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  • Complete Economic Madness

    Posted by David Foster on April 5th, 2010 (All posts by )

    Democratic Senator Christopher Dodd wants to impose some changes on the way that financing for new ventures works in America:

    First, Dodd’s bill would require startups raising funding to register with the Securities and Exchange Commission, and then wait 120 days for the SEC to review their filing. A second provision raises the wealth requirements for an “accredited investor” who can invest in startups — if the bill passes, investors would need assets of more than $2.3 million (up from $1 million) or income of more than $450,000 (up from $250,000). The third restriction removes the federal pre-emption allowing angel and venture financing in the United States to follow federal regulations, rather than face different rules between states.

    Here’s Keith Rabois, an early PayPal employee who is now a VP of Slide and an angel investor:

    Anyone still need more evidence that Obama and the Democrats intend to destroy Silicon Valley and the dreams of entrepreneurs?

    Numerous other comments from investors at VentureBeat. (link via Power and Control, who adds comments of his own)

    Note that while government seeks to protect individuals without a certain level of assets & income from participating in the economically-essential and often profitable activity of venture investing (even though some of these individuals may be highly sophisticated in their understanding of finance and of the relevant markets), it also seeks, via elaborate advertising campaigns, to lure people of all income levels–in practice, especially the poor–to “invest” their money in state lotteries.

    Disclosure: I have investments in venture capital.

     

    15 Responses to “Complete Economic Madness”

    1. Simon Kenton Says:

      One of the unintended consequences of Dodd’s latest idiocy will be that a number of people who are currently accredited investors will cease to be. Those opportunities will be closed off for people in the 1MM – 2.3MM bracket. But there are a lot of investments, far more conservative than being an angel, that are open to accredited investors. A lot of housing, for instance, is provided by investment from the current level of accredited investor.

      I like to think this is too stupid for Dodd to get it through, but you judge on what you’ve observed, and he’s been ‘successful’ at getting more stupid ideas than this reified in the past.

    2. david foster Says:

      Note also that limited partnerships for oil & gas drilling generally require investors to be accredited.

    3. Mrs. Davis Says:

      Just finishing what SarbOx began.

    4. david foster Says:

      Mrs D…much worse than SarbOx, IMNSHO. Far easier to strangle a baby in its crib than even a young teenager.

      What’s amazing is the number of VCs, tech-industry execs, etc who voted for Obama. Proving once again the truth of Heinlein’s dictum: “Even smart sons of bitches are dumb off their home ground” (or words to that effect)

    5. Mrs. Davis Says:

      What’s amazing is the number of VCs, tech-industry execs, etc who voted for Obama.

      Not only voted for him but enthusiastically supported and financed him. And virtually with out exception, TJ Rodgers aside. And Algore. I could never figure it out. Still can’t.

      Agree this is worse, but it will keep getting worse and worse until the government is in full sclerotic control or the voters throw out the current establishment. Hard to believe, but they’re making the WASP ascendancy look good.

    6. Tatyana Says:

      I recall an old conversation with a French expat, who told me he would rather stayed in France vs. coming to America, if not for the ease of becoming an investor and a business owner in US compared to France.

      I guess he’ll see no difference soon.

    7. onparkstreet.wordpress.com Says:

      Cheer up, everyone! The good President has named this month “Financial Literacy Month!” So there!

      http://corner.nationalreview.com/post/?q=ZGVlNTc1NGE2Y2Y1YzUxMzBlN2E5ZjUyMzIwMjk3ZjY=

      “Financial Literacy Month in Washington [Kevin D. Williamson]

      President Obama [… suppress laughter …] has declared [… grip desk, knuckles whitening …] the month of April [… bite tongue …] national financial literacy month. Thanks for the laugh, Big Guy. We need it.”

      – Madhu

      PS: I think I’ve got migraine from all of this….

    8. Jonathan Says:

      Summary of the bill is here. It appears that the bill:

      -Is a payoff to lawyers, unions and the exchanges,

      -Will drive much of the US hedge fund industry overseas,

      -Rewards the ineptitude of the SEC by giving the agency more power,

      -Will require SEC approval for each new derivatives contract, which means less financial innovation,

      -Will dramatically increase compliance costs for many financial start-ups by forcing them to deal with multiple state regulators,

      -Is a Congressional power-grab against the Fed,

      -Ignores systemic risks that are created by Congress and GSEs,

      -Systematically punishes risk-taking and drives up the cost of doing business, which means higher risks and lower rewards for the investors the new law is nominally intended to protect,

      -Will have little effect on actual fraud, because the regulatory system will continue to be too inept, slow and unwieldy to recognize and put a stop to scams before many investors are victimized, and

      -Will have little or no effect on systemic risks, except to the extent unintended consequences of this complex legislation create new systemic risks.

      This is all based on the summary. No doubt there will be many additional surprises in the details.

    9. ThomasD Says:

      I realize that venture capital is a term of art, but in the broader sense is not every single person who starts up their own business a ‘venture capitalist’ of a sort? Never mind the people (friends, family) who often fund such endeavors.

      Once again the Obama administration reveals their utter contempt for the American populace by telling us we cannot be trusted with our own money.

    10. zenpundit Says:

      “A second provision raises the wealth requirements for an “accredited investor” who can invest in startups — if the bill passes, investors would need assets of more than $2.3 million (up from $1 million) or income of more than $450,000 (up from $250,000).”

      Notice how Dodd proposes to kick the MC/UMC off the rungs of the ladder of success so that they can’t climb up without a patron? 1 million dollars in assets is a nice house in a desirable market plus a small business, like a dry cleaners or a restaurant. Or a small farm.

      It also removes the small investors from the field entirely, keeping everything in the hands of the “big boys” ( expect 2.3 mil to jump to $ 5 mil)

    11. JaimeRoberto Says:

      So I guess a repeal of Sarbannes-Oxley is out of the question?

    12. Alan K. Henderson Says:

      So I guess a repeal of Sarbannes-Oxley is out of the question?

      Ironically, Henry Waxman’s in the news because he’s going after corporations for their compliance with SOX requirements to report Obamacare-induced expenses.

      Someone should do a political cartoon with Waxman as Dr. Frankenstein and SOX as the monster which is turning on his creator.

    13. Shannon Love Says:

      So, where exactly does the Constitution give the Federal government the right to tell me where I can invest my money?

      While couched in terms of protecting the ignorant masses from slick financial con artist, it is really a restriction on the right of ordinary Americans to participate in investing. Yes, it might protect people from risk but it also protects them from the benefits of making good investments.

      Basically, this bill says that if you are not already rich you can’t participate in the capitalist system. This will reinforce an economic class system in which only the rich can really strike it big. There won’t be anymore cases of a machinist buying Apple at 12 with a few thousand dollars and retiring wealthy a few years later.

      It never ceases to amaze me that leftist who think of themselves as the spokemen for the little people always do everything in their power to take away the little people’s freedom while leaving the wealthiest richer than ever.

    14. Michael Kennedy Says:

      Michael Crichton commented on the tendency of very intelligent people to believe what they read in the newspaper even though, in areas where they are experts, they realize that newspaper reporters are inept and ignorant. He called this the Murray Gell-Mann Amnesia Effect.

      Briefly stated, the Gell-Mann Amnesia effect works as follows. You open the newspaper to an article on some subject you know well. In Murray’s case, physics. In mine, show business. You read the article and see the journalist has absolutely no understanding of either the facts or the issues. Often, the article is so wrong it actually presents the story backward-reversing cause and effect. I call these the “wet streets cause rain” stories. Paper’s full of them.

      In any case, you read with exasperation or amusement the multiple errors in a story-and then turn the page to national or international affairs, and read with renewed interest as if the rest of the newspaper was somehow more accurate about far-off Palestine than it was about the story you just read. You turn the page, and forget what you know.

      The people in Silicone Valley who supported Obama, seemingly, believed that he is brilliant and that makes him competent and, if he is competent, he will treat their interests as seriously as they deserve. He may indeed be brilliant in a social science or humanities sort of way. In practical knowledge that one would expect a president to possess, I don’t think so. Even Lenin was smart enough to realize that Communism was failing and he introduced the New Economic Policy.

    15. david foster Says:

      See related video here.

      Also see related post by Zenpundit.