The recent lawsuit by the Massachusetts Secretary of State Galvin attempting to subvert the expressed will of Congress, and the well designed and deliberate rules allowing firms to raise money under Title IV of the JOBS Act is the latest in a series of tragic mistakes by our regulators and consumer protection advocates. While America dithers, the rest of the world is rapidly innovating and developing profitable and safe financing vehicles helping fuel business growth and innovation.
Chinese Premier Wen Jiabao recently spoke at Tsinghua University and announced that the next 30-year plan for China will be based on innovation – not on manufacturing. Premier Jiabao understands the transformative power of innovation, and Tsinghua University is launching a huge program focused on FinTech and small business capital formation to provide the financial innovation necessary to support a new innovation based economy.
The European Union has an incredibly effective working group in crowdfunding and is crafting regulations to support crowdfunding – recognizing that crowdfunding provides a meaningful and significant source of alternative capital to spur economic growth.
The United Kingdom has crafted a lightweight regulatory scheme that has led to the creation of the most dynamic alternative finance market in the world. The eyes of the world are turning to London for leadership in finance, and the US is correctly seen as a failure in terms of supporting financial innovation.
What are our regulators doing to support job creation and economic growth in the United States? Nothing! We are still waiting more than three years later, for the SEC to pass Title III – which as I have written before, is unlikely to happen without the intervention of Congress.
Based on an exaggerated sense of risk – a fear that the open, transparent and regulated crowdfunding market will somehow turn into a fraud mill, we have potentially lost billions of economic growth. The crisis in America is not the too-big-to-fail banks; it is the too small for anyone to care about small businesses. While 2104 saw a resurgence of Venture Capital investing, the 99.9% of businesses that are not capable of receiving venture capital investing are left languishing – with banks hamstrung by Basel III and Dodd-Frank and unable to profitably lend to small businesses.
The Galvin vs. SEC case is tragic – it will delay the Title IV market from growing for years if the Federal Courts issue a stay. It represents the worst in government, the desire of a State to subvert an important new financing market that could lead to hundreds of small IPOs. If Venture Capital firms are wrong 80-90% of the time, what possible logic leads anyone to believe that a State security regulator can choose good investments for its citizens? After all, Massachusetts rejected Apple computer’s filing – since the company was overvalued!
Tax policies and incentives need to be created to encourage and facilitate risk investment and seed capital for small business. Crowdfunding and Alternative Finance cannot flourish in an era of regulatory uncertainty. There is already a drumbeat in certain Washington, DC government buildings for increased regulation of marketplace and alternative lending.
While I generally support a balance between effective regulation to support citizens – such as environmental regulation – and the need for business growth, in this case, the best available evidence demonstrates that regulators are attempting to protect us against the risk of profit in a new market they simply don’t understand. The exaggerated risks of fraud don’t justify the billions in growth we are losing to other nations.
It is time for us to focus on the innovation financial economy – without it; all of our other innovation programs may simply be a waste. It is time for government to allow a new market to flourish – following the lead of the UK. In the case, the US response to financial innovation has been a tragic, uninformed and dangerous miscalculation.
I encourage Congressman McHenry to dust off his legislation and short-circuit this lawsuit by pre-empting State review of Reg A+ offerings. It is time for America to act and encourage financial innovation, before more Billions are lost, more jobs destroyed, and more intellectual talent flees the United States for countries that are more tolerant of financial innovation.