While discussing the stock market over dinner recently, John Mackey, the Founder and CEO of Whole Foods said unequivocally: "I wish crowdfunding had been around when I started Whole Foods." While he did eventually list several positive relationships with VCs and institutional investors, John's sentiment is common among founders after taking the well-trod but treacherous VC track.
While the democratizing power of crowdfunding will certainly help the next generation of founders like John, the benefits of greater market freedom will reach well beyond company founders. The broader set of beneficiaries will initially be industrious individual investors and later the entire economy as the ultimate growth engine of freer capital markets brings fresh intelligence to bear on capital allocation throughout the system.
Ever since my "sec reg" class with NYU's iconic Jack Slain, I have wondered why, in the information age, even smart Americans continue to prefer paternalistic regulations deliberately designed to shut them out of what everyone knows are potentially high-alpha investments: growth-obsessed, privately-held companies. My puzzlement continued at NYU Stern in finance courses where I was taught that theory presumes an effective price discovery mechanism through supply and demand.
But how can you have effective price discovery when demand is overtly limited by federal law to no more than 500 persons? Answer: You can't. Cue: IPO pricing absurdities.
Rolling Stone's Matt Taibbi, who rose to fame after fingering Goldman Sachs as a "great vampire squid wrapped around the face of humanity," has taken the progressivist lead in criticizing certain aspects of the JOBS Act. Some of his criticisms, as usual, are right on including a reversal in the rules designed to prevent bank analysts from talking up a stock just to win business.
However, Taibbi misses the mark on the positive potential of crowdfunding, being too ready to trade democratic investment rights for what amounts to ineffective protection from Washington. Yesterday he blogged that shareholders weren't invited to the real FB party. This is certainly true, but irreconcilable with his unmitigated opposition to democratic deregulation.
The biggest loser in not being invited to the "real party" is actually not the unaccredited investor forced to wait for an S-1 which no one, even underwriting counsel, ever actually reads. The real loser resulting from the denial of authentic price discovery is our free market system and the consequential market inefficiencies and failures that follow.
Opening investment to smart but unaccredited investors (who are usually hungrier and more critical than the typical semi-retired CALPERS suits), promotes the price discovery process on which efficient market theory is based. In other words if there had been crowdfunding for a company like Facebook pre-IPO, the price transparency would have helped avoid the painful roller coaster and obviated the apparent "need" for the alleged (and, if-true, illegal) Reg FD violations.
But who will protect the little old lady?
If you agree with Taibbi's position on the bailouts, the little old lady is not being protected now. Forthcoming austerity that will cut her retirement benefits went to banks who took near zero-interest funds from the Federal Reserve and then loaned money back to the federal government on sweetheart terms.
Then there is Bernie Madoff. (The next Marc Rich and Michael Milken?)
The current solution of trading market freedom for protection from future fraudsters reminds me of the movie Minority Report -- where you are punished today for crimes you are supposed to commit tomorrow.
The real answer to the fraudster who steals the little old lady's money with words rather than a gun is to treat these two criminals equally. However, in the world of securities finance, as Taibbi puts it bluntly, "nobody goes to jail."
A thief is a thief regardless of the color of his collar.
Instead, we are punishing the (future) victims, the individual investors who lose opportunities and our citizens who end up paying a de facto dysfunctional-market tax. A cynic might go so far as to say there is a method to this madness, that the powerful want to maintain control of the market through the guise of protecting the little old lady.
Perhaps, the little old lady of pre-'33 is today the young Internet-savy investor with instant access to all human knowledge in her pocket. Investing a reasonable fraction of your net worth in companies you believe is very reasonable and can make perfect financial sense. In fact, given our citizens' and our nation's current savings rate, investing more in riskier but higher-growth businesses may be the only way to reach our respective financial goals.
Taibbi and others should help us enhance the market democratizing potential of crowdfunding while we safeguard against regressive and power-centralizing deregulation like the repeal of Glass-Steagall.
Somehow Congress actually got this one right.
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