Innovation is a key component of any free-market economy. Unfortunately, there are many who believe that unencumbered innovation ought to be curbed, despite the fact that capitalism is the system that has generated the most prosperity in human history.
The latest example of this comes from the Securities and Exchange Commission, a federal bureaucracy charged with regulating markets and allegedly protecting investors. The SEC was tasked with writing regulatory rules for the Jumpstart Our Business Startups Act, which was signed into law in April of 2012 under the much-heralded promise that everyday investors—not just accredited millionaires—could acquire early stakes in startups through “equity crowdfunding.”
As Christopher Mims explained at the Wall Street Journal, “Allowing everyday Americans to invest in today’s high-growth startups—picture grandma and grandpa putting a portion of their retirement savings into the next pre-IPO Facebook—has long been the dream of advocates of so-called equity crowdfunding.” (Pre-IPO is a reference to a startup before its “initial public offering,” i.e., before a private company sells stock to the public.)
“Imagine” writes Mims, “if all the people who backed the Oculus Rift VR headset—which raised $2.5 million on crowdfunding site Kickstarter in 2012 and was sold to Facebook for $2 billion in 2014—had gotten a piece of the company, instead of just early access to its headsets.” It’s certainly a hypothetical worth exploring, and one that the JOBS Act was supposed to address.
Unfortunately, as the SEC’s restrictive rules around the JOBS Act become clearer, we’re seeing a fairly typical confluence of established interests supporting government efforts to restrict new economic activity. As Mims notes, the disclosure requirements and limits on investments written into the regulatory schema—which arguably go against the law’s original intent—make equity crowdfunding in high-growth startups all but impossible.
Not surprisingly, there are professional investors who feel the SEC’s rules are reasonable and not, for lack of a better term, blatantly patronizing. Charles Moldow, a partner at Foundation Capital, told Mims, “the idea that a nonaccredited or even accredited investor is going to somehow be successful at early-stage venture capital strikes me as challenging.”
Even if Moldow is correct, it begs the question: so what? The government doesn’t stop the housewife with a shoe fetish from maxing out her credit card at Macy’s. Why should it stop a stay-at-home mom with an eye for tech trends from making an arguably more responsible early-stage investment with the potential for return?
Ben Weingarten at The Federalist is correct when he states simply: “The government thinks you’re too dumb to try crowdfunding.” He adds: “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?”
Frankly, even if the government were adept at protecting small-time investors, it isn’t their role. And the truth is, markets are always better regulators than bureaucrats. Weingarten sums it up aptly:
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.
The SEC’s crowdfunding rules are set to go into effect in May of this year, and as Mims notes, although it’s possible that Congress will challenge these regulations, we’re still a long way from “Kickstarter but for shares in a company.” The government, as usual, works at a snail’s pace. It took until 2012 to pass what seemed like a commonsense, pro-market law, then another three years for a bureaucracy to set us back to square one.
In the meantime however, feel free to gamble your money away in various nonsensical fashions—but don’t you dare acquire early-stage shares in a company!