutions to issues present in no other industry.

What you’ll learn from this episode:
– Digital Assets and Blockchain
– Learn about the genuine compliance of good deals
– How to be a value add to any deal

Connect with Josh:
LinkedIn

Full Transcript:

JP Maroney:

Well, hello and welcome to another edition of the deal flow show on JP Maroney, your host, along with my cohost, mr. Paul Nicoline here from Harbor city capital. And, uh, looking forward to this interview, we’ve got Josh Lawler coming to us from the other coast. So we’re here in Florida in our studios. Josh is on the West coast, joining us from Zuber Lawler is a partner there. And we’re excited because I was looking down cheating a little bit, looking ahead at some of the things that we’re going to be discussing today. And blockchain is one of them. I don’t think we’ve had on all of this season. That’s really diving into that topic. I think he’s one of the foremost experts on it. I think that’s what I’m reading. So yeah, I’m excited about that. So yeah, let’s jump in. Why don’t you just give us a quick background of how you got started in the capital market space and then we’re going to dive into some of these other topics.

Josh Lawler:

Sure, absolutely. Um, so, you know, talking about being a, not knowing enough to know better, uh, when I was at a second year attorney, which is I just now almost 24 years ago, um, I went to Skadden Arps and I spent six years working at Skadden Arps and mergers and acquisitions and finance. Uh, and you know, in that time really touched upon capital markets, uh, constantly. Uh, and then when we went and founded zebra Lawler, um, took a little while for us to build up the infrastructure to do it. But now that we have done that maybe the last 10 years or so, uh, we’ve been assisting clients in the capital markets also.

JP Maroney:

Very cool. So tell us a little bit about some of the work that y’all do, what, what your specialty is and really the value that you bring to the table.

Josh Lawler:

Absolutely. So, you know, our firm and I are really working in what we think our future edge cases. Uh, so as you were mentioning, uh, we really focused a great deal on digital assets and securities token offerings as, as they’re called. Uh, we also are extremely active in the cannabis space. Uh, we’ve worked with the United States companies that have gone public in Canada and then cross listed down to OTC, uh, down here. So a lot of relationships with the Canadian stock exchange, as well as the OTC folks, we’re a preferred provider, uh, and we’re really pushing more into the traditional public securities work, uh, in terms of, you know, exchange act compliance, which is going to be one of the things that’s critical in the digital asset space. So we’re really focusing on that, a great deal as well as just initial issue or transactions,

JP Maroney:

Obviously blockchain. And we’ll get into that as a sort of a democratized way of dealing with a lot of different things, but especially with data and, and the flow of information and currency and that sort of things. But, um, we had another guest on the show. We were talking about how much raggae has democratized, uh, capital raising and sort of that good old boys network, um, that, you know, we’ve had some great guys, the broker dealer and RIA community on the deal flow show, but it’s shaken things up a good bit. Um, how much of y’alls work you mentioned going into the traditional public markets, but how much of you all’s work is around that more of a reggae or crowdfunding type of capital raise?

Josh Lawler:

Sure. Um, so I’m going to distinguish between the two deregulation nature to write a being, you know, a viable, real size deal capital market offering the crowdfunding thus far has been limited to 1,000,070 thousand. And quite honestly, I don’t get into that very frequently and don’t know too much about it. Um, tier two reggae though, from a digital asset perspective is kind of the Holy grail. Um, so we do a lot in the space. Um, the ability to do an offering where you can have your asset, uh, immediately tradable thereafter by, you know, unaccredited investors is, um, really kind of critical when you’re talking about a digital asset that has, uh, a use case beyond being just a security. So, um, and forgive me if I dive into a little bit of technical here with the digital assets that people are used to calling cryptocurrency, some people might call them utility tokens, not huge fan of that term, but the idea is that these are assets where the fact that it’s a security is the tail wining, the dog, it’s an accident of us regulation that they’re regulated.

Now, it’s good that they’re regulated. I’m not saying that it’s not good because, you know, as we saw in 2017, when there’s no regulation involved, there’s serious inequality of information. And a lot of people who aren’t central to the industry and do things like mortgaging their house to buy a $20,000 Bitcoin. And that’s, you know, that’s not a good thing. Uh, so regulation is good. However, digital assets and especially the ones that have utility component don’t really lend themselves to an S one registration framework. Uh, and they also, by their very nature, the utility typically requires a wide spread of the digital assets. It doesn’t work if you’re only talking about accredited investors or a few investors. So, you know, there’s a conundrum, if you will, for the issuer of, do I stay out of the United States entirely, which is usually the choice actually, uh, or do I try to, you know, get these things out in a way that isn’t going to violate U S law recognizing that may take a couple of years and then there’s regulation a and tier two reggae specifically, where if you can get your document qualified by the sec, um, you know, theoretically at least you should be able to do a fairly widespread public offering treating things as they are securities, which is usually my preference anyways.

So the thing about that is it’s only been done couple of times, uh, and the first folks who did it block stack spins, according to them over a million dollars, getting through the reggae qualification process. Um, whereas, you know, ordinarily that ought to be somewhere between a hundred and 200,000, including your marketing and everything, you know, soup to nuts. Um, so, you know, it’s not what I would call a smooth path at this point, but it’s a good, it’s a path. I think that’s going to be very valuable in the future.

JP Maroney:

I love it. Yeah. I have a question with big with Bitcoin or the tradable assets, but there was a time where it wasn’t that it wasn’t the digital asset. There wasn’t a, there was a time that you could not trade those correct. In the beginning. And where are we now today in that process,

Josh Lawler:

Paul is all messed up. The scuffling answer. I can give you the, the, the problem. Uh, the main problem I think, is that everybody considers all of these things effectively the same thing, and they’re really not, uh, you know, what a digital asset is. It’s an asset that’s more realized digitally. And from that perspective, you know, it’s like saying a paper asset, well, what is a piece of paper? You know, it’s to share of IBM stock, it’s a high yield note, it’s a piece of toilet paper. It’s, you know, whatever it is, they’re all over the place and digital assets are no different. So, you know, that, that loosely breaks down into things that really behave like commodities, things that behave like financial products or securities, and some things that behave differently behave as consumer items behave as, uh, you know, there’s something called a non fungible token that is backing up, uh, validating art, uh, and products and things of that nature. So it’s really all over the board. Um, but our regulators, for the most part haven’t caught on to that. So where we are now, Bitcoin has been considered a commodity. You can trade Bitcoin pretty easily. There’s a few others that are like that. There’s some that are playing in gray areas and there’s some that are just completely outside the United States and afraid to go here

JP Maroney:

When you’re talking about. And, and I, I think it’s be a good idea for you to give an example of a digital asset, or you mentioned you don’t like utility token, but some sort of an asset that has a utility component to it where it’s not just an investment in a potential appreciation. Correct. That was the big, that was the big catch with the ICOs, the wild West that we had to two or three years ago, um, and the ICO market. And then now where we have evolved to today, could you kind of define that or give some examples of use cases with the sort of a durable, usable digital asset? I guess if that, if I could say

Josh Lawler:

Sure. So here’s the thing that’s got everybody spun on. A lot of the use cases require that the digital asset gain in value. So what’s happening here in, Bitcoin’s a good example of this, even though that’s not a use case tokens, a medium of exchange, but in order for all this stuff to work, there’s something called a consensus algorithm, which is, you know, all the different distributed nodes run, you know, have the same copy of the ledger and run the same calculation and spend compute resources, you know, Ram electricity, all that kind of good stuff in order to make the system work and validate the transactions actually are the transactions that are supposed to happen. And those folks need to be incentivized to do that. There’s gotta be a business reason for them to do that. And what that reason is typically is that they receive additional tokens for doing so, and those additional tokens are useless to them unless they can convert them into a Fiat currency because you can’t pay your taxes and big point, at least not yet.

Um, in order to do that, you need a third party source of liquidity, which is an exchange. And once you’re on an exchange, you’ve got speculators, you’ve got, you know, supply and demand dynamics, which are designed to drive the value of these things up in value. So in a lot of cases, in most cases that you hear about, um, the fact of the matter is that even though it’s, shouldn’t be considered a security, it kind of is because it falls into this category of things that can be speculated on. And if it doesn’t, then it tends to fall into the commodity world, which for that is I think a little bit more appropriate. And I I’ll give you an example of a good one. This is one of our clients. So I’ll mention, uh, which is a token called Bigchain. Uh, they’ve got a [inaudible] blockchain and there’s use case, uh, is a platform really for IOT and, uh, tracking of different IOT devices, tracking of, um, authenticity of some items, things of that nature.

And they’ve got something of a two token structure and I won’t get too into it cause it’s very technical, but one token is the token that people have bought for quite some time. Um, which you know, is, is under vet. It’s a top 50 token, I think. And then the CSO can, if you have it, that actually emits something else, uh, which is a V for token, which is actually, what’s used to run their blockchain. So that’s how they set things up. And the, you know, the fact is it’s, it’s kind of like having an oil, dirt and having oil in terms of that. And, you know, you can speculate it on either one of those and, you know, forgive me if it didn’t come up perfectly, clearly it is kinda complicated, but hopefully you get the idea.

JP Maroney:

Can I, could it also be like oil, but you’re also pulling gas or something else off of that, that product. Cause you’re what you’re saying is there’s a, there’s a token that’s sort of the investment side of it. And then there’s a token. That’s more of the use. Correct. Is that what you

Josh Lawler:

Mean? Yeah. In that particular paradigm.

JP Maroney:

Oh, and by the way, um, I’m going to play advocate for us guys who may or may not have all the acronyms down IOT is internet of things. I’m sorry. No, that’s okay. That’s okay. But I just want to make sure people understand, because what’s exciting in that world of IOT, you’ve got this massive distributed network and blockchain, um, is made, you know, a match made in heaven for that. So it’s really exciting. I’d also like you to distinguish between blockchain and cryptocurrency, because I think a lot of people just sort of package it all into the same ball of playdough.

Josh Lawler: 

Yeah, no, absolutely. It’s a great question. Um, so you know, the, the hierarchy I use, you know, the, the top level is digital asset that includes absolutely everything. Um, and digital ledger technology is kind of the top term in terms of the system that these things run on and some of them are blockchains. And then there’s other things that are, um, blockchain being the most prevalent certain way, um, within kind of blockchain, you’ve got different use cases. And one of the use cases is a medium of exchange. And this is Bitcoin. This is what Bitcoin first came out to do was to actually serve as something that people could use in transactions turns out it’s not great at that. But nonetheless, that is a cryptocurrency. Bitcoin is a cryptocurrency period. End of story. There are a number of tokens that also serve as mediums of exchange in particular systems.

And those are definitely cryptocurrency. Um, and then there’s a lot of gray space where people use the term and, you know, it’s hard to say exactly, but some people will think of it as anything that speculate on that’s on an exchange. That’s one way to look at it. Certainly. Um, I don’t think it’s the best way to look at it. Um, I personally prefer to call financial products, just digital assets or digital securities. Um, it makes life easier, uh, in my world in terms of, you know, figuring out what should and shouldn’t be regulated in different ways. Um, and then, you know, I’d be silly if I didn’t mention the digital dollar project and certain other stable coins, which are digital assets that are pegged to real world assets. Um, so there’s a few of those, the digital dollars, not out yet, but there is something called tether.

There’s a USBC. And supposedly there are dollars balled for each one of these tokens that are out there so that they maintain stable. Um, and the stable coin as we call them is critical to adoption of all the stuff for infrastructure, because you can’t have a level of volatility in cryptocurrency and expect that that’s going to be something that’s going to be used for commerce. It’s just way too risky. Um, so enter the stable, stable coin. And, um, if you’d heard about the Facebook Libra project that came out, that Congress conducted the hearings on all that, that was a stable coin that was pegged to a basket of different currencies. Um, and you know, if you think through the implications of that, it’s actually kind of staggering, uh, in terms of what that can do. So it’s not surprising the government had issues.

JP Maroney:

What are the guard rails for your stable coin? In other words, in fact, it’s ironic, but I literally looked up two days ago. Most are least volatile cryptocurrencies, 2020. That was my Google search like two days ago. So I want to ask you, and I want to say Bitcoin was, and I think these were 2019 numbers, but Bitcoin was like three and a half, 3.8% variance. Um, I don’t know if that sounds about right, but what is an acceptable variance for a stable coin?

Josh Lawler:

Uh, well, if the target is not, of course, um, and that’s variance against the, what it’s pegged to. So, you know, the dollar is going to vary against other currencies and, you know, your stable point is pegged to the dollar that should also now you don’t get that perfectly because what happens is depending on what the economy’s doing and what the cryptocurrency trading world is doing, people may want to get out of cryptocurrency into something that is active currency. So on a particular exchange, the token that, you know, should be a dollar, might be a dollar and 2 cents. It might be a dollar and 5 cents. And the reverse is true. Also suddenly everybody who’s holding that wants to flow into Bitcoin or Ethereum or something else of that nature, then, you know, tether, uh, or USBC might go down to 99 cents or, um, and, you know, that’s, that’s from an exchange perspective, from a use case perspective, if you know, I were to pay you for, you know, a cup of coffee or a coffee cup, it says deal flow on it. Um, you know, and you might have that as $2 and two together is what it is and I send you two together. Great. Then, you know, the tethers is perfectly. Um, so there’s, there’s a lot of context, uh, in all of these things. Also,

Paul Nicolini:

I’m going to switch a little bit and say an, ask a question, Josh, you you’ve had, um, over, I think, a billion dollars in aggregate value through M and a transactions for clients, I think in an earlier phone call that we just

Josh Lawler:

Yeah. And in total AF absolutely. Yeah.

Paul Nicolini:

Yeah. And so does one of those standout and tell us a little bit about that and what, what, what entailed,

Josh Lawler: 

You know, the, the exciting thing these days, it’s the cannabis stuff. And I’d say, you know, probably a hair under a 500 million of transactions we did last year was cannabis related. Um, you know, of those picking one that stands out is actually a difficult because in this environment, they all have their, their nooks and crannies. Um, you know, one of the ones that were particularly fond of, uh, was figuring out how, you know, more of a mainstream fund that didn’t want to be disclosed as investing in cannabis could invest in cannabis, recognizing that there are disclosure requirements in the state of California that say everybody up and down the chain right down to your LPs and your LPs shareholders need to be disclosed. Uh, as, as owners were financial interest holders, unless they fit into particular categories of exclusion, things like blind trusts, olders of less than 5% of public company, financial institutions.

So we we’ve had deals where, uh, because that, that interpretation hasn’t been enforced yet and still a lot of gray area, we’ll set things up where, you know, you can have a deal, it’s a hundred million dollar deal. And, you know, it’s set up in a way that we think will work to avoid disclosure. And then we’ve got to have almost another deal set up where it turns out we’re wrong. We unwind it to avoid the disclosure or have some kind of a, you know, option call scenario or put scenario to kind of work with the regulation in that way. Um, so, you know, as you can imagine, when you’re breaking new ground like that, uh, the negotiations can get very interesting,

JP Maroney:

Like a dog with a bone on this whole blockchain and cryptocurrencies. I’m going to go right back to it in just a moment. But before we do, if you’re watching or listening to this episode of the deal flow show, you can get access to our archives, listen to our past episodes, as well as follow and subscribe to us to get future episodes of the show by going to the deal flow, show.com the deal flow show.com, Josh Lawler. Um, we’re going to jump right back to this question, but I’m going to tie the two together. I promise. So the cannabis space historically has had a challenge in banking, their cash. It’s a known fact, right? Um, because of the federal regulations that, that kind of, uh, I guess, contrast with state laws and how they’re handling the industry. So how, how much has been done. And I haven’t even talked to anybody in this space in probably eight, 10 months.

So there may have been a lot of development, but how much has been done if any, utilizing ledger type assets, digital assets in this way to create an ecosystem, to allow businesses within that industry to sort of trade within themselves. I know years ago I was a part of a barter network. And rather than, you know, I’ve got a cup and you’ve got a computer, can we trade or whatever, and you may or may not have what each other, once they created a alternative currency, right? You had like a little bank account for your D your barter dollars. So is something been done in the crypto space or in the blockchain to provide an alternative Le ledger asset that can sort of create a currency for the people in the cannabis space

Josh Lawler:

It’s been tried, it’s been proposed a number of times. Um, I’ve got one or two clients who would like to do it. Um, the, the problem you run into is sooner or later, you need inputs. Now what’s on the system. And when you’re dealing in something like cannabis, which is the legal federally, you know, there’s issues in terms of what a bank will take, because they’re concerned with, you know, satisfying their money laundering and know your customer requirements, um, there’s concerns about how do you pay taxes. Um, you know, literally there were some of these cannabis companies paying taxes in cash because they had no choice cause they couldn’t get banked. Um, so you know, that, that kind of was what it is. So, you know, if you, if you follow it through, um, it’s, it’s easy to set up something, it doesn’t even have to be blockchain oriented.

Um, sugar barter network was, was not at that time, but it’s easier to set up something with an internal currency. It’s very hard to then make that currency, uh, able to be transacted into the yacht. Now what some folks have done is figured, okay, well, we can’t do that. We’ll transact from, from that to Bitcoin. And then from big point, we’ll get it to an exchange from the exchange. We’ll get it through, but that’s again, resulted in a real, uh, explosions, the wrong word, a lot of attention focused on anti-money laundry or your customer regulations and things of that nature, which banks have been living with for a long time, of course, but they’ve really gotten very careful as they should about when they need to file suspicious activity reports and things of that nature. Um, there’s been kind of an expansion of requirements to register as a money service business or money transmitter to types of businesses that maybe didn’t think that they had to do that. Um, so the, the short version is, yeah, it’s been tried. It’s not that easy. Uh, that’s kind of where that is

JP Maroney:

When you’re coming to the deal table. And I’m going to take you back as far as you want to go back in your legal career could be capital markets, but you’re starting to put this together. You’re bringing in a, you know, maybe you’ve been hired for a particular merger acquisition or whatever, but you’re at the table. What are some of the things that you look for in your process? How do you go through your deal evaluation process, sort of your checks and, you know, crossing the T’s and dotting the I’s.

Josh Lawler:

So first thing bar none is, is context. What is the business purpose for the transaction? Um, if you don’t know that you’ve got nothing, uh, so you, you need to understand the business from an operational perspective and from a cashflow perspective, at least fairly well. Uh, you can’t get around that decent in some that’s easy and in some it’s very hard, um, once you’ve got that set, um, you know, the next thing is I look for number one is tax structure and in an M and a transaction, it’s not quite as key in a finance transaction. Um, and, uh, then also, um, you know, just existential risks to the deal or are there third party consents that need to happen? There’s their government permitting process, those types of things. Once you got kind of that landscape down, then you can go into, you know, from, from the law perspective, it’s really identifying risk, uh, and quantifying to the extent you can and presenting choices to the client.

And that’s the whole, you know, representation and warranty process. Um, you, you know, you have to think about post-transaction, if you’re buy-side, what does the integration process look like if your sell side, you know, how few strings attached can you get before you get to take your, your consideration, is that consideration in stock? Is it public stock? How do you get liquid those types of things, which, you know, a lot of lawyers may look at those things and think, well, that’s, that’s business oriented. That’s like, you know, your, your client’s job or that’s the financial advisor’s job. You know, you can’t really effectively guide somebody through a transaction unless you know, those things. And once, you know, you know what, you’re trading off an exchange yet, what you do is you think you need to use really basic examples. You know, some deals, a buy side and the buyers trying to buy a distribution network.

And yeah, there’s a product that’s being distributed, but they don’t really care about that product. They don’t care about the intellectual property that goes along with that product. And they certainly don’t want to spend the legal fees and time validating the intellectual property on the product that they don’t care about in the first place, when really all that matters is the distribution channel. The reverse happens. Also sometimes the deal is entirely to pick up intellectual property or to be able to pick up a group of engineers and developers that happens a lot in the software space, in which case, you know, you don’t necessarily care what the sales work they’re going to be repurposed anyways. Um, but at the same time, if you tell most attorneys who are doing an M and a transaction, that there’s a situation where you don’t care what the sales were, you know, in working capital, doesn’t matter. Most of them, aren’t going to look at you like you’re from Mars. Um, but you know, that’s, that’s the difference between doing this stuff? Well, I’m doing it adequately, I suppose,

Paul Nicolini:

With that being said too, Josh, there’s so many moving parts in, in M and a transactions or deals, or what have you, what are some of the deal breakers for you?

Josh Lawler:

Well, pushing it to the cannabis activity, anybody who hasn’t paid their taxes in three years, um, that that’s a big problem. Uh, and that, that happened a lot, uh, when they couldn’t get banked and they were cash businesses. Uh, so you know, that, that took a lot of folks out. It’s a big example, illegal activities, big example, um, on the, um, you know, a note of advice for anybody selling a company, um, shaky financials and big ad backs, uh, to, to, you know, calculate EBITDA, um, that type of thing, spooks buyers badly and should spook buyers. You know, if there’s a feeling like there’s, you know, not, you know, genuine compliance with due diligence, uh, then, you know, that’s, that’s really, uh, there’s no way around that. Um, you know, sometimes we’ll see third party consents as being difficult. Um, we’ve had transactions where, you know, a smaller company was trying to buy a, a carve out of a bigger company.

There were longterm leases involved, and the landlords didn’t want to give permission for the transfer because the smaller company was less credit worthy. Um, you know, how do you, how do you fight with that? Well, we ended up working up some extremely, um, let’s call them customized deals where, you know, our larger client ended up guaranteeing some of the smaller clients obligations for a couple of years. They really, we, we didn’t want to do that where you really didn’t want to do that, but it was the only way the deal was going to get done and that would have killed the deal. Otherwise,

JP Maroney:

One of my favorite books early in my entrepreneurial career was a book called direct from Dell, by Michael Dell, where he talked about the early days of Dell computer. I want to talk about a favorite quote and ask you a question in just a moment, but if you’re watching or listening to this episode of the deal flow show, you can get access to our archives previous episodes, as well as following subscribers to get access to our future episodes, by going to the deal flow show.com, Josh Lawler from Zuber Lawler, and, uh, out on the West coast, California sitting and got a beautiful view there in the background here, amidst this COVID environment. So, um, I had a quote from the book and I paraphrase, but he said basically that the more mistakes we made early in the days of Dell, the more mistakes we made, the more, um, setbacks we faced, the faster we grew.

And so I made it my mission, my vision to make as many mistakes as fast as possible, knowing that that would get us to where we were trying to go. There’s not an entrepreneur, a business builder, builder, a dealmaker, an attorney, anyone at the table today that is successful, that hasn’t had their fair share of setbacks or failures or challenges. What is your approach? Cause it becomes kind of a mental game, right? At that point, when a deal hits the wall or a project or something, what is your process for dealing with that resetting moving forward?

Josh Lawler:

Sure. So yeah, you know, the phrase group fast and break things is very popular on our coast. As far as the venture capital guys. That’s what I was kind of getting to before about risk. Um, our, our job as attorneys are one of them is to try to point out and quantify the risk. Um, and then, you know, it’s our clients, you know, assuming we’re not talking about illegal activity, it’s our client’s decision as to whether that’s an acceptable amount of risk or not. And you know, how big of a mistake do you want to fit yourself potentially on the line for, um, you know, companies that are our cash star arms, you know, they may make all kinds of mistakes. They make deals with the devil to get cash flow going. Uh, and that’s, you know, that’s just kinda the way that it is.

Um, so, you know, there’s something to that. Now, our firms started with two guys in a kitchen and no clients. Um, I, I was not one of those two guys. I told my friend Tom zebra, that he was out of his tree and stayed at Skadden Arps for awhile longer. Um, but, um, we started with two guys and no clients, and we went through the entire growth process. We’ve been there when, you know, it’s payrolls tomorrow and you don’t know where the money’s coming from and how are you going to figure that one out? Um, you know, we’ve, we’ve gone through the whole good help is hard to find thing we’ve gone through the, you must, you know, build the administrative infrastructure before you actually need it in order to grow a certain way. And yeah, that’s scary. So, you know, I, I can identify with what Michael Dell is saying. There, obviously he’s done a heck of a lot more than I have. Um, and you know, as a lawyer, uh, it makes a difference because our job is not to get in the way. Um, you know, we like to say at our firm that we find solutions, not problems, um, because you know, any issue, spotting lawyer, that’s not going to find a solution. As you know, that’s a person who’s likely to kill a deal that maybe doesn’t need to kill.

Paul Nicolini:

Uh, you and I met a few years ago at a conference in New York. And it sounds weird saying back in the days of the conferences, does it, it, how is it, how is that weird saying that how has COVID affected you and your business?

Josh Lawler:

I actually almost feel guilty sometimes if anything, it’s been, it’s been helpful for us. Um, you know, we basically had everybody go home with their workstations. We’re a law firm. People can do what they do for involvement now with yours, they can do what they do from anywhere, uh, which is, you know, kind of a nice thing. Um, and we haven’t had any productivity drop at all. Um, for the first couple of months, there was a little bit of a slowdown in deal flow, uh, because nobody knew exactly what was gonna happen. Um, I had one, one sell side, middle market client that we closed their, uh, their business sale, uh, on one of the first days of March. And they were just so unbelievably thrilled because they, they were staring at it and didn’t know if this thing was going to go through. And it was, you know, generational wealth, uh, for a family type of thing.

So, uh, they were, they were quite happy with it. Um, a lot of our practices international, um, you know, we’ve been a zoom culture or team’s culture for quite some time. Um, and you know, to some degree it’s made things easier because now everybody understands and knows how to use the technology. So, you know, yesterday morning I was on with Russia. It’s not unusual for us to be on with Israel or Europe or South America. Um, so, you know, communicating with our Phoenix office, no problem the litigators have in Hartford. Uh, no question, but fortunately I am not one of them, so I’m not gonna worry about that too much at the moment.

JP Maroney:

Interesting. So a lot of people that have come on the show or several people that have come on the show have talked about the same thing that it’s changed the dynamics of the deal process, certainly capital raising, but it’s also made it faster, easier, more efficient, where you have people doing road shows virtually now and knocking out 75 presentations in a month or so, where they, no way you could have hopscotched across the United States. And I guess you could have, but it would have been like everybody you dealt with in the past where it was just absolutely exhausting, a drain on resources financially, as well as physically. Um, so yeah, I, and I know I’ll probably, I don’t know if I want to, should say this, but I’ve said to people that in certain industries, let’s say that this whole COVID fiasco, whatever you want to call, it has been kind of the gift that keeps on giving in some ways, because, and I see your eyes, cause we’re, we’re careful not to say things that we get quoted on, but maybe we can get Jessie to cut that out.

But the fact is, is that in, in life and in business, you have to make the best of circumstances. And that’s what it really comes down to is either, either you stop and you die, or you adapt. And, you know, I we’ve heard that the quote that necessity is the mother of invention or innovation. I mean, that’s where we’re being forced to change the way we do business. I mean, we’ve got a table here that we would have easily accommodated you here, but we’re able to do this digitally. So we’re excited about that as well. Um, anything outside of, of the business world that you’re involved in causes you care about, um, projects, anything like that, that you’d like to share with our audience?

Josh Lawler:

Uh, well, you know, family’s first, uh, obviously, uh, it should be obvious and I’ve got a wonderful wife and two kids who I’ve told not to come into this room while we’re recording this, uh, you know, and the Collie. Uh, and I’m very fortunate that I work with my best friends also. So, you know, that’s, that’s wonderful. Um, you know, as far as outside interests that I would say are, you know, really for, for the good of the planet, um, unfortunate that my work dovetails with them. I am a huge evangelists for blockchain technology and application across all kinds of different things, because, you know, it really does democratize a lot of things, you know, in the capital raising world, it opens up possibilities to a lot of people who did not have that possibility before it’s done correctly and safely. Um, you know, it’s doing amazing things and, you know, undeveloped countries also, um, on the cannabis front, you know, it’s, it’s plant medicine.

Um, and you know, it’s taken me years to, to get, you know, enough understanding. But yeah, the fact of the matter is there are pharmaceuticals being derived from this type of stuff that helps people. Um, you know, it’s not just kind of recreational go out and get stoned. So I feel very fortunate, uh, that, um, you know, compelled really, uh, as part of my job to, to handle those types of things. Um, you know, beyond that, um, you know, there’s a limited number of hours in the day. Um, you know, what’s, what’s going on are, I don’t know if you guys are aware, our firm is minority owned entity. Uh, we spend a lot of time thinking about, you know, uh, diversity and inclusiveness. Um, and you know, it’s been for a long enough time now that, you know, obviously I’m a white guy, um, but you know, I care about our firm doing well because it sets an example, um, and kind of where we are now as a country with, you know, the protests and everything else. I think that’s important. Um, so that matters.

JP Maroney: 

Talk to me about the eyeballs, because anytime I talked to someone about reggae or in this case, whether it’s reggae tied to some sort of a digital ledger asset, as you talked about, where do you get the eyeballs, the investors, the people who, you know, mom and pop put their money, grandma pulls their money out of the sock or whatever that invest in these kinds of deals all the way up to, I know family offices and others that have put money into the space, but where do you get in front of the people? How do you collectively access this willing and able group of people out there that will put money into these deals?

Josh Lawler:

Sure. So, um, first off there’s two sides of this. There’s the investors, and there’s also the folks raising the funds. Um, and, and certainly from the raising of the funds perspective, uh, life gets a lot easier from, from the investor perspective. Um, you know, what we tend to think of, and I say, we as kind of the kind of watching, you know, ecosystem, if you were, or, you know, whatever you want to call it, um, you know, it’s going to be adopted when people don’t know they’re using blockchain technologies, like the internal combustion engine or the, or the Silicon shift, you know, you don’t have to understand how it works to use it. You don’t even have to know it’s there to use it. Uh, and you know, the industry right now is at a place where user interfaces are what matters now against that background, if you’ve got, you know, legislation that allows for portal, you know, for investors to, into particularly for an inquest credited investor portal, because we’re all used to that.

Um, you know, at that point, it’s the same thing it’s always been as far as, you know, attracting folks into it, where things get interesting is again, that, you know, that regulation a spot, um, that allows you to do, you know, a transaction with, you know, a, an unlimited number of unaccredited investors subject to saying that, you know, you’re going to handle certain regulatory obligations and, you know, report your numbers going forward and all that. Um, that’s going to make life a lot easier, you know, on the investor side. Um, I do have to throw out a word of caution. It’s not always a good thing to make that easier. There’s a lot of discussion about opening up, you know, different venture capital investments to, you know, the mom and pops will, you know, nine out of 10 of those fail. A venture capital fund model is, you know, have one big, big hit that makes up for the, you know, all the misses.

Um, so, you know, it’s not necessarily the best thing. I think that, you know, the role of the financial advisor is not going away. Uh, the role of the broker dealer is not going away. Um, certainly from a technology perspective, both of those things could happen. Um, but it’s, it’s a really bad idea for them to happen. Um, so, you know, hopefully costs are reduced. Um, I know on the, on the broker dealer side of securities transactions, the whole T plus three settlements and custody and transfer agents and boyfriend DTCC, um, that stuff is all extraneous now, um, or, uh, and that will make things less expensive, uh, and you know, hopefully a little bit easier and less arcane. So from that perspective, I think it’s a very big deal.

JP Maroney:

That’s wonderful. It really is. Um, you obviously work with a purpose, Josh, and that’s really good to say, what are some of the goals that you’re still reaching for now? Can you tell us about that?

Josh Lawler:

You know, our firm, as I mentioned, started with two guys in a kitchen and in 10 years, I think we want to be 200 people. Um, that’s, that’s kinda what we’re targeting at. Uh, and growth is hard. Uh, good growth is very hard. Um, so that’s, that’s kind of a major goal. Um, personally, uh, you know, I’ve already mentioned it. I want to do transactions that are good for business, but also good for people. I want to do a lot of them. Uh, that’s, that’s, that’s really the goal.

JP Maroney:

When we do the show, we sit around, in fact, you and Daniel, our producer had a call with one of our previous guest, a couple of partners, and affirm today talking about how we be able to assist them, connecting the dots, what there’s about $30 million, 30 something, million dollars worth of deal flow available in that one conversation today, they’re going to be people that are going to watch this, they’re going to their minds are going to be set off. They want to connect with you. What kind of people would you like to connect with from our network, from the deal flow show network, um, as well as our audience,

Josh Lawler:

The first thing that, you know, I want is people who are genuine and not, not trying to profit illegally. So it’s a good thing. Um, putting that aside, um, you know, sophisticated persons, persons who really know their businesses really well on the sell side persons doing repeat transactions, uh, on the buy side, or, you know, perhaps, you know, solid strategic reasons for acquisitions. You know, it just makes life easier as far as who to work with. Um, obviously I’m a service provider, so I like people pay the bill, but that’s, you know, it’s own its own thing beyond that. You know, it’s really fairly, fairly open. Um, you know, some of our best clients, you would not have thought when they walked in the door. Um, some of our worst clients look, you know, like everything is just fantastic and super flashy and, and everything else.

Josh Lawler:

Um, so, you know, the thing really is not to, not to pretty judge, I will say it helps to have people come in who value legal services. Um, you know, when, when you see what legal services costs for a lot of people, it looks like it’s very, very, very expensive. Um, we’d like to think, and I think we are value add that, you know, we’ll certainly save you more than that, our fee OSCE. Um, but you know, some people just don’t value the service and if you just don’t value the service, then you know, everybody likes to be appreciated. Right?

JP Maroney: 

Absolutely. Uh, what was it, the old joke, the guy that runs the help wanted ad looking for a wife with a boat said, please send picture of boat. So when, when, if people are on, on the show, listening to the show, we’re talking to people, what’s the best way for them to reach out to you. It could be phone number, website, email, whatever,

Josh Lawler:

Right? So email is the best way to reach out to me personally. And it’s just my first initial and last name. J Lawler LA w L E R a at Zuber Lawler, a Z like zebra, B, like boy, E R L a w L E r.com. Uh, we’ve got a website. People can look at, um, I’m on LinkedIn and Twitter, uh, also, uh, tweet too frequently, but some, um, but we’re, we’re pretty easy to find.

JP Maroney:

Well, Josh Lawler, glad to have you on the show. I know we covered a lot, but we’re going to come back in private conversation and talk about some of this. I know our CTO is Jay Benoit is setting off screen over here on the edge of his seat, because this is a lot of the same. He and I have talked about in terms of digital assets. He’s been involved in the cryptocurrency space, the blockchain space. Um, and, and we’ve talked about Harbor city being a part of that space with something related to data and the lead generation assets that we produce in our business models. So eager to come back and talk to you about that more in depth than a new, another conversation in the future. Um, for now, if you’re watching or listening to this episode of the bill flow show, you can get access to our archives as well as subscribe and follow us for future episodes. By going to the deal flow show.com on behalf of myself, mr. Paul Nicoline, my cohost here at Josh Lawler from Zimmer Lawler in California. We will see you again and another episode very, very

October 7, 2020

Josh Lawler Securities Attorney on Digital Assets, Blockchain, and More!


Description:
Josh Lawler is a Partner of Zuber Lawler. Josh’s practice focuses on securities law, mergers & acquisitions and technology transactions. His M&A clients include public and private companies, private equity groups, fundless sponsors, family offices and high net worth individuals.
Josh is a premier counselor in respect of commercial transactions, M&A and finance in the cannabis and psychedelics space. Drawing on a bioscience education, Josh applies an understanding of scientific, commercial and regulatory matters to craft innovative solutions to issues present in no other industry.

What you’ll learn from this episode:
– Digital Assets and Blockchain
– Learn about the genuine compliance of good deals
– How to be a value add to any deal

Connect with Josh:
LinkedIn

Full Transcript:

JP Maroney:

Well, hello and welcome to another edition of the deal flow show on JP Maroney, your host, along with my cohost, mr. Paul Nicoline here from Harbor city capital. And, uh, looking forward to this interview, we’ve got Josh Lawler coming to us from the other coast. So we’re here in Florida in our studios. Josh is on the West coast, joining us from Zuber Lawler is a partner there. And we’re excited because I was looking down cheating a little bit, looking ahead at some of the things that we’re going to be discussing today. And blockchain is one of them. I don’t think we’ve had on all of this season. That’s really diving into that topic. I think he’s one of the foremost experts on it. I think that’s what I’m reading. So yeah, I’m excited about that. So yeah, let’s jump in. Why don’t you just give us a quick background of how you got started in the capital market space and then we’re going to dive into some of these other topics.

Josh Lawler:

Sure, absolutely. Um, so, you know, talking about being a, not knowing enough to know better, uh, when I was at a second year attorney, which is I just now almost 24 years ago, um, I went to Skadden Arps and I spent six years working at Skadden Arps and mergers and acquisitions and finance. Uh, and you know, in that time really touched upon capital markets, uh, constantly. Uh, and then when we went and founded zebra Lawler, um, took a little while for us to build up the infrastructure to do it. But now that we have done that maybe the last 10 years or so, uh, we’ve been assisting clients in the capital markets also.

JP Maroney:

Very cool. So tell us a little bit about some of the work that y’all do, what, what your specialty is and really the value that you bring to the table.

Josh Lawler:

Absolutely. So, you know, our firm and I are really working in what we think our future edge cases. Uh, so as you were mentioning, uh, we really focused a great deal on digital assets and securities token offerings as, as they’re called. Uh, we also are extremely active in the cannabis space. Uh, we’ve worked with the United States companies that have gone public in Canada and then cross listed down to OTC, uh, down here. So a lot of relationships with the Canadian stock exchange, as well as the OTC folks, we’re a preferred provider, uh, and we’re really pushing more into the traditional public securities work, uh, in terms of, you know, exchange act compliance, which is going to be one of the things that’s critical in the digital asset space. So we’re really focusing on that, a great deal as well as just initial issue or transactions,

JP Maroney:

Obviously blockchain. And we’ll get into that as a sort of a democratized way of dealing with a lot of different things, but especially with data and, and the flow of information and currency and that sort of things. But, um, we had another guest on the show. We were talking about how much raggae has democratized, uh, capital raising and sort of that good old boys network, um, that, you know, we’ve had some great guys, the broker dealer and RIA community on the deal flow show, but it’s shaken things up a good bit. Um, how much of y’alls work you mentioned going into the traditional public markets, but how much of you all’s work is around that more of a reggae or crowdfunding type of capital raise?

Josh Lawler:

Sure. Um, so I’m going to distinguish between the two deregulation nature to write a being, you know, a viable, real size deal capital market offering the crowdfunding thus far has been limited to 1,000,070 thousand. And quite honestly, I don’t get into that very frequently and don’t know too much about it. Um, tier two reggae though, from a digital asset perspective is kind of the Holy grail. Um, so we do a lot in the space. Um, the ability to do an offering where you can have your asset, uh, immediately tradable thereafter by, you know, unaccredited investors is, um, really kind of critical when you’re talking about a digital asset that has, uh, a use case beyond being just a security. So, um, and forgive me if I dive into a little bit of technical here with the digital assets that people are used to calling cryptocurrency, some people might call them utility tokens, not huge fan of that term, but the idea is that these are assets where the fact that it’s a security is the tail wining, the dog, it’s an accident of us regulation that they’re regulated.

Now, it’s good that they’re regulated. I’m not saying that it’s not good because, you know, as we saw in 2017, when there’s no regulation involved, there’s serious inequality of information. And a lot of people who aren’t central to the industry and do things like mortgaging their house to buy a $20,000 Bitcoin. And that’s, you know, that’s not a good thing. Uh, so regulation is good. However, digital assets and especially the ones that have utility component don’t really lend themselves to an S one registration framework. Uh, and they also, by their very nature, the utility typically requires a wide spread of the digital assets. It doesn’t work if you’re only talking about accredited investors or a few investors. So, you know, there’s a conundrum, if you will, for the issuer of, do I stay out of the United States entirely, which is usually the choice actually, uh, or do I try to, you know, get these things out in a way that isn’t going to violate U S law recognizing that may take a couple of years and then there’s regulation a and tier two reggae specifically, where if you can get your document qualified by the sec, um, you know, theoretically at least you should be able to do a fairly widespread public offering treating things as they are securities, which is usually my preference anyways.

So the thing about that is it’s only been done couple of times, uh, and the first folks who did it block stack spins, according to them over a million dollars, getting through the reggae qualification process. Um, whereas, you know, ordinarily that ought to be somewhere between a hundred and 200,000, including your marketing and everything, you know, soup to nuts. Um, so, you know, it’s not what I would call a smooth path at this point, but it’s a good, it’s a path. I think that’s going to be very valuable in the future.

JP Maroney:

I love it. Yeah. I have a question with big with Bitcoin or the tradable assets, but there was a time where it wasn’t that it wasn’t the digital asset. There wasn’t a, there was a time that you could not trade those correct. In the beginning. And where are we now today in that process,

Josh Lawler:

Paul is all messed up. The scuffling answer. I can give you the, the, the problem. Uh, the main problem I think, is that everybody considers all of these things effectively the same thing, and they’re really not, uh, you know, what a digital asset is. It’s an asset that’s more realized digitally. And from that perspective, you know, it’s like saying a paper asset, well, what is a piece of paper? You know, it’s to share of IBM stock, it’s a high yield note, it’s a piece of toilet paper. It’s, you know, whatever it is, they’re all over the place and digital assets are no different. So, you know, that, that loosely breaks down into things that really behave like commodities, things that behave like financial products or securities, and some things that behave differently behave as consumer items behave as, uh, you know, there’s something called a non fungible token that is backing up, uh, validating art, uh, and products and things of that nature. So it’s really all over the board. Um, but our regulators, for the most part haven’t caught on to that. So where we are now, Bitcoin has been considered a commodity. You can trade Bitcoin pretty easily. There’s a few others that are like that. There’s some that are playing in gray areas and there’s some that are just completely outside the United States and afraid to go here

JP Maroney:

When you’re talking about. And, and I, I think it’s be a good idea for you to give an example of a digital asset, or you mentioned you don’t like utility token, but some sort of an asset that has a utility component to it where it’s not just an investment in a potential appreciation. Correct. That was the big, that was the big catch with the ICOs, the wild West that we had to two or three years ago, um, and the ICO market. And then now where we have evolved to today, could you kind of define that or give some examples of use cases with the sort of a durable, usable digital asset? I guess if that, if I could say

Josh Lawler:

Sure. So here’s the thing that’s got everybody spun on. A lot of the use cases require that the digital asset gain in value. So what’s happening here in, Bitcoin’s a good example of this, even though that’s not a use case tokens, a medium of exchange, but in order for all this stuff to work, there’s something called a consensus algorithm, which is, you know, all the different distributed nodes run, you know, have the same copy of the ledger and run the same calculation and spend compute resources, you know, Ram electricity, all that kind of good stuff in order to make the system work and validate the transactions actually are the transactions that are supposed to happen. And those folks need to be incentivized to do that. There’s gotta be a business reason for them to do that. And what that reason is typically is that they receive additional tokens for doing so, and those additional tokens are useless to them unless they can convert them into a Fiat currency because you can’t pay your taxes and big point, at least not yet.

Um, in order to do that, you need a third party source of liquidity, which is an exchange. And once you’re on an exchange, you’ve got speculators, you’ve got, you know, supply and demand dynamics, which are designed to drive the value of these things up in value. So in a lot of cases, in most cases that you hear about, um, the fact of the matter is that even though it’s, shouldn’t be considered a security, it kind of is because it falls into this category of things that can be speculated on. And if it doesn’t, then it tends to fall into the commodity world, which for that is I think a little bit more appropriate. And I I’ll give you an example of a good one. This is one of our clients. So I’ll mention, uh, which is a token called Bigchain. Uh, they’ve got a [inaudible] blockchain and there’s use case, uh, is a platform really for IOT and, uh, tracking of different IOT devices, tracking of, um, authenticity of some items, things of that nature.

And they’ve got something of a two token structure and I won’t get too into it cause it’s very technical, but one token is the token that people have bought for quite some time. Um, which you know, is, is under vet. It’s a top 50 token, I think. And then the CSO can, if you have it, that actually emits something else, uh, which is a V for token, which is actually, what’s used to run their blockchain. So that’s how they set things up. And the, you know, the fact is it’s, it’s kind of like having an oil, dirt and having oil in terms of that. And, you know, you can speculate it on either one of those and, you know, forgive me if it didn’t come up perfectly, clearly it is kinda complicated, but hopefully you get the idea.

JP Maroney:

Can I, could it also be like oil, but you’re also pulling gas or something else off of that, that product. Cause you’re what you’re saying is there’s a, there’s a token that’s sort of the investment side of it. And then there’s a token. That’s more of the use. Correct. Is that what you

Josh Lawler:

Mean? Yeah. In that particular paradigm.

JP Maroney:

Oh, and by the way, um, I’m going to play advocate for us guys who may or may not have all the acronyms down IOT is internet of things. I’m sorry. No, that’s okay. That’s okay. But I just want to make sure people understand, because what’s exciting in that world of IOT, you’ve got this massive distributed network and blockchain, um, is made, you know, a match made in heaven for that. So it’s really exciting. I’d also like you to distinguish between blockchain and cryptocurrency, because I think a lot of people just sort of package it all into the same ball of playdough.

Josh Lawler: 

Yeah, no, absolutely. It’s a great question. Um, so you know, the, the hierarchy I use, you know, the, the top level is digital asset that includes absolutely everything. Um, and digital ledger technology is kind of the top term in terms of the system that these things run on and some of them are blockchains. And then there’s other things that are, um, blockchain being the most prevalent certain way, um, within kind of blockchain, you’ve got different use cases. And one of the use cases is a medium of exchange. And this is Bitcoin. This is what Bitcoin first came out to do was to actually serve as something that people could use in transactions turns out it’s not great at that. But nonetheless, that is a cryptocurrency. Bitcoin is a cryptocurrency period. End of story. There are a number of tokens that also serve as mediums of exchange in particular systems.

And those are definitely cryptocurrency. Um, and then there’s a lot of gray space where people use the term and, you know, it’s hard to say exactly, but some people will think of it as anything that speculate on that’s on an exchange. That’s one way to look at it. Certainly. Um, I don’t think it’s the best way to look at it. Um, I personally prefer to call financial products, just digital assets or digital securities. Um, it makes life easier, uh, in my world in terms of, you know, figuring out what should and shouldn’t be regulated in different ways. Um, and then, you know, I’d be silly if I didn’t mention the digital dollar project and certain other stable coins, which are digital assets that are pegged to real world assets. Um, so there’s a few of those, the digital dollars, not out yet, but there is something called tether.

There’s a USBC. And supposedly there are dollars balled for each one of these tokens that are out there so that they maintain stable. Um, and the stable coin as we call them is critical to adoption of all the stuff for infrastructure, because you can’t have a level of volatility in cryptocurrency and expect that that’s going to be something that’s going to be used for commerce. It’s just way too risky. Um, so enter the stable, stable coin. And, um, if you’d heard about the Facebook Libra project that came out, that Congress conducted the hearings on all that, that was a stable coin that was pegged to a basket of different currencies. Um, and you know, if you think through the implications of that, it’s actually kind of staggering, uh, in terms of what that can do. So it’s not surprising the government had issues.

JP Maroney:

What are the guard rails for your stable coin? In other words, in fact, it’s ironic, but I literally looked up two days ago. Most are least volatile cryptocurrencies, 2020. That was my Google search like two days ago. So I want to ask you, and I want to say Bitcoin was, and I think these were 2019 numbers, but Bitcoin was like three and a half, 3.8% variance. Um, I don’t know if that sounds about right, but what is an acceptable variance for a stable coin?

Josh Lawler:

Uh, well, if the target is not, of course, um, and that’s variance against the, what it’s pegged to. So, you know, the dollar is going to vary against other currencies and, you know, your stable point is pegged to the dollar that should also now you don’t get that perfectly because what happens is depending on what the economy’s doing and what the cryptocurrency trading world is doing, people may want to get out of cryptocurrency into something that is active currency. So on a particular exchange, the token that, you know, should be a dollar, might be a dollar and 2 cents. It might be a dollar and 5 cents. And the reverse is true. Also suddenly everybody who’s holding that wants to flow into Bitcoin or Ethereum or something else of that nature, then, you know, tether, uh, or USBC might go down to 99 cents or, um, and, you know, that’s, that’s from an exchange perspective, from a use case perspective, if you know, I were to pay you for, you know, a cup of coffee or a coffee cup, it says deal flow on it. Um, you know, and you might have that as $2 and two together is what it is and I send you two together. Great. Then, you know, the tethers is perfectly. Um, so there’s, there’s a lot of context, uh, in all of these things. Also,

Paul Nicolini:

I’m going to switch a little bit and say an, ask a question, Josh, you you’ve had, um, over, I think, a billion dollars in aggregate value through M and a transactions for clients, I think in an earlier phone call that we just

Josh Lawler:

Yeah. And in total AF absolutely. Yeah.

Paul Nicolini:

Yeah. And so does one of those standout and tell us a little bit about that and what, what, what entailed,

Josh Lawler: 

You know, the, the exciting thing these days, it’s the cannabis stuff. And I’d say, you know, probably a hair under a 500 million of transactions we did last year was cannabis related. Um, you know, of those picking one that stands out is actually a difficult because in this environment, they all have their, their nooks and crannies. Um, you know, one of the ones that were particularly fond of, uh, was figuring out how, you know, more of a mainstream fund that didn’t want to be disclosed as investing in cannabis could invest in cannabis, recognizing that there are disclosure requirements in the state of California that say everybody up and down the chain right down to your LPs and your LPs shareholders need to be disclosed. Uh, as, as owners were financial interest holders, unless they fit into particular categories of exclusion, things like blind trusts, olders of less than 5% of public company, financial institutions.

So we we’ve had deals where, uh, because that, that interpretation hasn’t been enforced yet and still a lot of gray area, we’ll set things up where, you know, you can have a deal, it’s a hundred million dollar deal. And, you know, it’s set up in a way that we think will work to avoid disclosure. And then we’ve got to have almost another deal set up where it turns out we’re wrong. We unwind it to avoid the disclosure or have some kind of a, you know, option call scenario or put scenario to kind of work with the regulation in that way. Um, so, you know, as you can imagine, when you’re breaking new ground like that, uh, the negotiations can get very interesting,

JP Maroney:

Like a dog with a bone on this whole blockchain and cryptocurrencies. I’m going to go right back to it in just a moment. But before we do, if you’re watching or listening to this episode of the deal flow show, you can get access to our archives, listen to our past episodes, as well as follow and subscribe to us to get future episodes of the show by going to the deal flow, show.com the deal flow show.com, Josh Lawler. Um, we’re going to jump right back to this question, but I’m going to tie the two together. I promise. So the cannabis space historically has had a challenge in banking, their cash. It’s a known fact, right? Um, because of the federal regulations that, that kind of, uh, I guess, contrast with state laws and how they’re handling the industry. So how, how much has been done. And I haven’t even talked to anybody in this space in probably eight, 10 months.

So there may have been a lot of development, but how much has been done if any, utilizing ledger type assets, digital assets in this way to create an ecosystem, to allow businesses within that industry to sort of trade within themselves. I know years ago I was a part of a barter network. And rather than, you know, I’ve got a cup and you’ve got a computer, can we trade or whatever, and you may or may not have what each other, once they created a alternative currency, right? You had like a little bank account for your D your barter dollars. So is something been done in the crypto space or in the blockchain to provide an alternative Le ledger asset that can sort of create a currency for the people in the cannabis space

Josh Lawler:

It’s been tried, it’s been proposed a number of times. Um, I’ve got one or two clients who would like to do it. Um, the, the problem you run into is sooner or later, you need inputs. Now what’s on the system. And when you’re dealing in something like cannabis, which is the legal federally, you know, there’s issues in terms of what a bank will take, because they’re concerned with, you know, satisfying their money laundering and know your customer requirements, um, there’s concerns about how do you pay taxes. Um, you know, literally there were some of these cannabis companies paying taxes in cash because they had no choice cause they couldn’t get banked. Um, so you know, that, that kind of was what it is. So, you know, if you, if you follow it through, um, it’s, it’s easy to set up something, it doesn’t even have to be blockchain oriented.

Um, sugar barter network was, was not at that time, but it’s easier to set up something with an internal currency. It’s very hard to then make that currency, uh, able to be transacted into the yacht. Now what some folks have done is figured, okay, well, we can’t do that. We’ll transact from, from that to Bitcoin. And then from big point, we’ll get it to an exchange from the exchange. We’ll get it through, but that’s again, resulted in a real, uh, explosions, the wrong word, a lot of attention focused on anti-money laundry or your customer regulations and things of that nature, which banks have been living with for a long time, of course, but they’ve really gotten very careful as they should about when they need to file suspicious activity reports and things of that nature. Um, there’s been kind of an expansion of requirements to register as a money service business or money transmitter to types of businesses that maybe didn’t think that they had to do that. Um, so the, the short version is, yeah, it’s been tried. It’s not that easy. Uh, that’s kind of where that is

JP Maroney:

When you’re coming to the deal table. And I’m going to take you back as far as you want to go back in your legal career could be capital markets, but you’re starting to put this together. You’re bringing in a, you know, maybe you’ve been hired for a particular merger acquisition or whatever, but you’re at the table. What are some of the things that you look for in your process? How do you go through your deal evaluation process, sort of your checks and, you know, crossing the T’s and dotting the I’s.

Josh Lawler:

So first thing bar none is, is context. What is the business purpose for the transaction? Um, if you don’t know that you’ve got nothing, uh, so you, you need to understand the business from an operational perspective and from a cashflow perspective, at least fairly well. Uh, you can’t get around that decent in some that’s easy and in some it’s very hard, um, once you’ve got that set, um, you know, the next thing is I look for number one is tax structure and in an M and a transaction, it’s not quite as key in a finance transaction. Um, and, uh, then also, um, you know, just existential risks to the deal or are there third party consents that need to happen? There’s their government permitting process, those types of things. Once you got kind of that landscape down, then you can go into, you know, from, from the law perspective, it’s really identifying risk, uh, and quantifying to the extent you can and presenting choices to the client.

And that’s the whole, you know, representation and warranty process. Um, you, you know, you have to think about post-transaction, if you’re buy-side, what does the integration process look like if your sell side, you know, how few strings attached can you get before you get to take your, your consideration, is that consideration in stock? Is it public stock? How do you get liquid those types of things, which, you know, a lot of lawyers may look at those things and think, well, that’s, that’s business oriented. That’s like, you know, your, your client’s job or that’s the financial advisor’s job. You know, you can’t really effectively guide somebody through a transaction unless you know, those things. And once, you know, you know what, you’re trading off an exchange yet, what you do is you think you need to use really basic examples. You know, some deals, a buy side and the buyers trying to buy a distribution network.

And yeah, there’s a product that’s being distributed, but they don’t really care about that product. They don’t care about the intellectual property that goes along with that product. And they certainly don’t want to spend the legal fees and time validating the intellectual property on the product that they don’t care about in the first place, when really all that matters is the distribution channel. The reverse happens. Also sometimes the deal is entirely to pick up intellectual property or to be able to pick up a group of engineers and developers that happens a lot in the software space, in which case, you know, you don’t necessarily care what the sales work they’re going to be repurposed anyways. Um, but at the same time, if you tell most attorneys who are doing an M and a transaction, that there’s a situation where you don’t care what the sales were, you know, in working capital, doesn’t matter. Most of them, aren’t going to look at you like you’re from Mars. Um, but you know, that’s, that’s the difference between doing this stuff? Well, I’m doing it adequately, I suppose,

Paul Nicolini:

With that being said too, Josh, there’s so many moving parts in, in M and a transactions or deals, or what have you, what are some of the deal breakers for you?

Josh Lawler:

Well, pushing it to the cannabis activity, anybody who hasn’t paid their taxes in three years, um, that that’s a big problem. Uh, and that, that happened a lot, uh, when they couldn’t get banked and they were cash businesses. Uh, so you know, that, that took a lot of folks out. It’s a big example, illegal activities, big example, um, on the, um, you know, a note of advice for anybody selling a company, um, shaky financials and big ad backs, uh, to, to, you know, calculate EBITDA, um, that type of thing, spooks buyers badly and should spook buyers. You know, if there’s a feeling like there’s, you know, not, you know, genuine compliance with due diligence, uh, then, you know, that’s, that’s really, uh, there’s no way around that. Um, you know, sometimes we’ll see third party consents as being difficult. Um, we’ve had transactions where, you know, a smaller company was trying to buy a, a carve out of a bigger company.

There were longterm leases involved, and the landlords didn’t want to give permission for the transfer because the smaller company was less credit worthy. Um, you know, how do you, how do you fight with that? Well, we ended up working up some extremely, um, let’s call them customized deals where, you know, our larger client ended up guaranteeing some of the smaller clients obligations for a couple of years. They really, we, we didn’t want to do that where you really didn’t want to do that, but it was the only way the deal was going to get done and that would have killed the deal. Otherwise,

JP Maroney:

One of my favorite books early in my entrepreneurial career was a book called direct from Dell, by Michael Dell, where he talked about the early days of Dell computer. I want to talk about a favorite quote and ask you a question in just a moment, but if you’re watching or listening to this episode of the deal flow show, you can get access to our archives previous episodes, as well as following subscribers to get access to our future episodes, by going to the deal flow show.com, Josh Lawler from Zuber Lawler, and, uh, out on the West coast, California sitting and got a beautiful view there in the background here, amidst this COVID environment. So, um, I had a quote from the book and I paraphrase, but he said basically that the more mistakes we made early in the days of Dell, the more mistakes we made, the more, um, setbacks we faced, the faster we grew.

And so I made it my mission, my vision to make as many mistakes as fast as possible, knowing that that would get us to where we were trying to go. There’s not an entrepreneur, a business builder, builder, a dealmaker, an attorney, anyone at the table today that is successful, that hasn’t had their fair share of setbacks or failures or challenges. What is your approach? Cause it becomes kind of a mental game, right? At that point, when a deal hits the wall or a project or something, what is your process for dealing with that resetting moving forward?

Josh Lawler:

Sure. So yeah, you know, the phrase group fast and break things is very popular on our coast. As far as the venture capital guys. That’s what I was kind of getting to before about risk. Um, our, our job as attorneys are one of them is to try to point out and quantify the risk. Um, and then, you know, it’s our clients, you know, assuming we’re not talking about illegal activity, it’s our client’s decision as to whether that’s an acceptable amount of risk or not. And you know, how big of a mistake do you want to fit yourself potentially on the line for, um, you know, companies that are our cash star arms, you know, they may make all kinds of mistakes. They make deals with the devil to get cash flow going. Uh, and that’s, you know, that’s just kinda the way that it is.

Um, so, you know, there’s something to that. Now, our firms started with two guys in a kitchen and no clients. Um, I, I was not one of those two guys. I told my friend Tom zebra, that he was out of his tree and stayed at Skadden Arps for awhile longer. Um, but, um, we started with two guys and no clients, and we went through the entire growth process. We’ve been there when, you know, it’s payrolls tomorrow and you don’t know where the money’s coming from and how are you going to figure that one out? Um, you know, we’ve, we’ve gone through the whole good help is hard to find thing we’ve gone through the, you must, you know, build the administrative infrastructure before you actually need it in order to grow a certain way. And yeah, that’s scary. So, you know, I, I can identify with what Michael Dell is saying. There, obviously he’s done a heck of a lot more than I have. Um, and you know, as a lawyer, uh, it makes a difference because our job is not to get in the way. Um, you know, we like to say at our firm that we find solutions, not problems, um, because you know, any issue, spotting lawyer, that’s not going to find a solution. As you know, that’s a person who’s likely to kill a deal that maybe doesn’t need to kill.

Paul Nicolini:

Uh, you and I met a few years ago at a conference in New York. And it sounds weird saying back in the days of the conferences, does it, it, how is it, how is that weird saying that how has COVID affected you and your business?

Josh Lawler:

I actually almost feel guilty sometimes if anything, it’s been, it’s been helpful for us. Um, you know, we basically had everybody go home with their workstations. We’re a law firm. People can do what they do for involvement now with yours, they can do what they do from anywhere, uh, which is, you know, kind of a nice thing. Um, and we haven’t had any productivity drop at all. Um, for the first couple of months, there was a little bit of a slowdown in deal flow, uh, because nobody knew exactly what was gonna happen. Um, I had one, one sell side, middle market client that we closed their, uh, their business sale, uh, on one of the first days of March. And they were just so unbelievably thrilled because they, they were staring at it and didn’t know if this thing was going to go through. And it was, you know, generational wealth, uh, for a family type of thing.

So, uh, they were, they were quite happy with it. Um, a lot of our practices international, um, you know, we’ve been a zoom culture or team’s culture for quite some time. Um, and you know, to some degree it’s made things easier because now everybody understands and knows how to use the technology. So, you know, yesterday morning I was on with Russia. It’s not unusual for us to be on with Israel or Europe or South America. Um, so, you know, communicating with our Phoenix office, no problem the litigators have in Hartford. Uh, no question, but fortunately I am not one of them, so I’m not gonna worry about that too much at the moment.

JP Maroney:

Interesting. So a lot of people that have come on the show or several people that have come on the show have talked about the same thing that it’s changed the dynamics of the deal process, certainly capital raising, but it’s also made it faster, easier, more efficient, where you have people doing road shows virtually now and knocking out 75 presentations in a month or so, where they, no way you could have hopscotched across the United States. And I guess you could have, but it would have been like everybody you dealt with in the past where it was just absolutely exhausting, a drain on resources financially, as well as physically. Um, so yeah, I, and I know I’ll probably, I don’t know if I want to, should say this, but I’ve said to people that in certain industries, let’s say that this whole COVID fiasco, whatever you want to call, it has been kind of the gift that keeps on giving in some ways, because, and I see your eyes, cause we’re, we’re careful not to say things that we get quoted on, but maybe we can get Jessie to cut that out.

But the fact is, is that in, in life and in business, you have to make the best of circumstances. And that’s what it really comes down to is either, either you stop and you die, or you adapt. And, you know, I we’ve heard that the quote that necessity is the mother of invention or innovation. I mean, that’s where we’re being forced to change the way we do business. I mean, we’ve got a table here that we would have easily accommodated you here, but we’re able to do this digitally. So we’re excited about that as well. Um, anything outside of, of the business world that you’re involved in causes you care about, um, projects, anything like that, that you’d like to share with our audience?

Josh Lawler:

Uh, well, you know, family’s first, uh, obviously, uh, it should be obvious and I’ve got a wonderful wife and two kids who I’ve told not to come into this room while we’re recording this, uh, you know, and the Collie. Uh, and I’m very fortunate that I work with my best friends also. So, you know, that’s, that’s wonderful. Um, you know, as far as outside interests that I would say are, you know, really for, for the good of the planet, um, unfortunate that my work dovetails with them. I am a huge evangelists for blockchain technology and application across all kinds of different things, because, you know, it really does democratize a lot of things, you know, in the capital raising world, it opens up possibilities to a lot of people who did not have that possibility before it’s done correctly and safely. Um, you know, it’s doing amazing things and, you know, undeveloped countries also, um, on the cannabis front, you know, it’s, it’s plant medicine.

Um, and you know, it’s taken me years to, to get, you know, enough understanding. But yeah, the fact of the matter is there are pharmaceuticals being derived from this type of stuff that helps people. Um, you know, it’s not just kind of recreational go out and get stoned. So I feel very fortunate, uh, that, um, you know, compelled really, uh, as part of my job to, to handle those types of things. Um, you know, beyond that, um, you know, there’s a limited number of hours in the day. Um, you know, what’s, what’s going on are, I don’t know if you guys are aware, our firm is minority owned entity. Uh, we spend a lot of time thinking about, you know, uh, diversity and inclusiveness. Um, and you know, it’s been for a long enough time now that, you know, obviously I’m a white guy, um, but you know, I care about our firm doing well because it sets an example, um, and kind of where we are now as a country with, you know, the protests and everything else. I think that’s important. Um, so that matters.

JP Maroney: 

Talk to me about the eyeballs, because anytime I talked to someone about reggae or in this case, whether it’s reggae tied to some sort of a digital ledger asset, as you talked about, where do you get the eyeballs, the investors, the people who, you know, mom and pop put their money, grandma pulls their money out of the sock or whatever that invest in these kinds of deals all the way up to, I know family offices and others that have put money into the space, but where do you get in front of the people? How do you collectively access this willing and able group of people out there that will put money into these deals?

Josh Lawler:

Sure. So, um, first off there’s two sides of this. There’s the investors, and there’s also the folks raising the funds. Um, and, and certainly from the raising of the funds perspective, uh, life gets a lot easier from, from the investor perspective. Um, you know, what we tend to think of, and I say, we as kind of the kind of watching, you know, ecosystem, if you were, or, you know, whatever you want to call it, um, you know, it’s going to be adopted when people don’t know they’re using blockchain technologies, like the internal combustion engine or the, or the Silicon shift, you know, you don’t have to understand how it works to use it. You don’t even have to know it’s there to use it. Uh, and you know, the industry right now is at a place where user interfaces are what matters now against that background, if you’ve got, you know, legislation that allows for portal, you know, for investors to, into particularly for an inquest credited investor portal, because we’re all used to that.

Um, you know, at that point, it’s the same thing it’s always been as far as, you know, attracting folks into it, where things get interesting is again, that, you know, that regulation a spot, um, that allows you to do, you know, a transaction with, you know, a, an unlimited number of unaccredited investors subject to saying that, you know, you’re going to handle certain regulatory obligations and, you know, report your numbers going forward and all that. Um, that’s going to make life a lot easier, you know, on the investor side. Um, I do have to throw out a word of caution. It’s not always a good thing to make that easier. There’s a lot of discussion about opening up, you know, different venture capital investments to, you know, the mom and pops will, you know, nine out of 10 of those fail. A venture capital fund model is, you know, have one big, big hit that makes up for the, you know, all the misses.

Um, so, you know, it’s not necessarily the best thing. I think that, you know, the role of the financial advisor is not going away. Uh, the role of the broker dealer is not going away. Um, certainly from a technology perspective, both of those things could happen. Um, but it’s, it’s a really bad idea for them to happen. Um, so, you know, hopefully costs are reduced. Um, I know on the, on the broker dealer side of securities transactions, the whole T plus three settlements and custody and transfer agents and boyfriend DTCC, um, that stuff is all extraneous now, um, or, uh, and that will make things less expensive, uh, and you know, hopefully a little bit easier and less arcane. So from that perspective, I think it’s a very big deal.

JP Maroney:

That’s wonderful. It really is. Um, you obviously work with a purpose, Josh, and that’s really good to say, what are some of the goals that you’re still reaching for now? Can you tell us about that?

Josh Lawler:

You know, our firm, as I mentioned, started with two guys in a kitchen and in 10 years, I think we want to be 200 people. Um, that’s, that’s kinda what we’re targeting at. Uh, and growth is hard. Uh, good growth is very hard. Um, so that’s, that’s kind of a major goal. Um, personally, uh, you know, I’ve already mentioned it. I want to do transactions that are good for business, but also good for people. I want to do a lot of them. Uh, that’s, that’s, that’s really the goal.

JP Maroney:

When we do the show, we sit around, in fact, you and Daniel, our producer had a call with one of our previous guest, a couple of partners, and affirm today talking about how we be able to assist them, connecting the dots, what there’s about $30 million, 30 something, million dollars worth of deal flow available in that one conversation today, they’re going to be people that are going to watch this, they’re going to their minds are going to be set off. They want to connect with you. What kind of people would you like to connect with from our network, from the deal flow show network, um, as well as our audience,

Josh Lawler:

The first thing that, you know, I want is people who are genuine and not, not trying to profit illegally. So it’s a good thing. Um, putting that aside, um, you know, sophisticated persons, persons who really know their businesses really well on the sell side persons doing repeat transactions, uh, on the buy side, or, you know, perhaps, you know, solid strategic reasons for acquisitions. You know, it just makes life easier as far as who to work with. Um, obviously I’m a service provider, so I like people pay the bill, but that’s, you know, it’s own its own thing beyond that. You know, it’s really fairly, fairly open. Um, you know, some of our best clients, you would not have thought when they walked in the door. Um, some of our worst clients look, you know, like everything is just fantastic and super flashy and, and everything else.

Josh Lawler:

Um, so, you know, the thing really is not to, not to pretty judge, I will say it helps to have people come in who value legal services. Um, you know, when, when you see what legal services costs for a lot of people, it looks like it’s very, very, very expensive. Um, we’d like to think, and I think we are value add that, you know, we’ll certainly save you more than that, our fee OSCE. Um, but you know, some people just don’t value the service and if you just don’t value the service, then you know, everybody likes to be appreciated. Right?

JP Maroney: 

Absolutely. Uh, what was it, the old joke, the guy that runs the help wanted ad looking for a wife with a boat said, please send picture of boat. So when, when, if people are on, on the show, listening to the show, we’re talking to people, what’s the best way for them to reach out to you. It could be phone number, website, email, whatever,

Josh Lawler:

Right? So email is the best way to reach out to me personally. And it’s just my first initial and last name. J Lawler LA w L E R a at Zuber Lawler, a Z like zebra, B, like boy, E R L a w L E r.com. Uh, we’ve got a website. People can look at, um, I’m on LinkedIn and Twitter, uh, also, uh, tweet too frequently, but some, um, but we’re, we’re pretty easy to find.

JP Maroney:

Well, Josh Lawler, glad to have you on the show. I know we covered a lot, but we’re going to come back in private conversation and talk about some of this. I know our CTO is Jay Benoit is setting off screen over here on the edge of his seat, because this is a lot of the same. He and I have talked about in terms of digital assets. He’s been involved in the cryptocurrency space, the blockchain space. Um, and, and we’ve talked about Harbor city being a part of that space with something related to data and the lead generation assets that we produce in our business models. So eager to come back and talk to you about that more in depth than a new, another conversation in the future. Um, for now, if you’re watching or listening to this episode of the bill flow show, you can get access to our archives as well as subscribe and follow us for future episodes. By going to the deal flow show.com on behalf of myself, mr. Paul Nicoline, my cohost here at Josh Lawler from Zimmer Lawler in California. We will see you again and another episode very, very

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