April 20, 2013
Re: [Release No. 33-9354; File No. S7-07-12]
Just as our nation is struggling to do today, during the Great Depression of the 1930s the American political system struggled to identify the cause of complex, widespread economic devastation. After the boom of the Roaring Twenties culminated in a stock market bubble and the crash of 1929, one group in particular was blamed for causing financial losses: people who offered and sold unregulated securities to the general public.
Ostensibly to stop such a thing from ever happening again, Congress invented a new system of regulation, codified in the 1933 Securities Act and the 1934 Exchange Act, that revolved around making it illegal to raise capital from the general public without first registering interstate securities offerings through a new political commission known as the Securities and Exchange Commission.
Under the securities registration scheme created in 1934, audited financial statements along with comprehensive and truthful material information about each registered issuer are required to be filed with the SEC prior to any initial public offering. The word "initial" in this context has always been key to understanding these Depression-era securities regulations. Subsequent to the first public offering of registered securities, resales to other people have been governed by anti-fraud statutes and regulation of brokers or market makers who create the secondary markets for used, second-hand financial products.
Heavily regulating one small part of a complex system that involves millions of people who are economically-active in their lives, and keeping that one small part of the system regulated heavily over long periods of time, accomplishes only one thing: it causes criminal and civil fraud to move to a different place in the system. With initial public offerings made accessible only to people who are already wealthy and well-connected, there have been relatively few instances of fraud in IPOs since 1934 despite the high failure rate of companies that manage to conduct an IPO. Causing losses, honestly, even recklessly, for the general public is apparently a special privilege reserved for the rich. When a poor person does it we call it fraud and call for jail time. Conducting an IPO has long afforded the privileged few the free money they need in order to dominate the many economically. However, over time there have also been extreme changes in the willingness of companies to go public to get access to that free money at all because of its extreme cost and regulatory burden. Today there are almost 50% fewer public companies traded on US stock exchanges compared to the all-time high reached during the dot com bubble. With far more dollars in the the economy chasing half as many public companies one must wonder whether it is meaningful that certain stock market index valuations have recently reached new all-time highs.
The JOBS Act eliminates the prohibition on general solicitation and advertising for initial public offerings of unregistered securities. It does so first for all initial public offerings that rely on Rule 506 provided that only Accredited investors are allowed to invest. Later, as crowd funding rules are formulated and equity crowd funding platforms begin to join the SEC's regulatory regime for crowd funding pursuant to the JOBS Act there will be a limited and heavily-regulated way for non-Accredited investors to invest in unregistered initial public offerings also. Unless, as many observers expect may happen, Congress simply revokes the JOBS Act entirely with new legislation. If the JOBS Act is not revoked, many people believe that the Securities and Exchange Commission will quickly become completely unnecessary because nobody will register securities in the future.
Big public companies with such high valuations and tangible assets that their balance sheets make them look like banks frequently also behave like banks, doing things like borrowing money from new investors to pay dividends or "interest" to old investors. Any time a bank-like big company has the potential to engage in such Ponzi-like activities, and any time a bank-like big company becomes too big to fail, banking regulations should govern those bank-like companies because nobody can evaluate the risk that they pose to investors or to the public due to a scale that is too big to analyze from the outside. Too-big-to-fail bank-like companies should perhaps be further required to allow Federal banking regulators to inspect and audit daily operations. It would then be much more difficult for big bank-like companies to commit fraud or mislead markets as to their true economic value at any given time. Waiting for auditors to admit that they helped cook the books and signed off on fraudulent audits is not a reasonable nor effective method of regulation of big bank-like public companies.
Likewise, threatening to put elderly corporate executives in prison for the remainder of their lives if they violate the Sarbanes Oxley Act has, thus far, not deterred very many elderly white collar criminals from engaging in their financial crimes. The majority of Sarbox doesn't even apply to anyone who runs a company or issues securities that are not registered with the SEC, therefore the ability to avoid Sarbox-type criminal risk exposure yet successfully raise capital in an initial public offering of unregistered securities is a primary concern for everyone who wants to raise capital from the public. The JOBS Act has explicitly granted everyone that freedom, restoring what was unlawfully taken away from all Americans during the Great Depression. When regulated banks and other too-big-to-fail bank-like companies in the United States can operate with impunity and with bailouts to save them from themselves when they make criminal mistakes which harm millions of people, but a sole proprietor who just needs the freedom to raise seed capital from the public can't legally solicit investors other than friends and family or other people with whom the securities issuer has a "substantive pre-existing relationship" it is easy for everyone to agree that the current system of securities regulation is not a reasonable method of protecting anyone and its costs long ago destroyed all of its potential benefits.
For reasons that I still do not understand, a presumption of guilt exists today when anyone who is not already wealthy or anyone who does not have the blessing and material support of a big bank-like company attempts to raise capital in the United States. This presumption of guilt extends even to the unborn, to everyone who will ever live in the future, for the SEC broadly prohibits everyone from attempting to raise capital from strangers through their own effort during their lives, requiring everyone to seek capital only through established bank-like companies such as the ones that were bailed out by taxpayers during the financial crisis. (And yes, even Goldman Sachs required a bailout -- they might not have survived if AIG had been allowed to fail!) Everyone who is unlucky enough to be born without "substantive pre-existing business relationships" is a potential "fraudster" in the eyes of the SEC. In anticipation that young, poor people will attempt to defraud old, rich people, and that there is no way to prevent this from happening if the prohibition against general solicitation and advertising is removed, the former Chairman of the SEC, Mary Schapiro, refused to comply with Federal law which required her to enact a revised Rule 506 pursuant to the JOBS Act by the Fourth of July, 2012.
My best guess as to why there is such a presumption of guilt, and why it has been so widely institutionalized in American finance, across nearly all states and within every Federal institution, is that the investment banking industry and the powerful special interests such as the AARP which lobby lawmakers seeking to "protect the market" have a near-monopoly on the way the economy functions today by virtue of the political power that Federal welfare programs have amassed during the same time period that the investment banking industry has grown up to be "too big to fail." The Social Security Act was enacted in 1935, and it cannot be a coincidence that the 1934 Exchange Act and the 1935 Social Security Act have co-created a seemingly-all-powerful juggernaut of socioeconomic political belief that says, essentially, "the public financial markets are regulated by, and for the benefit of, the investment banking industry, for the purpose of ensuring the solvency and political power of the welfare state."
The rationale behind this belief system is very compelling. Knowing that the lesson of the Great Depression was that the Social Security system must exist and must not be allowed to fail, and having no other means of influence over the economic decisions of Americans (so as to guarantee that Social Security will never fail) other than through the mechanisms of banking and market regulation, legislators seem to have, until now, accepted an ugly tradeoff -- in exchange for removing constitutionally-protected rights, including the right to assemble and to speak in public (for the purpose of forming capital, not just to meaninglessly protest against bad government or fight market abuses but to actually FORM CAPITAL in order to DO SOMETHING about the problems oneself), for the benefit of investment bankers and other special interests funded by bank-like companies, the too-big-to-fail institutions have tacitly and at times explicitly promised that they will provide financial support without limit to the public policy objectives of the Federal government, wherever such objectives are achievable through the mechanisms of "free market" finance.
This seems to be the best explanation for why it made sense to bail out the too-big-to-fail bank-like companies when they destroyed the global economy. It also explains why there is such political resistance to the JOBS Act -- if the bank-like companies had not been bailed out, or if poor people are empowered to raise capital by removing legal prohibitions and dropping the stigma of "fraudster" that is being used to malign everyone who is not already wealthy but who would like the opportunity to raise capital like wealthy people do, then somebody OTHER THAN MEMBERS OF THE CURRENT ESTABLISHMENT WHO PROMISE TO PERPETUATE THE STATUS QUO will naturally end up reinventing the entire American experiment around fundamentally-different beliefs about what the proper role of banks, bankers, bank-like companies, and old people, should be in the future of American society. This is a risk that Mary Schapiro was not willing to take, at least not one she was willing to accept the blame (or the credit) for helping to create.
It is disgusting beyond words that Mary Schapiro, the former CEO of FINRA, who was also the former Chairman of the Commodity Futures Trading Commission, refused to comply with Federal law in 2012 and resigned rather than attempting to repair her legacy of mistakes, self-serving abuse of others, and poor judgment. The economic injustice of prohibiting freedom of capital formation only benefits the friends in high places whose interests Mary Schapiro obviously served during her profitable career. There is no rational basis for the belief that retirees are going to be defrauded en masse by "fraudsters" when everyone is legally permitted to engage in general solicitation and advertising of securities offerings, other than the rationale that says "old people are crazy, and lonely, and wealthy, and they are home all day long so they are available to answer the phone and to read their mail so fraudsters will target them with fraudulent initial public offerings and nobody will be there to save the crazy old people from themselves (now that Mary Schapiro has resigned the position of protector)."
Former Wyoming Senator Alan K. Simpson, writing to the California Alliance for Retired Americans on April 7, 2012, just two days after the JOBS Act was signed into law by President Obama, had this to say about the kind of thinking and political nonsense that seems to have steered policy at FINRA and the SEC from the time that Mary Schapiro became Vice Chairman of NASD in 2002: "What a wretched group of seniors you must be to use the faces of the very people that we are trying to save, while the 'greedy geezers' like you use them as a tool and a front for your nefarious bunch of crap. You must feel some sense of shame for shoveling out this bullshit."
There can be no dispute about the fact that some old people are crazy. When crazy is combined with a dysfunctional family system, money and assets that are supposed to be conserved for retirement actually are very likely to be stolen from retirees. My own grandmother was tricked into giving her silicon valley home to actual criminals. She was ridiculed by her daughters for her foolishness and she died broke and alone because nobody in her family was willing or able to save her from herself after she had inflicted a lifetime of pain, suffering and emotional and physical abuse on her victims, her offspring.
Protecting the market for crazy is no longer our national priority. Since Mary Schapiro removed herself from the equation, to retire comfortably in her piles of money, with her $9,000,000.00 pay package in 2008 including her retirement benefits from FINRA, which could certainly have been donated to the victims of Madoff instead as a token apology for her failure to do a competent job of "protecting investors" in the past, plus whatever she was able to save each year from her multimillion-dollar salary (prior to joining the SEC for her grand finale of abusive mistreatment of the economy she gave birth to over the course of her career) the SEC has a new Chairman, Mary Jo White, the 31st person to hold the title in a legacy that goes straight back to Joseph P. Kennedy, Sr., notorious short-seller during the stock market crash of 1929, and Democrat. The 31st Chairman of the SEC now has a duty to uphold the law and enact the revised Rule 506 and the rest of the JOBS Act without delay.
There will be new problems, real problems, caused by restoring the right of everyone, everywhere, to solicit everyone else for capital. Senior citizens might become productive in the economy again, investing directly in new companies instead of buying used shares from a broker which only enriches the big bank-like companies and does absolutely nothing to help the company that issued the shares in a previous initial public offering. Brokers may find that they start to go out of business because nobody needs them anymore. Some people will be defrauded, and law enforcement will try to help but probably not because most financial fraud does not rise to the level of a criminal act so law enforcement will have to try to explain (sometimes to crazy people who are angry about their own stupidity) that no law enforcement officer can do anything to help somebody who was robbed, even in a premeditated fashion, if the robber accomplishes the robbery by creating a civil contract and a civil dispute, instead of a violent form of crime, in the process.
People will need better ways to crowd source information about the people who are offering to sell securities to the public. For all the political posturing that the legacy SEC espoused about the need for "bad boy" and "bad actor" safeguards for investors, nobody at the SEC ever bothered to create a centralized SEC'S OFFENDER REGISTRY where photographs and profile information including last known address and aliases and so forth of known bad actors could be published for all to see. Heck, such a registry could be created for free using Google+ by somebody at the SEC and it could just grow through online community investor activist participation, this doesn't even require any extra budget for SEC annual operations.
Education, skill, investing experience, healthy family systems that are every person's first line of defense against self-inflicted harm including avoidable financial loss, and new digital government tools that are integrated into social media, are the correct safeguards against every risk factor or fear-mongering scenario that Mary Schapiro and others of her political ilk are shoveling. There will obviously be very substantial new opportunities for free market solutions, including new technology and new social platforms, as well as new associations, financial literacy products and services, forensics clubs, and financial service providers to grow up in the new environment of freedom for job creators and liberty for all creative capital formation that is being (painfully) birthed in 2013.
Refusing to reform bad-acting institutions of government and finance for nonsensical political reasons is a nefarious bunch of crap. I hope the Commission has the wisdom to create economic growth and stability through protecting freedom instead of through racketeering and protection money schemes. The Federal government does not need to pay protection money to the investment bankers in order to keep Social Security in existence. It is time to call their bluff and risk some broken legs, because the economy is not the creation nor the exclusive property of the bankers. The economy is of and by the people.
Co-Founder and CEO
Public Startup Company, Inc.