Individual Choice is Better Than Bureaucratic Choice

Thought these two articles were interesting.

The SEC ruled that companies can start selling up to $50M in securities within a 12 month period, subject to eligibility, disclosure, and reporting requirements.  Without parsing the entire regulation, it is a step in the right direction.

I think that individuals no matter what their net worth should have the freedom to choose what to do with their money.  Crowdfunding is a good innovation.  We can and will do more.  Markets are efficient allocators of capital, and the more society trusts and enables markets the better off all of us will be.

The second interesting article I saw had to do with Wall Street getting in between investors and employees of hot startups.  Little surprise that Wall Streeters found a way to act as a risk free broker, but in this case could create value.

One of the pitfalls of working for a startup or investing in them is that the time to monetize is long.  That increases the risk.  Once you put money in, there is almost no way to get money out.  It’s not like trading.  Startups aren’t liquid.  You cannot “buy” at a $3M valuation and “sell” in the next round at a $10M valuation.

But, as more and more startups get valued at the billion plus range, the pressure to get out rises.  The pressure gets greater when employees of “unicorns” see what happened to a company like Fab.  Once valued at over $1B, it’s now valued at less than $20M.

Investors in Fab might have unloaded some equity at high valuations as well.  But, the way to make money in the startup game is take advantage of the “optionality” of investing.  The best funds press their winners and kill their losers.  If a company is doing well and raises another round of capital it behooves investors to take full advantage of their pro rata.

Places like Second Market have existed for a while now.  Employees were able to monetize some shares there. But, because of SEC requirements it can make life really difficult on the company.  All of a sudden, the SEC could rule that the company is “public”.  That changes reporting requirements.  If that happens, the company has become public without the benefit of a roadshow or splashy IPO.  Much tougher to raise money then.

There are a lot of tools at our disposal today to make things more transparent.  Information flows faster and doesn’t get tied up in old boys clubs as much as it used to.  Centralized bureaucracy can rarely keep pace with the market.  Today, bureaucratic systems are more about control of freedom than they are about mitigating risk.  They are also used to barriers to entry and limit innovation.

I think the more that the government regulates in the spirit of “freedom of choice” the better.  Allowing individuals to determine their own destiny, and what to do with their own shares and money is better than a centralized authority determining what goes where.  Allowing freedom of choice will create different economic incentives, change risk profiles. and create markets that didn’t exist before.