Michael H. Shuman
For nearly a century local investing has been essentially illegal, and Wall Street has controlled all the investment options for the average investor. Thanks to the JOBS Act that President Obama signed in the Rose Garden last week, local investing is now legal. Like all legislation, this bill is not perfect, but for local economy advocates, it’s a great game-changer, and one we should not only be enthusiastic about but also play an active role in implementing effectively.
There has been a tremendous amount of misinformation spread about this Act, much of it by liberals I usually admire. Jim Hightower, for example, condemns the bill for “deregulating Wall Street.” In fact, the bill spells the end of Wall Street as we know it. It allows the 99% of us who are not wealthy (“unaccredited investors”) to put our money in the local businesses we love, by removing what were once impossibly difficult and expensive legal barriers. Those barriers had been so high, so poorly designed, so targeted against small business and small investors, that they have resulted in almost none of our long-term savings – now totaling $30 trillion – going into the local half of our economy. The JOBS Act ends this monopoly for good.
To me it’s ironic, and disappointing, that folks like Hightower, Robert Kuttner, and Eliot Spitzer were committed to the status quo and to maintaining Wall Street’s monopoly on capital. How could such great thinkers get this issue so wrong? Here are my top five reasons:
First, the critics misunderstood who was pushing this bill. Kuttner, for example, blames Obama for being “always eager to curry favor with Wall Street donors…” In point of fact, Wall Street lobbyists played at most a peripheral role. Small business owners and “makers,” like Woody Neiss and Paul Spinrad, led the charge. Innovative thinkers in the White House, like Doug Rand at the Office of Science and Technology Policy, played a pivotal role in shaping the President’s views about entrepreneurship. Non-Wall Street insiders like IndieGogo, a crowdfunding web site, and the nonprofit Sustainable Economies Law Center, pushed hard as well.
Second, the critics, justifiably skeptical of wholesale deregulation, don’t like to concede that any regulation has been a failure. But any honest assessment of the history of securities law would observe that we basically regulated local finance out of existence while permitting Bernie Madoffs to operate freely. For decades, the SEC has held annual meetings where small businesses have urged reforms – modest deregulations that could open up capital to small companies – and none of the suggestions have been implemented.
Here’s an example of the SEC’s intransigence: Three years ago, I recommended in a journal published by the Federal Reserve a $100 exemption from securities filings, on the argument that $100 “risked” on a small business was no more dangerous to an investor than a dinner for two at a Chinese restaurant. A year later, Jenny Kassan, co-founder of the Sustainable Economies Law Center, and Paul Spinrad of Make Magazine, sent a petition to the SEC to request the $100 exemption, and 150 people wrote letters of support. Last May, at a House hearing, the head of the SEC, Mary Schapiro, was asked if she supported this exemption, and she stonewalled, saying that the SEC was convening an internal group in the autumn to “study” the issue. It was clear that the entire securities law establishment needed to be shaken up, and to their credit, that’s what Congress and the President did in enacting the JOBS Act—Republicans and Democrats alike.
Third, the critics have tremendously exagerrated the dangers of fraud. The casual reader of the liberal critiques might conclude that the sale of fraudulent securities is now legal, and that “boiler room” operations can bilk grandma of her life savings. Yet state and federal laws against securities fraud are still in effect. In fact, the JOBS Act adds a number of new provisions for preventing fraud (through registered intermediaries). Why, moreover, should anyone be banned from spending, investing, or donating a couple of hundred dollars any damn way they please? The JOBS act exempts grandma from investing $2,000 (higher amounts, if grandma is wealthier). I was not thrilled with the $10,000 number in the original House bill – again, I originally advocated $100 – but I think $2,000 is fine. The law does not permit any business to take more than 10% of an unaccredited person’s income or wealth.
Fourth, the critics do not appreciate that there are other approaches to preventing fraud. E-Bay has all but eliminated fraud through consumer and business evaluations of one another. So have other crowdfunding sites in the United Kingdom. In other words, the SEC’s premise – that the only way to prevent fraud is by banning unaccredited investors from making their own judgments – is flat out wrong.
Perhaps their most appalling misunderstanding is how fraudulent the status quo is. Every day the SEC allows the Ric Edelman’s of the world to sell people on the stock market, promising 10-20% annual returns, when in fact the returns – once inflation and compounding are taken out – are closer to 3%. These misrepresentations have convinced Americans that putting 100% of their savings into Fortune 500 companies is safer and provides a better return than investing in local business. In reality, the stock market is becoming an increasingly dangerous and unregulated casino where trades are done by computers that cause flash crashes when they malfunction. The JOBS Act will allow local businesses to begin to compete for a fair market share of investment dollars.
I said at the outset that the bill is imperfect. For example, the bill legalizes all kinds of crowdfunding, local and nonlocal. I believe that local economy advocates now must start educating the public about the importance of favoring local investment. Our argument should be that knowing the business in which one invests – knowing the products, the entrepreneur, the workforce, etc. – is the best way to prevent fraud.
It’s worth adding that after the bill was signed yesterday, 25 of the people who were most instrumental in passing the bill – none from Wall Street, by the way – got together to discuss ways we could create internal checks and balances on the marketplace, to improve quality control and help identify hucksters. I hope that similar groups form in every community to create an honor roll of local businesses they know and trust – perhaps businesses that embrace open-book accounting – and that they then encourage residents to prioritize for their crowdfunding.
Like it or not, Wall Street’s stranglehold on investment is over. We now have a new legal landscape that we can play a pivotal role in shaping. Local economy advocates everywhere need to step up, not out.