7 Reasons Why Capital Markets Need to Innovate
In the last month the SEC has said that it will consider changes to certain capital markets regulations, including:
- Raising the 500 shareholder threshold that triggers a public disclosure of financial results (and usually results in a public stock offering);
- Adjusting the ban on general solicitations that prohibit or restrict publicizing share offerings; and
- Allowing some form of crowdsourcing to raise smaller amounts of capital from a larger group of investors. (via Mashable and VentureBeat)
Changing these and other rules are long, long overdue. Our capital markets operate under some regulations that are decades old – pre-Internet, pre-mobile phone, pre-lots and lots of other advances.
Here are seven reasons why the markets and regulations need a dose of innovation.
- The current regulations let the rich get richer. Not to get all Robin Hood-y, but most start-ups only raise money from “accredited investors” (at least $1 million net worth) because of the cost and administrative burden imposed if you raise money from individuals who are not accredited. As a result, you need to be rich in order to buy those start-up shares that might make you richer. I know a lot of smart people that aren’t worth $1 million.
- The current regulations haven’t exactly protected us. Enron, Worldcom, and Madoff all happened while these types regulations were in place. They are supposed to protect us from fraud… but I’d just assume protect myself if you don’t mind.
- The world is interconnected and communication is much more open. I can do more due diligence on a start-up I want to invest in, or at least on the founders of that start-up, than I could even 10 years ago.
- Making it easier to access capital will lead to more innovation. Everyone talks about wanting to encourage innovation in this country. It’s been a theme of President Obama’s State of the Union, and presidents before him. It’s time to stop talking and make some changes that most people agree are overdue, including perhaps the most respected venture capitalist today.
- $1 today is worth a lot more than it was a decade ago. That sounds wrong if you understand inflation, until you consider that start-up costs for many businesses have decreased dramatically over that time. While software and Internet are obvious examples where some have estimated a 10x decline in cost-to-launch, other innovations like social networking channels have decreased marketing costs across all industries.
- Crowdsourcing works. In the last 2 years, the crowd-funding platform Kickstarter has helped over 7,000 projects raise a total of $40 million.
- Secondary markets are already disrupting the norm. Aptly-named SecondMarket is a registered broker-dealer that facilitates private share sales between the shareholders of high-flying private technology companies (often employees or former employees), and eager investors. This booming secondary market is allowing companies to delay their IPOs even longer by providing current employees with a mechanism to cash out some of their shares (and therefore reduce the pressure to go public). But – like #1 above – the buyers of these coveted shares in companies like Facebook and Twitter must be (drumroll) accredited investors.
The time has come to modernize our capital regulations. Making it easier to access capital will help give more innovative ideas a chance to launch.
Rocco Tarasi was an accountant, investment banker, and CFO before becoming a technology entrepreneur. He is @RoccoTarasi on Twitter.
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