The Law Of Unintended Consequences
One of the great things about getting older is you see things over and over again and you start to understand. That’s called wisdom I guess. One thing I have seen over and over is that the best of intentions often lead to unintended consequences that are exactly the opposite of what the good intentioned people wanted to happen. I like to call that the “law of unintended consequences” and it goes like this:
Whatever it is that you intend to do, you will likely do the exact opposite
I was reminded of that when I read Marc Andreessen’s comments on Sarbanes Oxley (and IPOs in general) in this interview in Vox. Marc said:
The irony of Sarbanes-Oxley was that it was intended to prevent more Enrons and Worldcoms but it ended up being a gigantic tax on small companies.
Sarbanes Oxley and Regulation FD were an attempt to make the stock market safer for the average investor. What it did is make the stock market less attractive for the average investor by removing the best investment opportunities from the market.
Marc lists investments like Netscape, Microsoft, Oracle, HP, and IBM as companies that went public at relatively small valuations and grew their valuations in the public markets. I would add Apple, eBay, Yahoo!, Cisco, and a host of other silicon valley success stories to that list.
The Vox piece points out that:
Twitter waited until it was worth about $25 billion before it went public last year. Facebook was worth more than $100 billion when it had its IPO in 2012.
Dropbox did a private financing recently at $10bn, Uber did a private financing recently at $17bn, Airbnb recently did a private financing recently at $10bn. All three of those deals could have and would have been an IPO in the 1980s or 1990s.
The public markets are not as attractive to emerging high growth companies as they used to be. The private markets have accumulated enough capital to support the growth needs of high potential companies and IPOs are no longer being used to finance growth. They have now been relegated to liquidity paths for the most part. And Marc explains why in this part of the interview:
But for young companies, everything is connected: stock price, employee morale, ability to recruit new employees, ability to retain employees, ability to sign customer contracts, ability to raise debt financing, ability to deal with regulators. Every single part of your business ends up being connected and it ends up being tied back to your stock price.
I have lived through this (being public while you are still building the company) and it is not easy. You really want to wait until you’ve got everything very buttoned up before you run the gauntlet that is the public markets.
Of course the important question is can we go back to the way it was before the federal government messed things up with all of their good intentions. I think the answer is no. We are not going to put that genie back in the bottle.
But I do think there is another way to fix this mess and it is already happening. As my partner Albert likes to say “the line between the public markets and the private markets are blurring”. Platforms like AngelList and our portfolio company CircleUp are allowing individual investors the opportunity to invest in startups and the amount of capital that is being invested on these platforms is growing very quickly.
If the regulators keep their hands off these new emerging markets and let them develop naturally, we will eventually fix this problem. Let’s hope they have learned their lesson from the fuckup that was Sarbanes Oxley and Reg FD and don’t try to help us out again.
Well, “Platforms like AngelList and our portfolio company CircleUp are allowing individual investors the opportunity to invest in startups…” …are only available to accredited investors. So, that’s not helpful to the average Joe.
that’s right. but my hope is these platforms will grow in importance and there will be an outcry to let the average person invest on them.
Thinking that Uber, Airbnb, et al didn’t care about regulation when they started. Maybe for industries like finance and farming, startup and ignore the bureaucrats. Get big enough, and they have to make room for you.
What’s right is what’s working does at time seem like the truth.
That’s the key. We simply need to rebuild the public markets on a new platform, with the key differentiator from day one being basic safeguards but not overwhelming regulation. Here’s hoping it happens.
It’s expensive to compete. Hard to startup an exchange.
No question. Very hard problem.
I hope you’re right, ’cause it’s unAmerican. Unlimited contributions to political campaigns is ok, but this isn’t?!
There you go again. “this is ok but that isn’t”.
Spend some time with “average” people and then come back and tell me you think they should be throwing money at this. (Which is not the same as saying I think they should throw money in the stock market or real estate by the way..)
It is indeed pretty insane that we still have policies encouraging leveraged home ownership, student debt that follows you through bankruptcy, and restricted participation in an asset class that at worst can go to 0.Returning the public markets to a place where they’re a viable option for small companies to raise capital seems like a longer, more arduous, and less likely outcome than seeing a continued trend of increased transparency and liquidity that AngelList, CircleUp, etc. are bringing to private markets.
I’m with ya. I have neighbors that lost their houses…yeah, plural…2 houses. So it’s OK to expose unaccredited investors to that risk, but they can’t invest $5,000 in a startup?
That’s the same argument that people use to try and say pot should be legal by comparing it to alcohol and/or cigarettes which are “much worse and/or the same”.Or with the vietnam war “they can’t vote but hey you draft them” etc.One has nothing to do with the other.People need to be prevented from their folly plain and simple.
Not only are they only available to accredited investors, we need more instruments such as mutual funds to get the average person in – they don’t have the mindset/time to scour AngelList
This touches on my favorite point from the Vox piece:@pmarca: “Most American retirement savings is invested in the public stock market. Most Americans can’t invest in private companies and most Americans can’t invest in venture capital and private equity funds. They’re actually prohibited from doing so by the SEC. If you both prohibit them from investing in private growth and wire the market so they can’t get into public growth, then you can’t be invested in growth.”I yearn for the day when “accredited investor” is an obsolete term. Until then, I suppose the best choice to invest in growth is to build a company myself. Challenge accepted.
I’m with ya.But likely more people will just drop $5k at a casino.
The casino is actually safer. You get quick results of losing and see you probably will never win. (As long as you don’t get intermittently reinforced or addicted that is). Plus it’s already clearly labeled “gambling”.Now company investing is over time. Different animal psychologically reinforcement wise.Even cluefull angel investors have their money spread over multiple investments. Your aunt probably isn’t going to do better than that unless she can add value to the investments because it’s something that she knows about.
Getting quick results of losing doesn’t stop many people from making terrible and uninformed decisions at the black jack table.Put it this way: I can think of no other arena where decision making is outlawed simply on the grounds that it may be uninformed.
Average person is absolutely to stupid and/or uneducated and greedy and wanting quick easy results to do anything investment wise. They do need to be protected no question about that.
I’m in the same camp – so what are you building?
Real estate portfolio. You?
The public market structure is totally screwed up. The stock market should exist so companies can get growth capital and the public can participate in that growth. But, regulatory and tax structure incent companies away from public markets. Futures markets are less screwed up, but they are screwed up as well. Starting to see private markets for hedging and risk transfer crop up.Sarbox was like most government programs. Totally screwed up and didn’t stop what it intended to stop while layering on massive cost. Crony capitalists like Gov. Jon Corzine get away with ripping off billions from their customers, while less connected companies like Gibson guitar get punished.
At the time that SOX passed, I was CEO of a publicly traded company and I will tell you it decimated the markets and quadrupled our compliance costs. The worst thing is it was a carpet bomb not a smart bomb. It absolutely fits your definition of the “Law of Unintended Consequences.”SOX should have been repealed long ago as the ham-fisted remedy that it was. But the good news, as you started to say, is that the reform to Reg D under the JOBS Act coupled with crowdfunding are opening up new market platforms for entrepreneurs to offer stock privately directly to investors. This field is going to grow and it is an affirmation that the entrepreneurs of the world always find a way to solve problems and go to market… even in spite of ham-fisted legislation.
New and liquid marketplaces for private shares are needed. Right now, Reg. D offerings nearly quadruple (in dollars) the amount raised in public equity markets and are nearly equal to public debt markets. Unregistered offerings on the whole are greater than those that are registered ($1.7T versus $1.2T). It would be interesting to see if SOX was an inflection point for this trend.
Perhaps now folks in both parties will wake up and realize that you cannot legislate evil out of the world with more laws. What they missed is that Enron and WorldCom broke all the laws, and SarbOx wouldn’t have changed that. Evil will still happen. Put the people in jail and move on.The resulting mess is a far greater reason for “the rich getting richer” than any of the tripe that Piketty tried to manufacture in his book. We have systematically put all of the good investment opportunities and value creation out of reach of average investors.
sadly you are right
“Average investor” I find that a funny term and can’t figure out who that is. In my mind part of Sarbanes-Oxley’s problem is that “average investor” means the average of every person who has invested in the market. I think that’s a big mistake and think most individuals should not be involved in stock market picking at all. We just don’t have the knowledge to do it well. By all means invest but have someone either pick for you or stick with index funds. In other words, I’m not certain the stock market should really be for “average investors” at all.
Other terms I could have used were “everyday investor” or “typical investor.” Effectively, I mean access by ALL investors, including the ones who are unaccredited. We are systematically discriminating against the non-rich by barring them from the best investments under the guise of “protecting” them.
Fred used that term, too. The “everyday” investor is already barred from the best investments by their lack of knowledge and time to understand the market and those companies.
That same investor has the same lack of knowledge and time to understand publicly traded companies.We are starting to head back to a feudal system. “The best way to ‘protect’ the vassals is not to let them own land, my lord.”
Point well taken and definitely not my intent at all. All stocks are speculative, some more so than others, especially for those that don’t have the time and inclination to really know what’s happening.
Exactly right. Could not agree more. Most investors should stick with a cheap index fund. But barring investors from investment choices is not working.I say this as someone who has built a startup while NEVER doing crowd funding. I’ve stuck exclusively to accrediteds and always plan to do so. 🙂
Why is it not working? Companies are getting all the capital they need. “Buying hot start-up stocks” is a crazy policy to deal with the wealth and employment problems the US has.
It’s not about “hot startup stocks” — it’s about the feudal system of reserving the value creation for the lords and ladies and keeping the vassals out in the cold.It’s true. The easiest way to protect consumers from investment losses is to not allow them to invest, just like the easiest way to protect black people from investment losses was to keep them enslaved and not allow them to own property.
Ummm, yes it is about “hot startup stocks.” Retail investors have lots of opportunities to invest and lose money, as they do again and again.Just not in overvalued trendy startup stock, which means private money (VC, PE) will be left holding the bag this time, which is why they are crying.I think you bringing up slavery and monarchy means I win. thank yous!
Nobody is barred from subscribing to Morningstar and reading the WSJ. Just takes a willingness .
and cash – neither are free
Morningstar and WSJ are available in many public libraries.Here in Seattle, you don’t even have to bother going to the library. You can access them online with your (free) library card and PIN.
Reading Morningstar & the WSJ does not allow me to be a USV LP.
Ella, yes you are correct, but when companies stay private longer they also cannot be included in most index funds, so “average investors” cannot participate at all.
That is true but I’m not certain average investors should be investing in highly speculative stocks to begin with. Maybe that is for the best. (Granted, I wish there were better ways to accomplish that then Sarbanes-Oxley, though.)
i’m reading picketty – i don’t see tripe, I do see correlations and not causations.And if I recall, people said that about Keynes too…
That was a bit of a leap. Let’s just call it a hypothethis.
The Economist, which I’d argue isn’t exactly a socialist type of publication, summed up the ‘scandal’ like this:All told, Mr Piketty is guilty of sloppiness (certainly in his notation), and perhaps of some errors. But there is little evidence, so far, to support the serious charge of cherry-picking statistics. Nor have his findings that wealth concentration is, once again, rising been fatally undermined.
Piketty’s work is riddled with errors and obfuscations. It’s an embarrassment to academia.
I don’t want to wear the Kid’s clothese, but isn’t the subprime crisis also the consequence of policies established 20+ years before which aimed to helping *anyone* become a homeowner? In the end, hasn’t this put more people on the streets?
Blogger Steve Sailer has been arguing that for years (except the last part, perhaps). He noted last year that the NY Times had finally gotten wise to it: http://isteve.blogspot.com/…
Lemme cc that for you. @kidmercury:disqus
its complicated. I don’t think it is just polices as much as also the previous tech boom killing other low risk/high reward places to stick the global pool of money into
Is this any better in other countries? Can we globalize our way out of this?
Thoughtful.. and I agree with this.Just a heads up as I didn’t realize that you funded Circle Up. A great idea but they are exclusive by definition and feel like an old boys club a bit. Accredited investors on the investment side (understand this) and rather poor followup to apps to be considered for listing (no excuse for this of course).
great feedback Arnold. i will pass it on.
This cycle of regs and then business figuring a new way is our history. Regs may not appeal to too many and are seen as impediments. And, I’ve always been negative on them but since our most recent Crash I’m not so sure we can live safely without some regs good and bad.
you need some. but as few as possible
The fall out from the crash was the big banks who perpetuated the shell game got bigger. They control 37% more assets post crash than they did pre-crash, with less competition courtesy of Dodd-Frank.
money seeks higher ground during bad storms and is still there
I found the interview with pmarca a good but sad read. Here’s a thought. With negative real interest rates, and equity returns flat, did SOX+Fed drive the real estate bubble? http://blog.atomicinc.com/2…
Now that the private market has the resources to fund these massive rounds to the tune of billions of dollars, how does that change expectations of an exit from a VC perspective?I would think that especially those that participated in earlier rounds would anticipate an IPO when the company gets to a valuation in the billions but instead are faced with another round of financing.
these rounds often include a lot of secondary. we sold $250mm of Twitter stock privately after i left the board. the company was involved in those transactions and they hand picked the investors who bought from us. we probably took a bit less than “market” but it was important to us that the company be comfortable with the investors it was getting in its cap table.
Thanks for the clarification, it makes sense to get other investors in as a company is making it up the “stairs” of funding.Glad twitter raised those rounds, USV got a nice return and Twitter had funds to buy one of our incubator graduates today — TapCommerce (Co-founded by NYU alums!)
Fred, as someone who has been politically active on a few different issues in recent years, how does the law of unintended consequences inform your advocacy?
we advocate for less not more and super lightweight and simple rules
Why can we not go back? Is it that the political system is so corrupted? Or is it that the public wants the heavily regulated but no growth environment, and thus the political system just reflects it?
it’s a one way street with regulators
Agreed. Regulators are as subject to greed, self-interest, avarice, narrow mindset, groupthink and corruption as the next person – politician, artist or businessperson. But regulators are subject to politicians, who are subject to the public.
The only way back is to disband the regulator.
Just repeal the enabling legislation.
And that has happened when?
Never unless it’s a coup or revolution.
The odds are not usually so good for those. The US one was a rare exception for working out, and even that came close to turning on itself. Big debt of gratitude to Gen. Washington
I’ll be the dissenting voice here.Without arguing that SarbOx was a net positive, maybe companies also prefer being private because they can retain much stronger control over their activities. If SarbOx disappeared tomorrow do you think Travis Kalanick is going to decide to go public and put Uber’s valuation in the hands of millions of buyers and sellers, or is he going to keep it in the hands of people he can pick and choose?Also, as to the “making the market less attractive” comment, DJIA is up 5.5% per year since 7/30/2002, S&P500 is up 6.5% per year. Those are surprisingly close to the historical 7-8% annual averages considering the economic disaster that was 2008/09. At the same time, Shiller Index was up less than 2% per year, interest rates rarely cracked 1%, and 10yr treasuries went from 5.5% to 2.5%. So the market still looks pretty attractive compared to lots of other options.
Ryan, I am good with people choosing to remain private. But if there are other who would choose to go public – and thus benefit themselves and the investing public – but are swayed not to by the sheer expense of SOX?
It’s a bitch to manage I can attest.I was an exec during the rollout of it, one after.
True, sir. And the attractiveness of it is inversely proportional to the “bitchness” level. So why make it “bitcher”?
Aw, Ryan, come on. Picking 7/2002 when SNP was at its worst trough to today is unfair. It’s only up 30% cumulative over last 14 years, which is basically flat. Considering that inflation ran a cumulative 38% over the same period….
When the Fed went to 0%, markets had no choice but go up since the opportunity costs and risk/reward ratios changed. Had nothing to do with Sarbox. Sarbox triples accounting costs.
For the record, 7/30/2002 wasn’t cherry-picked, it was the day that SOX became law in America.If SOX is supposedly making the public markets less attractive to investors, we should expect to see reduced returns since implementation, no?
No. Yes, except for all the other unpredictable, independent exogenous factors which can provide plenty of noise to swamp the effects.Generally, meaningful tracking from cause to effect is challenging in uncontrolled situations. This is (‘appears’ to be!) one reason why ‘social science’ has a heck of a time getting solid results.
Haha! Ok, fair enough on the date. Although, to be truly fair, the day it became law is not the day that matters; it is the day that investors believe that it (or something like it) will become law.But again, the market was near a low at that point. It might have corrected anyways at some point. The questions really are:1- What would the market have done in the absence of SOX? (control group)2- What did the market do over the long term, as opposed to right after SOX? Here, the verdict is clear: loss in real terms.3- Since macro is just the sum of all micro activities, what is happening with IPOs, and what are the real individuals who make those decisions saying about their behaviours. This was one of the key points of pmarca’s interview.
I’m also having trouble connecting Uber’s and/or Airbnb’s failure to IPO to Sarbanes Oxley.
There is nothing more permanent than a temporary Government Regulations – Milton Friedman
.Haha, best ever!Well played.JLM.
there was no Government in 1788, it was a monarch and in a democracy the above holds…
there’s always a power behind the throne of any monarchy. i live in the UK 🙂
The purpose of banking regulations is to oblige banks “to be more circumspect in their conduct, and by not extending their currency beyond its due proportion to their cash, to guard themselves against the ruinous runs, which the rivalship of so many competitors is always ready to bring upon them”Adam Smith, 1776
No way they have learned their lesson.
The realities of the market have changed (whether organically or due in some part to SOX & other macro events) but the regulation stays the same.
Is this not in a sense the unbundling of investment markets
Admit it, Fred…You sat down to write this post and wanted to Tweetstorm it instead. Amirite?
Did not consider that
Fun data point.If you had purchased $1,000 of YHOO on the first day it traded you would now have $47430 (although the smart money got out in early 2000 with 80K)If you had purchased $1,000 of GOOG on the first day it traded you would now have $10630Given how late companies now IPO I don’t ever see the retail investor in Facebook or Twitter, let alone AirBnB or Uber or Square will ever see much better than a 2X
Discriminatory like a stacked deck of cards.
Your $GOOG calculation has to be incorrect no? http://money.cnn.com/2004/0… If you take a Warren Buffett strategy, and buy management teams in great companies, hold for the long haul, you will do better than 2X. But, an individual can’t beat the market so you are better off holding a no load S&P fund
First price the public could get GOOG at was (split adjusted) about $54 it’s now at ~ $575. That’s about a 10.6Xhttps://www.google.com/fina…
If you take a Warren Buffett strategy, and buy management teams in great companies, hold for the long haul”You” and “Warren” are two different animals.I think that’s a typical media creation and what Warren likes to bandy about as well the folksy humble image. The devil is in the actual details with all of this. Are there people who invest in bad management teams? Besides what’s a “great” company anyway that’s pretty broad. Isn’t that all priced into the market already?It’s like saying that you win ball games by hiring great players and having good strategy. Thanks for the advice and insight I didn’t know that.Lastly, it’s different to be the Yankees (Buffett) vs. anyone else. It’s been so long since Buffett was a nobody he gets to take advantage of situations that others would never be able to.That said the key to success in a lot of industries is spending enough time in that industry that you end up being the one getting the low hanging fruit passed by you to be able to take advantage of that by people to lazy to shop the market and expend effort (only one factor not everything obviously). Merely because of being connected by hard work and over time and having a good reputation as a go to guy that can get a deal done and doesn’t waste people’s time.
Apple is 20x. S&P 500 is 3x what it was in 2008. IBM is 3x what it was in 2009.10x over 20 year period. No shortage of 2x+ opportunities for retail investors.Maybe the problem is that VCs know they are overpaying and want to find some other chump to be left holding the bag when the music stops.
If the public will pay 50 x sales, VC’c only job is to have bought at some factor less.
> find some other chump to be left holding the bag when the music stopsA joke during the 1999 dot com bubble was, “Never be between a VC and the door when the lockup period is over.”! :-)!
Best insight from this post. 10 bangers from current IPO prices don’t seem like they exist
I slightly disagree with the law. They did not make it with intention. They did it out of fear of another Enron, worldcom etc. They focused too much on the fear and too little on the purpose they wanted to create such as an efficient capital market with high transparency and few transaction cost. That is when you reach the opposite consequence! Focus on what you don’t want.Lets hope the private financing funding market will self regulate well. Unfortunately history show that the market need some governing body. I think we need a private industry association to keep an sharp eye over the private markets.
Government regulation and “programs” are full of unintended consequences.”Government help” continues to be a big oxymoron.
Worst words you can hear, I am from the government and I am here to help-Ronald Reagan.
How about – I am from the Health Insurance Company and I’m here to help… or – I’m from the Telecom Company… or, I am from the Wall Street Bank… ah…?To be clear – I am not pro-regulation-to-death; I am against anything beyond a certain scale. Big is bad, in my book (including gov and nonprofits).
In some cases, you are free to choose not to use them. But we can’t ignore the government.
True – you are free to be sick and die… not have an Internet connection… not keep your money in the bank.Again… not saying anything good about the government, just pointing the stupidity of thinking that the government is the sole problem.The problem is a self-perpetuating “elite” using every possible system of privilege for their own kids – in all organizational forms (biz, gov, edu, nonprofit)… with special role of very big organizations where there is a total disconnect between purported stakeholders/owners and the executive nomenclature.
I said big is bad – https://twitter.com/takingp…
Fred, I have been arguing with my friends for some time that we just need to start repealing laws. My argument has been we need to repeal like 2/3rds of what it is on the books. Everyone thinks I am nuts, of course. But seriously, we just have too many. Too many rules. What good does it do anybody? In my opinion, more harm than good. Let’s repeal most of them.
I don’t think you’re nuts. I think you’re absolutely onto something.
I think if this ever happens it will be the laws that are very old and obvious and don’t matter anyway. Like “there’s a 1850 law that says you can’t stand next to a horse while drinking a cup of water at 4:00pm”.In order for anything worthwhile to happen there would have to be a non partisan group that provides the framework and does the heavy lifting to present the case regarding which laws should be repealed, who would be affected pro and con, and then a way to actually implement it and make it happen. Of course if you did that there would be unintended consequences.Perhaps easier is something similar to what the government does with marijuana which is essentially a hands off and “do not prosecute” situation. (Which I’m not in favor of by the way).
.The big idea — these two notions are not mutually exclusively.JLM.
We can no more repeal anything that is worthless than pass something that is essential (including repeals).They key problem is structural/organizational.
.The problem with repealing any law is the Congress does not even understand the laws it passes.Does anyone really understand Obamacare and how it works? With 43 and counting revisions since its passage? No.The Congress does not write law. The K St crowd does. The think tanks do.What the Congress does understand is governing philosophyWhy should dying be a taxable event? Forget the ramifications of wealth or rates or such nonsense but why as a matter of taxation should dying be a taxable event? It is not a commercial or mercantile event, right? It is a tragedy in which the person being taxed has been literally “taxed to death”? No?One’s estate is composed exclusively of “after tax” dollars by definition. What did these dollars do to wander into the purview of the tax man for a second bite of the apple and why?It was originally intended to temporarily fund wars. That made some sense.It is not the law, it is the Rules which are the problem. The Rules are obscene. A ten page law generates 10,000 pages of Rules.JLM.
how would you get k street out of congress?
.Couple of Ranger companies out of the question?Public funding of elections. Public debates.Law not directed toward elections but legislation.JLM.
not going to happen – as dc is wealthy for a reason.
Why should not the inheritance of wealth be a taxable event? It’s government that assures, or tries to assure, that the inheritance in fact does go to the legitimate heirs. Should the relatively-impecunious rest of us pick up the tab so that the 1-per-ten thousand can have their inheritance without having to pay taxes? As far as “after-tax”, that is increasingly not the case as Congress, the IRS, SCOTUS, and I don’t know who else increasingly bend to the will of the plutocrats, and in some cases kleptocrats. K street is only one of the many agents used to bring about this subjection. It may sound cynical, but it appears that some wealthy people have only one moral scruple: that nothing and no one should stand in the way of their increasing wealth and power.
.That is one of the shallowest defenses of the death tax I have ever heard.Again, what is the intellectual basis for making death a taxable event?Because YOU are not wealthy?You use a lot of jargon which is meaningless.We are a nation of private property as enshrined in the Constitution.We need to stop feeling entitled or awkward about obtaining the just rewards of our labor.I work hard, I prosper. I pay taxes once on my wealth when I earn it. I own property. It is only my business as to how I dispose of it.Want to get wealthy? Come to work early, stay late, work hard. save and invest your money. It is not a difficult formula to understand.JLM.
> Again, what is the intellectual basis for making death a taxable event?Easy: A rich, dead person had the money; many poor people don’t and want it; and many politicians want some votes of many poor people instead of just a few rich people.Can see something similar on the plains of Africa: A cheetah makes a kill and isn’t very large or strong, and several unscrupulous, hungry hyenas gang up and steal the kill.No, no, no: certainly I’m not saying that politicians are like gangs of unscrupulous, hungry hyenas. That would be a gross insult — to hyenas!Of course, some vultures might also steal the kill, but I don’t want to insult vultures either!Leopards have an advantage: They are a little larger and quickly drag and carry each kill to maybe 30 feet off the ground to rest on the branches of a tree. I.e., they make their kill inaccessible to hyenas and vultures. Hmm …. Off shore accounts? A big box of gold coins hidden behind a wall in the basement? Bitcoin?Lions? They are strong; don’t mess with a hungry, feeding lion!We’re talking the ‘law’ of the plains of Africa. There should be some better law? Let’s see: When the asteroid hit 65 million years ago, mammals were something like present mice, and it took nearly all those 65 million years to get us to cheetahs, leopards, lions, hyenas, vultures, etc. Significant life got started on earth about, what, 750 million years ago? Life started on earth about 4.5 billion years ago. Earth started about 5 billion years ago. The big bang was about 14.7 billion years ago.Humans? They walked out of Africa about 40,000 years ago. Soon some went to Western Europe; some went to Japan, and both lines have had essentially no genetic interactions since. Now, look at a pretty girl in France and one in Japan and see that they are an awful lot alike, amazingly alike in construction and even behavior — they are both very much ‘girls’. Okay, then, either one of those two girls has to be closer to their common ancestor 40,000 years ago than they are to each other now so that both of them are darned close to their common ancestor 40,000 years ago. So, want to know what girls 40,000 years ago looked and acted like: Sure, just take what is in common now between that girl in France and that one in Japan. Even behavior! So, net, 40,000 years ago we had essentially modern humans. More generally, once we got modern humans, they went a long time without changing much. So, net, the rates of change are so slow that there hasn’t been a lot of time for humans to develop farther than we see now. So, don’t expect humans and their ‘laws’ to be as up to date as, say, the latest iPhone!There was at least one star that formed, by nuclear fusion burned all its hydrogen fuel down to iron, had its iron core collapse under its own gravity, and exploded providing the matter for both earth and our sun. So, that star that exploded might have been a ‘first generation’ star since the big bang and, thus, started to condense out of gas at the time of the big bang.So, the star that provided the matter for earth and our sun started maybe at the big bang itself, and ballpark both earth and the first life on earth started about 1/3rd of the way back to the big bang.Net, just getting earth as far along as the present law of the plains of Africa took a major fraction of all the time since the big bang so that there hasn’t yet been much time for any more nuanced legalism! So, really, our ‘law school’ remains heavily the plains of Africa.Uh, you expected something else?Clear enough? :-)!
> Does anyone really understand Obamacare and how it works? With 43 and counting revisions since its passage? No.Sure, easy! Just keep looking at it as progress in health care, keep struggling and struggling to see how it constitutes progress in health care, and, then, finally conclude the truth: It has nothing to do with health care!So, what is it? Sure: It’s the main product of DC — politics! That is, it’s intended to excite, please, placate, pander to, etc. a collection of voters, insurance companies, etc. who take the promises seriously and, thus, will for now support Obama. It’s intended to last only as long as Obama is in office, and then it stands to fade away slowly until in some late night session in Congress it is finally killed off. It’s only intended to last a few more years. The ‘revisions’ are just to keep the promises alive in the minds of the true believers and cover up/over the flaws from the obvious fact that the thing was never designed better than, say, a paper mache boat to cross the Pacific.Not the only example: A hurricane? Right, due to ‘climate change’. A drought, flood, tornado, a shoreline change, more wildlife some place, less wildlife some other place, an unusually cold winter some place, and unusually hot summer someplace else, a forest fire, right, each is presented as rock solid evidence of ‘climate change’ caused by evil humans.How’d we get humans in there? Because it is a given, axiomatic, that humans are evil, or in other words, sinners. There is a trilogy: Evil humans’ use of carbon is the transgression. Climate change is the retribution on the evil humans. Sacrifice and suffering by the evil humans are the redemption. How? Sure: Carbon taxes!The real cause? Sure, politics. Obama plays the ‘climate change’ card every chance he gets. He and some of his supporters just keep saying ‘climate change’, and suggesting that the cause is the use of filthy carbon by sinful humans, over and over and over as more and more people will come to support it. It’s an old propaganda device: Repeat a big lie often enough, and eventually a lot of people will believe it. To Obama, that’s much of all of what politics is about.Then when enough people believe, boom, get some political power, carbon taxes, subsidies for buddies, etc. For a politician, what’s not to like?Not nearly the first time. E.g., the Mayan charlatans killed people and poured their blood on a rock saying that this was necessary to keep the sun moving across the sky.No, no, no, I’m not saying that Obama is like the Mayan charlatans; that would be an insult to the Mayans who couldn’t begin to compete in politics with Obama and his Obamacare and ‘climate change’!It’s politics.
Yep. Every time something goes wrong there is this gut reaction (from some) that there has to be a system to prevent it from going wrong in the future. Sometimes a mistake is just a mistake and does not need a system.
Love systems, believe in systems. But you are right, not everything is systemic.
I use systems all the time and they are great.
ok, which laws do you think absolutely need to be repealed.
To start, Section 409A of the IRC. Then all of the drug laws.
You’re very right Joe. How do we start? Are there precedents?You can’t keep stuffing new laws without making room. We need to elect un-law makers.
I couldn’t agree more William!
Maybe it should be like the wardrobe rule where you get rid of everything you haven’t worn in a year. If a law hasn’t been used in X number of years, archive it.Too simplistic?
I like the idea!
i’m sure Tim Berners-Lee contemplates unintended consequences quite often.
Today’s Hobby Lobby decision at the Supreme Court will also incent companies to stay private. Public companies are subject to government mandates. Will be easier for private companies to avoid them.
When SOX was legislated the vote in the House was 423 in favor, 3 opposed and 8 abstentions. The Senate vote was 99 in favor with 1 abstention.See our gov’t branches can indeed work quite well together. A classic case of a unified, non-partisan fuck up.
This is why hedge funds and public mutual funds are encroaching on VC with private investments. They are trying capture the value previously available to public investors. This also means that need for secondary markets for private companies is compounded. Longer exit horizons + a deluge of private investors (via AngelList, FundersClub, and crowdfunding generally) increases the pressure for liquidity.
this doesn’t sound healthy
This is a complex issue, but let’s not forget who caused this. In 2002 Worldcom rattled the public confidence in the market. Along with the accounting games played by NorthPoint Communications, Global Crossing, JDS Uniphase, XO Communications, and Covad Communications et al., the markets almost unanimously agreed that reform was necessary. There is nothing more important to New York than the public having confidence in its public markets.
I did a lot of SOX stuff a few years ago – I was at a SAP Washington DC event when the sheer monolithic madness of it became apparent; there’s more effective governance in my working behind a bar.
When I first saw the title to your post, Fred, I thought it was going to be about the unintended consequences of regulatory implementation of pro-startup reforms under the JOBS Act.Even as angel investing is being democratized by Angellist, Circle Up, and other innovative platforms (I would put my client, Fin Tech Collective, in that category, though they are relatively new to the scene), a rearguard action is under way from “consumer” groups, regulators, and others, not only to hamstring 506(c) general solicitation but, incredibly, to make it tougher to qualify as an accredited investor.The result, if this rearguard action is successful, would be to shrink the pool of persons eligible to participate in private financing.Can’t take our eye off this ball for a second!
Ah, you just don’t understand! :-)! So, I’ll have to explain it to you: You see, don’t you see, surely you can see, did I mention you can see, that people are badly confused about the money, and some people even believe that the money they earn is theirs. Ah, foolish confusion! Instead, the money belongs to everyone, is in ‘common’ and for a person to have only temporarily and with limitations on its use!This situation is because the great Sugar Daddy in the sky, or at least in DC, is to take care of you, as it takes care of everyone with, of course, all the money that is in common to everyone! No way can the Great Sugar Daddy in the sky, or DC, permit just ordinary, little people to make really big decisions with their money like investing it! They might lose that money. Even worst, they might get rich and, thus, have too many others feel poor!Much better is the infinite, caring wisdom and care taking of the Great Sugar Daddy! Didn’t you know these things? Now you do! Glad we got this all cleared up. See how educational AVC.com can be? :-)!
Yes, I saw the Andreessen interview and kept a copy. Andreessen made being a public company look really ugly, nasty, wasteful, dysfunctional, deranged, demented, sick, scary, little things like those. E.g., the company would need another C-level executive, the CBS Officer, to swat down daily all the absurd rumors put out by hedge funds on chat boards, etc. Bummer.While Fred discussed the funding side and the change from public to private funding, there is also the ‘exit’ side, and that is now very limited and unattractive: Basically have to (A) remain a private company with at most only a few stockholders, that is, not really ‘exit’ or (B) be sold in total to a large company. For the C-level people of the small company, case (B) usually means being unemployed in about a year.Yes, there can be a special case, instead of just (A) Private World or (B) Public World, there’s also Buffett World: Hello Warren! Let’s talk! Do I have a deal for you!Ah, there’s a rare, special case in part of my software, and for that I need to tweak one routine and change a case of a = b + c to just a = b. That part of the software is 5845 lines of code with 4579 language statements in a file of 15360 lines. Back to it.
Asymmetries of information. Core problem. Great to have investment and financing alternatives but we must figure out better ways to resolve the asymmetry problem. I like self-regulating communities as a model because community, by definition, says all stakeholders have visibility and can contribute. No, this is not “hey legislators, we promise to behave if you leave us alone.” It has to be community and it has to resolve asymmetries. It’s natural law.
Unfortunately I have no confidence that the regulators have learned any kind of lesson. To quote Marc from the same interview: “When there’s a problem, the answer is presumed to be more regulation — even when the regulation was the problem in the first place. This is the central flaw in how the government operates.”
Well surelegislators are to regulations/ruleswhathammers are to nails’This is the central flaw in how the government operates’Sure, but what other governance mechanisms would substitute for regulations/rules in our effort to enforce some sort of positive/effective social collaboration/contract ?Surely no one is suggesting that we should do away with focusing our collective-will and common-interests via democratic government mechanisms.Regulation is an obvious and necessary-evil especially in regards to social food fights let alone investment-markets which are more like multilayered opaque food wars.The problem is not regulations per-se !The problem is simplistic, static, regulations that completely lack any timely, dynamically-adaptive, interplay with the complex environments they are designed to regulate.Those regulated environments are populated by an array of constantly evolving living-system(volitional entities) all conspiring as free agents to legitimately and adaptively gaming all our regulatory frame works as if they had a right to, because they do !.That begs the question, how do we up our game regarding collectively democratic self-regulation in an age of adaptive network dynamics.Continuing to regulate the emerging array of social/commercial living-systems(volitional entities) that are all now operating on adaptive network dynamics seem totally futile in a world of linear static government regulations.It seems clearly that more distributive, adaptive, relationally linked, ratio-driven, regulatory-fedback network-dynamics need to replace our static rule-driven regulatory frameworks.I blame it on the internet 🙂 for elevating almost everything into the realm of living system dynamics where all volitional agents must practice adaptive communication/synchronization or be pushed out of the living-system gene pool.So, if democratic governance over our collective-will and common-interests is to survive in a gene pool now dominated by adaptive social mechanisms it will need to get onboard with some serious, dynamic, network-driven, App/Big-Data, regulatory-mechanism upgrades.Yup !That all seems too complex, easy to say, hard to do, pie in the sky rant material, because it is !Still proper framing is the first step in solving any problem.Even in this age of complex organics we are still stuck with what that smart-ass guy said:”Make everything as simple as possible but no simpler”Libertarians !Don’t hold your breath waiting for this type of dynamic, network-driven, App/Big-Data, adaptive, democratic self-regulation to be delivered by Google, Facebook or the like.”Unfortunately I have no confidence that the regulators have learned any kind of lesson””We get the government we deserve” !It is the citizenry that needs to learn lessons only then can we democratically impose those lessons on our democratic representative or replace them with more modern organically-direct democratic mechanisms.A collective democratic lesson is really only learned when it establishes itself as a stable and dominate mass-culture meme(one strong enough that we can’t get fooled again). Meaningful/realistic collective lessons are hard to come by in a network empowered environment where large corporate entities and there interests increasingly dominate the Big-Data/Viral-App-Applification pathways by which lessons coagulate into solidly entrenched mass-culture memes.This is why we desperately need some sort of mass-accecable social-network assembler tools to democratize the application of networking-power and its inherent self-organizing dynamic to the fabric democratic governance.GoogleWave was a good rudimentary starting point but it got pulled.- Maybe Googlge didn’t understand what it had- Maybe they din’t have the skills to simplify the interface- Maybe they didn’t see there opportunity to market it simple as a new email App and allow users to incrementally absorb and utilize its extensible palette of social construction tools at the users now pacePersonally I think they saw its federated structure as giving away the farm.Maybe Twitter could develop a platform with a similar extensible palette of social construction features but that would probably detune their monetization focus?Apple with their sandboxed iSO-8 extensions is most likely laying the ground work to ultimately deliver mass-culture access to social-network assembler tools that will democratize the power of the network effect. Perhaps they will deliver the mother of all Hyper-Card descendants.In the end I’m hoping for the emergence of Apps that are nothing but extention-libraries full of actionable/customizable interface screens with built in back-end support mechanisms/services. Then atop those extention-library-Apps some Social-Assembler-Apps that tap into those extention-library-Apps to deliver a palette of social-network building blocks for the rest of us.I’m not a developer so maybe that is all just a pile of fruits & nuts but an end user can dream can’t she ?
.I was running a public company when SOx was put into effect. Much of SOx was much ado about nothing and it was actually hard to see what was intended to be accomplished.Let me use as an example the criminalization of signing financial statements. With much fanfare, CEOs and CFOs were now required to sign financial statements but now with possible criminal sanctions rather than just potentially civil implications.As CEO I had to sign the financials something I was already doing. My CFO used to get quite panicky and did not want to sign until I had signed.Other than the ridiculous notion that my behavior was now criminally sanctionable, what did this really accomplish? NOTHINGWasn’t I already civilly liable for any financial report I approved anyway? It is very hard to see the real difference.Sec 404 required small companies to document their financial controls which resulted in a lot of consultants offering to do this for us at $50,000 per year. As an engineer w and MBA, I made my CFO do this.Oh, there was a lot of wailing and gnashing of teeth to be sure but I was adamant about it I refused to pay anyone to do this. I made them get out Visio and diagram the hell out of our processes. I first made them whiteboard them.The CFO wanted a consultant to do it. I made him do it.Great irony? The PCAOB came calling and said our diagrams were perfect.The PCAOB was formed to essentially do what the SEC was already doing — disciplining bad guys and issuing an accounting letter every 3 years to public companies. The PCAOB used to fixate on our use of the term EBITDA because it was not a GAAP term and required us to explain and derive it from GAAP terms each and every time we used it in a document (10K or 10Q).I had the CFO put in a blanket derivation of the term for the entire document which still pissed them off but carried the day.SOx spelled out some very specific requirements for independent directors and the composition of Boards which simply mirrored Delaware law. If you were organized in Delaware, you already should have been doing all of this stuff. Good companies were.SOx forced a company attorney to report wrongdoing to the SEC or PCAOB essentially nullifying the attorney-client privilege. I never thought this was a big deal as I never intended to engage in any wrongdoing or criminal activity.SOx was a knee jerk to Enron but it was not realistic. Enron would have still happened there would just have been more fierce penalties.The problem is always this — good law does not make bad guys behave unless you enforce it. Bad law does not change the conduct of good guys.The existing laws are simply not being enforced. Did anyone on Wall Street get disciplined in the great recession for peddling obscenely illegal derivatives? Anyone? No.Wall Street got well in one year. Within two years bonuses were back at record levels. The deck is stacked and it has always been stacked. Sorry.Bottom line — I spent a lot of time thinking and talking about SOx but we were already doing almost all of it. I resisted the temptation — including fighting with my board and CFO — to spend unnecessary money on such silliness as 404. We complied but did it on the cheap.None of his crap is particularly impactful if you know how to run a business and run a clean shop.The Reg D exemptions to the JOBS Act will turn out to be the low hanging fruit in the long run not the “on ramp” provisions. The only meaningful change is the authority to solicit accredited investors BEFORE establishing they are accredited which means mass market marketing contact.JLM.
Fantastic. I’m keeping that. Just do the usual stuff, mostly the same stuff should have done anyway, draw some diagrams with some software, develop some boilerplate and insert a copy wherever needed, and keep it cheap and simple, not wasting armies of accountants and lawyers and millions of dollars, like the hysteria from some. Darned good to know.
Have done the same in the past. But always have retained a trusted lawyer for the final once-over….
It appears that JLM made a first effort in the sense that he made a good effort and let the regulators say if they liked it. So, maybe JLM was just assuming that if the regulators didn’t like his submission, say, his diagrams, they would say so and JLM would make ‘corrections’ and submit again, all without much risk of going to jail.So, try, make an okay effort, don’t sweat a lot of ambiguous regulations, send in the results, let the regulators object if they want some things different in which case make the changes and submit again. Then maybe the first effort will be good enough for the regulators and, then, just keep doing the submissions that way.Or, plead: “Look, we’re trying to run a business here and not waste money everywhere possible. We have more to do than regulatory archania. So if you want some changes, then we will respond.” It might work.
Dropbox did a private financing recently at $10bn, Uber did a private financing recently at $17bn, Airbnb recently did a private financing recently at $10bn. All three of those deals could have and would have been an IPO in the 1980s or 1990s.However could have also been the unintended consequences of high frequency trading and/or in combination of a number of other factors. (That is an airbnb would have never made it to square one in the 1980’s nor would Groupon or any internet company finance wise).Unintended consequences are not always universally bad anyway. One of the UC’s of commenting online was that it got me involved in something different that I almost certainly wouldn’t have done without “wasting” time commenting. One of the UC’s of not being able to go into my father’s business was that I ended up starting my own business. At the time it didn’t appear to be a good thing it seemed to be a bad thing.  One of the UC’s of my wife not getting good guidance in HS was that she didn’t pursue a career in math (as a result of being a woman) but something else. But when that didn’t work out well she actually ended up doing something that was better than math (at least financially).So the question is is there a complete study of all of the UC’s consequences of all laws or are we (or Marc A) just cherry picking some monday morning quarterback examples to prove a point? You can spin a story any number of ways depending on the point you are trying to make.
SarBox killed the first startup i worked for. We went public with a very solid offering at the forefront of an entirely new industry, a decision likely made under the pressure to “become” before we were ready – certainly before ready for that which SB wrought. We got squeezed out; slowly; deflated.
People in Cleveland blame SarBox for causing LeBron James to take his talents to South Beach, so you are not alone!
The reality is, SarBox scrutiny probably just poked holed in the accounting practices of a very young company with a lot of promise 😉
Enron etc. took money from the public, and poof, the money is gone. Luckily, no such thing can happen when the government itself takes public money
I think the same can be said about financial services. Industry hopelessly in need of innovation but so much regulations aimed at “too big to fail” holding back startups.
I’ve thought about this throughout the day, and thinking contrarian.Is the dichotomy that Uber, Airbnb and Dropbox are “small” companies or that their private valuations are too high?I’m not totally convinced that they opted to prolong their private markets fund raising just because of SOx.And I’m not sure it’s entirely fair to think of AngelList & CircleUp as alternatives to going public. These 2 are serving the early to mid- lifecycles of startup funding, not the later stages.The only good thing about the current situation is that if these companies stop performing well, only a handful of private capital investment firms will suffer, and not the public at large.Maybe there is a distortion in sales/market valuations ratios that needs to be corrected first. I’m curious to hear directly from Airbnb, Dropbox and Uber why they elected to delay their public debuts.
I think this is a false dichotomy. On one hand you present: anything you try to regulate will have the opposite effect. On the other: freemarket solutions will solve the problem.First, it is possible, and I would argue, likely, that fixing public company oversight can be addressed through better reporting, yet SarBox’s implementation is flawed. The question is whether there is a better way to provide transparency that doesn’t result in a punitive tax. SarBox is not the only construct that can be conceived. However, I will grant that the question of whether a superior construct can actually be implemented in our political framework may be a valid existential criticism of my view.Second, AngelList is helping rich SV technofiles invest in startups, not improving the 401K of everyman. I would argue that growing that platform outside of this population will create situations which will get easily manipulated and result in significant amounts of fraud and negative returns for less sophisticated investors.To waive your hands and state “If the regulators keep their hands off these new emerging markets and let them develop naturally, we will eventually fix this problem.” as a truism is wishful thinking. You’ve provided no analysis of this other than to point at the current state of affairs and cry “quelle horreur”!A current bad regulatory regime does not necessarily imply that no regulation is the only way forward.
Sarbanes was and is not a tax on small businesses. Are you referring to “humble and pious” start ups at the brink of a $2B IPO? Is Sarbanes perfect, no. But its intentions were meant to “protect” the same people who were wiped out during the Enron fraud.
here’s a hint: they weren’t REALLY trying to ‘help out’, it was about control for them
Most regulations do nothing but hurt the 99% because it is exactly the 99% who pay for all the regulations, by either taxation, unemployment or a lower standard of living than they otherwise would have enjoyed.Most people ignore the cost of regulation, who really pays it and how, the unintended consequences of it or the invisible results of it (meaning the good things that did not get to happen because of it, the businesses and jobs that did not happen and the competition that did not get created).The best regulation is concise regulation, minimal regulation that is absolutely necessary, not maximal regulations, not micromanaging regulations.Exactly because humans are corruptible is why the government fails at regulations. It is excessive regulation that makes buying the regulators and influencing the regulations an expense that is worth it for business. Thus enter the lobbyists, the corruption of politicians, the increasing of the cost of entry for competitors, the regulatory capture and increased cost to the consumer.Most of the time government protects bad businesses, not the public from bad businesses. A convoluted tax code and excessive regulations cause this.A convoluted tax code and excessive regulations are bad for the people they are meant to help.
Companies and venture capitalists do not want to take the added risk of public stock price associated with their capital. Start ups are generally funded by vc’s and they see IPO as a route for them to liquidate the company , take their earnings.
I find this a really interesting post if, as it seems to, it is broadly suggesting that regulation in general is bad (on average).Apologies if I’m reading more into this than that, but I think if you look at the biggest fucks ups of the last twenty years it’s the de-regulation of the financial markets, egged on by disciples of Milton Friedman who is name dropped in the top comment.That led pretty much directly to the devastating crash of the last 6 years. Regulation put in place in the US and UK after the depression was systematically ripped up (by both major parties in both countries) and we’re still counting the cost now.It’s obviously a shame that investors & start-ups may have lost out but it’s a much bigger shame that entire countries have been devastated through a mixture of greed, incompetence and terrifying arrogance.
And frequently overvalued
Yup.This done right could both fill a big market need and do a lot of good both.They don’t, as do many vertical funders, understand the difference between inclusive and exclusive as market positioning.
Big fan of Rick’s Picks–the pickles that is!And just as there are celebrity investors, there are celebrity raises which roll up hill from the status of the investors in the early seed rounds. An amazingly small circle.As it should be. And wonderful for the annointed;)
So you’re saying that super savvy, ultra rich private investors are not smart enough to correctly value a company and the solution is to try and get joe-six pack’s money? Is this just a shakedown racket?
Investing isn’t mandatory, it’s a choice.
just like it is choice to have private market and public market and two be different. question is what is problem? (except VC paying too much money and not being able to offload on suckers like before?)
.When one thinks about the power of incumbency, aren’t we already there?The Feds give each candidate money to conduct their conventions already.The system is obscene with money and yet all it delivers is a message of lies repeated endlessly particularly in the key states and a GOTV effort.So I come to my position by default not because I think it is a good idea but it gets the undue influence out of it.I would sacrifice the impact of Citizens United if the labor unions were out of also. Mutual disarmament, no?JLM