The SEC has formed a committee to analyze regulation around fast-growing companies, and today the House held a hearing on “crowd-funding” for small companies.
On the SEC side, looking to reform regulation around private companies and their ability to raise money is probably a good thing – the market is already doing it, perhaps most publicly exemplified by Facebook using Goldman Sachs and a special purpose vehicle to effectively beat the 500 shareholders of record limit – so, it’s about time that the SEC at least looked at the regulations and decided if they make sense in the context of successful, private companies. But considering those market shifts, I’m not sure regulation is needed to further open the floodgates to private, unsophisticated investors – The Groupons, Zyngas, and Facebooks of the world have no problem raising money until the time comes to file for an IPO, and smaller companies don’t feel pressure from the 500 shareholder limit, which is really the only regulatroy constraint on a company’s growth in that stage. If Facebook’s Goldman Sachs strategy becomes popular, I’m not sure there’s a good reason to loosen regulations on a segment of the capital market that seems to be working quite efficiently. That said, the makeup of the committee is largely representatives from the big private companies I just mentioned, and likely they will push for an abandonment of that 500 shareholder cap.
As for the notion of “crowd-funding”, that doesn’t make much sense to me either. Small companies as a whole have a tremendously low success rate, and I’m not sure it’s in the public’s best interest to have a private market with lower disclosure requirements for funding small companies with 90% failure rates. Even if you focus on the technology/energy/etc startups that tend to come out of startup-heavy regions like Silicon Valley, those startups still have a huge failure rate (at least 40%, my quick survey of blogs seems to suggest), and the startups already have pretty excellent access to capital through VCs, superangels, and angels on Angel.co. Maybe the costs of raising capital for some of those startups would go down, but probably not by much, and it might be better for the public if the risk of those companies failing was taken on by large institutional investors who can better calculate the odds. While I’ll admit that I’ve only considered the benefits of “crowd-funding” for about 15 minutes, it doesn’t strike me as something the startup world is dying to have – picking winners in the early stages of startups is hard enough for institutional investors, and I imagine after one or two rounds of losing money on short-term, low-value investments, most small-time investors would realize it isn’t as fun to invest in startups as it is to read about them. VCs aren’t even that great at picking winners: ten-year returns for VCs as a whole are reported at anywhere from 8.4 percent to a loss of .09 percent, depending on where you get your information, which isn’t necessarily a better return than investors get in the existing public market. If VCs can’t pick winners with all of their knowledge and all of the advantages they convey to the companies they invest in, why would anybody think the public could?
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