Leave it to the Obama administration to steal defeat from the jaws of capitalist victory.
That is the devilish reality in the details of a piece of legislation—the Jumpstart of Our Business Startups (JOBS) Act—that appeared destined to be a rare thing: A pro-market bill whose name was actually commensurate with its letter and spirit, rather than another slice of Orwellian-titled sophistry that is standard Washington fare.
What seemed too good to be true indeed appears to have been, particularly with respect to the bill’s Title III crowdfunding provisions. Superficially, this component of the legislation would have democratized the early-stage funding of companies, allowing all Americans—not just venture capitalists and other sophisticated investors—to have the opportunity to invest in the next great startup by acquiring an equity stake.
But, according to the Wall Street Journal, theory and practice are not jibing:
[I]f you talk to people building startups around equity crowdfunding, you’ll discover an open secret: As a mechanism for funding startups…it [the JOBS Act] is basically a nonstarter.
This is apparently deliberate. The SEC, responsible for creating the rules designed to fulfill Congress’s mandate in Title III of the JOBS Act, included rules—known collectively as the 12g rule—that are a powerful disincentive for high-growth startups to use what the SEC calls ‘regulated crowdfunding.’
These rules stipulate that any company that takes on more than 500 individual investors or grows to a size greater than $25 million in assets must start filing regular disclosures just like a publicly traded company. It is all the pain of an IPO without the benefits of the IPO. (Emphasis mine)
Businesses free of such disclosure requirements will still have to produce several documents including a discussion of the company’s financial condition, reviewed or audited financials, and annual reports. In other words, these small businesses already stretched thin will have to divert precious time, energy, and resources towards lawyers, accountants, and others to create regulatory disclosures, rather than focusing on their products and services.
Such businesses are also only allowed to raise a maximum of $1 million via Title III crowdfunding, although the Securities and Exchange Commission (SEC) is soliciting comments on a proposed amendment that would raise this number to $5 million.
You Can’t Manage Your Own Money
As with Sarbanes-Oxley, such regulatory costs, along with investing limitations, are likely to deter small businesses from availing themselves of crowdfunded equity capital. In addition to such strictures, regulations limit the total sums investors can commit:
- Those with an annual income or net worth below $100,000 may only invest the greater of $2,000 or 5 percent of annual income or net worth;
- Those with an annual income or net worth greater than or equal to $100,000 may only invest the greater of 10 percent of annual income or net worth, not to exceed $100,000.
All of these rules and regulations presumably are intended to protect investors from themselves. But is this the job of government? And what does it say about the government’s dim view of the public that unelected bureaucrats at the SEC ought to have such control over how we invest our money?
Free markets composed of individuals participating in voluntary exchange are remarkably adept at digesting information and allocating capital accordingly. As a regulator, the marketplace calibrates the subjective preferences of consumers and investors and bakes in all available knowledge to price signals, resulting ultimately in profits or losses. The SEC, try though it might, is an inferior regulator.
Minimizing Risk Minimizes Rewards
Market participants in crowdfunding would invest in companies with varying levels of disclosure on varying terms based upon risk-reward payoffs they deem appropriate. In fact, while startups are loathe to provide detailed information on their operations, some companies would voluntarily provide more robust disclosures to entice greater investment on more company-friendly terms, thereby creating a potential race to the top without government coercion.
Moreover, market participants are perfectly capable of determining for themselves how much money they should invest in speculative startup ventures. Americans are free to spend as much as we want on everything from doughnuts to liquor and lottery tickets. Investing in startups may provide only marginally better odds than the latter; at the very least it has the upside of leaving us thinner and sober. Why should government leave us free to choose on how we spend on some things, but not others?
The costs of government schemes to protect us from ourselves more broadly are incalculable, not just economically, but to our own human capital. Perpetually seeking to minimize risk also means minimizing rewards, whether in an economy or an individual. If you hyper-regulate a society, the state becomes the father and individuals its children.
Perhaps the most important protection we should be seeking today is from politicians and the unelected bureaucrats in the administrative state (to whom they have ceded their legislative authority) who make decisions that sacrifice our lives, liberty, and property according to their whims. Congress’s dereliction of duty in allowing bureaucracies like the SEC to draft hundreds of pages of rules according to the SEC’s own political fancy based upon a 22-page bill represents a violation of our representatives’ fiduciary responsibility. This has become the rule, not the exception, under Congresses Democratic and Republican.
The market may punish Americans, perhaps most brutally in the area of speculative investment, but a free system is vastly superior to one rooted in costly coercion and infantilization. Congress has failed to preserve and protect such a system, and we are all paying the price.