The Up w/ Chris Hayes panel dives into the details of the "Jumpstart Our Business Startups Act," also known as the "JOBS Act." Alexis Goldstein of Occupy the SEC and University of Missouri-Kansas City professor William Black join to share ways the act provides loopholes in financial regulation.
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Over the past decade, Americans watched in bafflement and rage as one institution after another – from Wall Street to Congress, the Catholic Church to corporate America, even Major League Baseball – imploded under the weight of corruption and incompetence. In the wake of the Fail Decade, Americans have historically low levels of trust in their institutions; the social contract between ordinary citizens and elites lies in tatters.
How did we get here? With "Twilight of the Elites," Christopher Hayes offers a radically novel answer. Since the 1960s, as the meritocracy elevated a more diverse group of men and women into power, they learned to embrace the accelerating inequality that had placed them near the very top. Their ascension heightened social distance and spawned a new American elite--one more prone to failure and corruption than any that came before it.
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Chris,
Subject: the dead elephant on the table you missed with respect to the JOBS Act
I am a passionate viewer who was incredibly frustrated with your conversation today about the JOBS Act. There was a giant hole in the discussion today that I, as a 30 plus year entrepreneur (who has raised millions of dollars from private investors), want to bring to your attention – my dead elephant analogy in the subject line. The giant hole has to do with who was the main driving force behind this bill.
Did you stop to wonder about who was behind it? Think about it – who has the vested interest to support that bill to help small businesses? What I can tell you is that it wasn’t Wall Street or the financial industry, but rather Main Street and the entrepreneurial community, a group not represented on your show.
I know because I am one of the one’s who helped bring it forward, as did a number of my colleagues. And your two guests - Alexis Goldstein and Professor Black missed the boat entirely about this bill. They were totally focused on a Wall Street interpretation of this bill, and thus they showed a profound lack of understanding on who this bill was written for and why it is such a good thing for them. Yes there may be abuses on Wall Street (common for Wall Street), but that wasn’t the intended beneficiary of this bill, but rather Main Street and Main Street entrepreneurs – something Alexis dismissed as insignificant businesses. And the Chicken Little claims they make of boiler room abuse and rampant fraud, rarely take place on Main Street.
Let me give you background to those claims. Last year the White House, as part of its Startup America Partnership program, held (along with the SBA) a series of eight roundtables all across the country. At each they invited approximately 150 representatives of the small business, entrepreneurial community, to solicit feedback from that community about their relationship to the government and how that helped or hindered their goals as entrepreneurs trying to launch and grow new businesses. I was invited to attend the last one held in the heart of Silicon Valley at Stanford University last May.
A common format followed at each one of those meetings was this. Following a general session in which introductions were made and the goals of that roundtable defined, we broke up into four working groups tasked with coming up with the issues we considered the most import issues we wanted them to deal with. The input from each of those groups was gathered and reported back by group leaders in a follow-on general session, where we had the opportunity to hear the thoughts of our fellow entrepreneurs.
What was striking was that 3 out of the 4 groups at my roundtable all reported one common issue (the only issue raised by more than one group) and that was a need to institute “crowd funding” in order to address the difficulties we all experience in trying to fund our companies. I learned from the leader of our roundtable, a member of Pres. Obama’s economic advisor's team, that crowdfunding was the number one issue raised all across the country – by the entrepreneurs!
A website setup by the White House/SBA seeking written feedback on the concerns raised at the roundtables and provision was made to vote on those issues. Crowdfunding was the number one topic voted for, and a topic I put forth as a complement to crowdfunding was ranked number two (see below).
Yet Alexis Goldstein claimed that there was plenty of money (in particular venture capital) for this community, so she thought this bill fixed a problem that doesn’t exist. If that is such a non-existent problem, why did the entrepreneurial community all across the country raise the issue as their number one problem? And let me point out that the vast majority of them are substantially smaller (just a few million in their earlier stages) than the maximum figure of $1 billion she and Prof. Black focused on.
What that demonstrates is her near complete lack of knowledge about the small business community and the problems it has with raising capital. She knows what she is talking about when it comes to Wall Street and I am impressed with her and her efforts there, but unfortunately she, nor Prof. Black, seems to know much about the Main Street small business community.
To back that up, let me give you some specifics. She thinks there is plenty of VC money available for entrepreneurs. The reality is that at best, venture capitalists account for no more than approximately 2% of all the funding that is raised by small business entrepreneurs across the board, and the majority of the rest comes from angel investors, who have been retreating in today’s economic environment. Were she to attend the annual conference held at the SEC headquarters concerning small business capital markets, she would find that this community is far from satisfied with their ability to raise money and have long begged the SEC to change its rules to make it easier to raise money.
Chris, this is the real driving force behind this legislation. What happened following those roundtables is that a number of Congressional folks were approached by key volunteer voices from the entrepreneurial community, with the request to introduce a bill to authorize crowdfunding. These folks had almost no money but a whole lot of passion and a powerful argument why this was needed.
What happened is that representatives like Congresswoman Maloney heard their pleas and responded to them. What is remarkable about this is that this legislation did not originate with deep pocket lobbyists or powerful constituents, but rather the little guy. No votes were bought and common sense prevailed. And members from both sides of the isle listened and responded to that call. How rare is that?
And as to Congresswoman Maloney’s offer to improve on that bill, let me share this. The alternate suggestion I made on the above mentioned website, that garnered the second highest votes, pertains to creating a whole new regulatory environment for small business capital markets that would be driven primarily by the small business community rather than Wall Street, big business, Washington and the regulators, who all barely know and understand that world. See this link for an introduction to that idea
Then, if you really want to learn what the world of capital raising is like for the entrepreneurial community, I invite you to check out a series of white papers, law journal articles, studies and newspaper articles that drill into the problem of small business capital markets and the need for changes like those just passed in the JOBS Act. Yes it was flawed and can be improved upon and I applaud Rep. Maloney offer to improve on it. Far more can be done to help those who are the primary job creators in this country. Details about what can be done can be found here:
Michael, I am quite familiar with high tech business. In your voluminous commentary, you do not address the objection to the bill- that lack of transparency or the ability of the SEC to regulate is not the obstruction to job growth or capital formation. Instead, you assert that concerns about fraud are misplaced. You fully exercise the trope that what is holding back job creation is regulation. Small business owners genuinely feel overwhelmed with paperwork burdens, and there is no lack of ill will towards government intrusion into their businesses. There is no question there is no shortage of passion on that point. But be honest. Human nature being what it is, are you serious that small businesses are somehow immune from fraud?
Quite simply, you are living in a fantasy world. Perhaps willfully so.
The statistics do not bear out your absurd claim. The FTC reports that 30 million Americans were the victims of fraud. That is nearly 14% of adult Americans. Most of these were perpetrated by small businesses on consumers. Why should we believe the fantastic claim that government should not also police small businesses selling themselves as a business investment opportunities? If some are perfectly happy to lie about their weight loss product, why do we think that some won't lie about the true financial health of their company to potential investors? It's nuts.
Sure, scammers give honest businesses a bad name. That is why honest businesses need to be foursquare in favor of transparency and oversight.
John, If I came across as not concerned about fraud, then my apologies, for that is not what I believe. However, I do feel that the emphasis on fraud as the key problem to be addressed is misplaced. Does it need to be addressed - Yes. Is it the biggest problem, no.
In the universe of small businesses, those who would perpetrate fraud on others is a small percentage of all those businesses. As a Silicon Valley entrepreneur, I saw more good, honest and viable businesses die because they were unsuccessful in raising funds than for any other single reason. Not one of them was setup for a nefarious purpose. With a proper funding environment, many of them would at least had a chance to survive, grow and create the jobs the country so desparetly needs.
I do think that reasonable precautions need to be setup to help filter out those truly fraudlent schemes that you and the others are concerned with, but I think there is a much bigger problem concerning investor risks that neither you nor those focused on the fraud problem seemed to address. I wrote a short one pager about what I considered the much larger problem for investor risks than fraud. In case you are interested in reading it, here is a link:
commonwealthgroup.net/docs/ANewPerspectiveOnInvestorProtection.pdf
Is it your opinion that high tech has been a significant source of US jobs creation in the past?
Again, the statistics do not bear out what you are suggesting is the case. When people think about industrial expansion, they think about labor intensive 20th century technology factories. This sort of free association leads to misconceptions about high technology businesses which by their nature have low labor requirements in proportion to their profits.
People point to magnificent new products like Twitter, but fail to realize though they serve 200 million active users, they employ only 300 people. While many silicon valley companies have a physical object associated with their intellectual property, you and I know that this manufacturing is off shored. In 2006, iPod employees in the US earned 7.5 billion in sales, but Apple paid back into the US economy barely 10% of that- $750 million in wages. (source)
This process of high technology businesses extracting capital from US consumers, and not returning it in the form of wages and lower cost products works to reduce the purchasing power of the US economy's consumers. Martin Ford, another Silicon valley entrepreneur explains this danger in his book "The Lights in the Tunnel", offering the metaphor of a river of purchasing power being pumped dry.
So besides the downside costs I related above, the upside payout in high tech jobs is miniscule. Worse, the overall impact these businesses have on the US economy serves to starve the national consumption engine of cash, resulting in reduced demand due to reduced purchasing power of our consumers. This initiates a negative feedback loop.
I am optimistic that high tech can be a key contributor to a healthy economy, but the needed reforms have little to do with reduced regulation.
In short, at a number of levels this is an ill conceived policy.
John,
With respect to the concentration on high tech, you have extrapolated something that I did not say nor mean. Yes I was an entrepreneur in Silicon Valley, but that does not mean I am focused on high tech. Not at all.
In fact, I now live in Ohio where I am focused very much on main street businesses, including manufacturing, retail businesses, contracting and all the other generic types businesses, that make up the bulk of our main street economies and jobs, very little of which is high tech. And that is where I believe the majority of new jobs will be created, not high tech as you point out, so we are in agreement there. That is my prime focus, not high tech.
That said, I return to my central point though - securities laws from the 1930s are a severe impediment to entrepreneurs who need to raise funds to launch and grow their businesses. I don't know if you have ever tried to raise capital, but I have and I can tell you that the current laws make that extremely difficult, and the bulk of my fellow entrepreneurs feel the same way.
Those laws make us largely turn to the wealthy called accredited investors, who make up only 2% of the population, to ask them for money (do I hear 99%/1%). And we are supposed to have a pre-existing relationship with them to boot. Most entrepreneurs don't know folks in the country club set and current laws largely prohibit us from asking our friends and neighbors to support our local businesses.
If you want to get a really good feel for the depth of this problem, check out this article by two securities attorneys - Greg Yadley, one of the current advisory board members to the SEC on small business capital markets and his law professor colleague, Stuart Cohn, entitled "Capital Offense -The SEC's Continuing Failure To Address Small Business Financing Concerns"
commonwealthgroup.net/docs/CapitalOffense-TheSECsContinuingFailureToAddressSmallBusinessFinancingConcerns.pdf.
Now all this points to the need to change the laws so that entrepreneurs can get the money they need, to create the jobs the country needs. That said, I and all other entrepreneurs I know do not want this to open up the floodgates to the dishonest folks who would take advantage of the system. And I am all in favor of modifying the recently passed law to improve on those protections.
But I am in favor of "reasonable" and "effective" safeguards to protect the public, not meaningless rules that only create problems for honest people, but do nothing to stop the crooks. Unfortunately, even the current safeguards do not do a very good job of it and really only get in the way. So when it comes to crowdfunding, we really do need to come up with a better way to protect the public.
If you don't believe what I have just said, perhaps you will believe a study that was done by the state of California (for the California legislature) on that very issue, which you can also find on my website with the Yadley article here: www.commonwealthgroup.net/regulations. That study is entitled: "Securities Regulations And Their Effects On Small Business" which can be found here: commonwealthgroup.net/docs/SecuritiesRegulationsAndTheirEffectsOnSmallBusiness.pdf. They conclude that current securities regulations don't really protect the public and only deter business formation.
All that said, I would welcome you providing any kind of study that validates what the regulators currently do actually protects the public. I can tell you that the SEC has never done an analysis of the actual effectiveness of their regulations. I would welcome that, as it would smoke out the fact that their rules don't really protect us (especially on main street) as the public might be led to believe. They certainly haven't done a very good job on Wall Street, let alone main street.
To prove that point, I can speak from personal experience that I tried to bring what was a clearly outright fraud case to the SEC several years ago that concerned a $100 million company. They told me that it was too small for them to spend any resources on it, now matter how clear cut the crime was. Imagine what they would say about a $5 million dollar company?
Now, if all the above "facts" don't give you sufficient reason to change your opinion as to the merits of this bill and its need, then there is probably nothing else I or anyone else can say that will make a difference.
Modernization trope. If only businesses where unshackled from these troublesome regulators holding them back they could expand the economy.
Really. We get the tropes. And we have read the countless reports and studies backing them up. Professor William Black tells us they are nonsense. Is he ill informed too? Jim Wright, speaker of the House was implicated in influence peddling, because he tried to get Black fired from his job regulating the Savings and Loan industry. Black has a lot of practical experience in how this game of deregulation is played.
Those of us who have been around a while know this story well because we heard these tropes in 1990s. This is precisely the way democrats during the Clinton presidency were talked into the Commodity Futures Modernization Act of 2000. This "modernization" caused us to unlearn a lessons taught us in 1907, 1929, the S&L fiasco of the 80s. Our country was taught the folly of this "modernization" nonsense over and over, most recently with the 2008 meltdown costing us trillions. Trillions.
The tropes you are using are fictions, persuasive to those who are genuinely frustrated trying to grow businesses in a harsh economic environment caused- yes caused- by deregulation and "modernization" of financial regulation. There is no question that honest businessmen should be able to gain access to capital markets, and that helping them do that is a worthy goal.. But it is also cheap politics and self deception to blame one's frustrations on the well principled rules of the game or the referees on the field. Having a well staffed SEC that requires transparency in the solicitation of investment is fair play. Removing these requirements and defunding the SEC is the path to financial fiascos of 1907, 1929... 2008. The problem with promises of modernization is the reality of history.
Let's live in reality.
Actually, I know a great deal about entrepreneurship, and have been involved in it since the 80s. If you are curious, you may look up my patent on a device for the sightless. I developed it in my own company and it was successfully sold in US and European markets. I also have a great deal of experience interacting with smaller (less than 1Billion capitalization) businesses, in my work as part of a global software company.
Now, as for not understanding or listening to facts, I would urge you to listen carefully to the educated criticisms of this Jobs act offered by Black and Goldstein. These are sensible positions that have the weight of our enormous experience with financial fiascos behind them.
It seems to me that Alex Goldstein was deterred from speaking in the end by Chris.
John,
My apologies for my closing comment. That was uncalled for and I should not have said it.
By way of an explanation (but not excuse), I have been deep in this battle for several years now and I get frustrated with people like Alexis or Prof. Black, who may know one environment very well (in their case Wall Street) but who have not been down in the trenches with the small business community to really know what their world is like and what they need and don't need, what works and doesn't work, etc.
In your case, I see that you spent many years at Microsoft and that has certainly exposed you to the high tech world. And you made some very good and relevant comments about the high tech world vis a vis their ability to create jobs, and I couldn't agree with you more on those points. However, as I said in my above comment, the high tech world is not my prime focus.
Creating jobs on main street is the goal here and I for one am very glad that Congress passed this bill. I will not be surprised if there will be those who abuse this new system, and the likelihood is high that some of them will be held up to the public as proof of the folly of the legislators in passing this bill. Unfortunately we probably won't hear about the many thousands of small businesses that will be helped by it, which I am confident will dwarf those other statistics.
Thank you for your thoughts in this matter and once again, my apologies.
No harm. We both have been in heated exchanges in rooms where the stakes were high and the quality of the motives and factual basis for positions were in question. I don't think anyone who has witnessed or been the subject of verbal assaults in such meetings are much phased by such commentary.
Some of my former colleagues, including one I was interacting with in an email mentioned in a DOJ report- do not share my opinion that businesses work best when the society sets rules for fair play. We had some very smart and competitive people. If the rules are to maximize commissions, that is the way you keep score and you screw the customer. If there are no rules to maximize employment, and the game is to maximize ROI, then that is how you keep score and demonstrate your prowess. It really doesn't matter what the point scheme is. Government can take a role in setting the bar for corporate behavior. Others of my colleagues believe as you possibly do, that regulations and regulators are not the same principle as rules and referees. That there is something inherently suspect about a government setting economic rules.
It comes down to a philosophical question about what the economy is for.
John, Michael,
I want to thank you both for one of the better well-informed debates I've seen in comments in a while. I am both an entrepreneur who has raised $1.2M in seed money since early 2009 for my startup and a citizen that believes in intelligent regulation to minimize the excesses of the darker demons of our shared human natures.
Theodore Roosevelt once said "Perpetual, mild reform is the only true conservatism in that it protects existing institutions from atrophy and relieves the buildup of radical pressure."
The Securities act of 1933 has not undergone that "perpetual mild reform" and that is a problem. Innovation currently is held hostage to that 80 year inflexibility.
This is not an either/or question but a polarity to be balanced for optimal benefit. Anyone with money should have both the right to invest it as they see fit as well as easily available mechanisms that allow them to make better decisions about where, when and how much to invest in either small or large entities that are public or private.
The internet and social networks represent the foundations of that kind of mechanism. The post-1933 public stock market used to represent that mechanism. But change,calcification, overs-peculation and outright corruption has rendered US public equities as opaque to the small investor as far as being to feel confident their money is wisely invested.
Given that the wise choice to both offer new options to those small investors that will add pressure to work to cleanup of the old ones.
There is certainly a win/win path here and it involves both crowdfunding options and the intelligent implementation and application of constraints so crowdfunding does not become rife with fraud and scams.
Roger