Can Government Regulation Spur Innovation?

Sure, and pigs can fly too

by Rocco Tarasi

Can Government Regulation Spur Innovation?President Obama has signed the Dodd-Frank Wall Street Reform and Consumer Protection Act into law.

Besides my general opinion on the size and role of government(*), I wasn’t happy about the initial drafts of the law due to its impact on a start-up companies’ ability to raise angel funding.

Under the previous regulations, start-ups raised angel funding from only “accredited investors” to minimize their legal costs, hassle and time to close. During the initial drafting of this new law, Congress proposed raising the bar to quality as an accredited investor from a $1 million net worth or $200,000 annual income to $2 million net worth or $400,000 annual income, and just as (or more) damaging, requiring the SEC to review every security offering, or in the absence of an SEC review then the relevant states could in turn review. It was referred to as a possible fundraising “Armageddon” – which I don’t think was a strong enough word to describe it.

Fortunately, most of the onerous provisions were cut or reduced in the final law, to the point where the most significant change is in the definition of an accredited investor. They did not raise the net worth or income thresholds, but now an individual can no longer count the value of their primary residence in their net worth calculation to determine whether they are an accredited investor. The result of this change is indisputable: less people will qualify as accredited investors, and therefore there will be less people to help fund start-up companies.

This has a direct, negative effect on innovation in this country – less funding, less start-ups, less innovation. No one can argue this point. I’m disappointed, both for my own self-interests and for our country as a whole.

But given how bad this could have been under the original provisions, I wouldn’t have taken the time to write about.

Until I saw this absolutely unbelievable quote from President Obama (via imarketnews):

“Well, this reform will help foster innovation, not hamper it”

My jaw literally dropped. Are you kidding me? This goes beyond just “spinning” the story. This is saying the exact opposite of what the law will actually result in.

I’m not an expert in the financial industry. And I’m as unhappy as the next person about the financial meltdown and government bailout. I think it’s a fair bet to say that there are some good provisions in this bill, some bad provisions, and some more good provisions that should have been in the bill that didn’t make it. If you choose to take the position that it is the government’s responsibility to create and enforce all of these regulations “for the greater good”, then fine, that is your decision and you can justify your position. In some cases I might even agree with you. But don’t insult my intelligence by claiming that new regulations, from a 2,323-page legislation, are actually going to “spur innovation”.

(*) Fun fact: there are 243 rules ordered by the legislation. Know how many rules were required by SOX in 2002? Sixteen. (From marketwatch)

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Rocco TarasiRocco Tarasi was an accountant, investment banker, and CFO before becoming a technology entrepreneur.

Rocco Tarasi




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