Co-founder of Activision & co-founder and CEO of StartEngine
The thinking from the general public is clear: the rich get richer. As time goes on, we continually see more news of billionaires raking in more billions, of startups going belly-up, of a middle and lower class that are not financially improving and if anything are declining.
How does this help democracy and the idea that everyone should have the same access to wealth and the opportunities to acquire more wealth? If we take a closer look at history, unfortunately, the Securities Exchange Act of 1934 did not help this cause.
In fact, the Act did the opposite and created new classes of people, a class in which the rich had access to opportunities to get richer and a class in which the poor and those with smaller means are stuck in their place. You could argue this is unfair, that it is un-American, but you should also understand the logic behind this cruel and unfair rule.
In the pre-1934 era, we have to consider context. Think about the 1929 stock crash, a crash caused by investors and speculators that had little to no restrictions. Some borrowed up to 90% of the purchase price hoping to make a quick buck.
Anyone could invest in speculative securities, and unscrupulous entrepreneurs and promoters sold securities with little rules and oversight, only for investors to find out later that there were 10x more shares in a company than they initially thought when they purchased the shares. They got screwed over.
The message was clear: non-sophisticated investors needed protection from those who would take their money from them. The Roosevelt government was compelled to make some real changes and thus was born the Securities Act of 1934 and the creation of the Securities Exchange Commission. Its first chairman was no other than Joe Kennedy, father to the future president.
With the new rules, companies had to either register their securities offering with the SEC or seek an exemption. Registering sounds like a simple thing, but it is not so simple. In fact, it is very expensive and time consuming. Most companies then could not afford it. The same is true today.
In fact, just 158 companies have gone public so far in 2018. This amounts to crony capitalism, or worse a plutocracy, that is far ingrained in our society. What compounds this issue is that only accredited investors can invest in companies that are not on the public market. This means that the vast majority of deals are not accessible to the main street investors.
To become accredited and enter this upper echelon of opportunity is really simple. Just earn $300,000 per couple annually ($200,000 for an individual) for the last two years and expect to continue earning this in the future. Alternatively, own $1M or more in liquid assets outside of your primary residence. Sure, this accreditation test is easy, but 95% of people cannot pass it. Those who do pass are rich. So you now see why this is a problem. Entrepreneurs need access to capital, but capital is only available from a very small segment of the population.
Last week, SEC chairman Jay Clayton made a statement, acknowledging the problems with the current state of private investments. “There are complex offerings where you need a lawyer of the type that I was in the private sector, but you shouldn’t have to hire a high-powered Wall Street lawyer to conduct every private placement,” Clayton said at Launch Tennessee’s 36|86 Entrepreneurship Festival, as reported by the Wall Street Journal.
The SEC promised to publish a lengthy paper, a “concept release” on how the capital raising process can be improved, and ask for public comments on that document to get input from retail investors. This could unchain the ordinary investor and give them access to private stock for the first time, but how far is the SEC willing to go?
The ultimate outcome is unclear, but the SEC’s mandate remains the same: protect investors, facilitate access to capital for small companies, and maintain orderly secondary marketplaces. With this in mind, finding a way for more investors to get access to the next Uber or Airbnb is a big idea. However, protecting those investors from making dumb mistakes is hard.
The good news is that with the JOBS ACT, the SEC has made the first step possible by giving consumers access to new investments opportunities. Utilizing one of two exemptions from registration, companies can now raise capital from the public, and Joe Investor can buy shares in a company before it goes public through an IPO.
This market is growing. Dozens of funding portals (including my company StartEngine) are offering hundreds of offerings to the general public. Initial Coin Offerings, or Security Token Offerings, are offering hundreds of opportunities to invest in blockchain companies to those interested in the world of cryptocurrencies and cutting-edge technology.
With the new SEC proposal in the works, there is hope that the JOBS Act can be improved, whether the SEC increases the annual fundraising limits, reduces the barriers to become an accredited investor, reduces the company’s filing and reporting requirements, or makes any number of other changes. An improved JOBS Act will help the marketplace grow and give investors more access to private companies. As the economy is growing 4% or more, there is already momentum for private enterprises in the US. Increasing investor access to those enterprises creates more opportunities, and more momentum, for everyone.
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