Saturday, April 9, 2011

At last! Sanity in start-up investment regulation?

The SEC is looking at fixing their past mistakes that have stifled start-up investment.

Boy, are changes ever needed! The SEC has implemented increasingly burdensome rules to try to prevent fraudsters taking advantage of the gullible over the past 15 years. The real result has been a stifling of start-up investment. Their philosophy has been that, for a start-up, the innovators should hit up family or friends, or pitch an angel venture capitalist firm. Problem is, only 1 in 500 new ideas get funded by angels, and for anybody who doesn't have wealthy family or friends, the problems are almost insurmountable.

This has stifled innovation. The backbone of the US is small business, and this is also the breeding ground for what will become big business in the future. Great ideas with huge market potential (Google, Facebook, etc) come from these small, innovative bases.

When we look at the widening US income inequality, it is driven by this inability for the little guy to contribute to the innovative infrastructure that used to exist before all these crazy new rules. The big investors in the US can pick and choose from the wealth of new inventions, but the small investor can't even get a look-in. Further, it prevents the average Joe or Joan from tossing $100 at some new idea that they think has great merit, unless they simply want to make it a gift.

The obvious problem is that innovators have to seek investment elsewhere in the world. New, creative product ideas depart US shores, and if they are successful in the world, they come back to the US as imports, a further cash drain to overseas companies. The idea of starting a new business in the US is currently a ridiculous scenario. Not only do current SEC regulations create huge barriers, but further bureaucracy at State, County, and City levels, with their attendant registration costs and micro-sales-tax approaches create bewildering administrative complexity. The State of California passes some 1,200 new laws a year, and many of them are poorly conceived, the bad ones never being repealed.

It is only a matter of time before a foreign Facebook-type success is the direct result of the current rules.

For the SEC, I applaud the change. But I would severely kick them for being 15 years late in recognizing the incredible damage their bureaucracy has done to the entire fabric of the American start-up environment.

Now, if we can get the rest of the Government bureaucracies to wake up: the State Franchise Tax Boards, the IRS, the business climate in cities and counties, maybe we can re-create the free space for new, small companies to join the Darwinian struggle for survival.