Streetwise Professor

April 5, 2010

The Chris Dodd Strangle Entrepreneurship Act, or Where’s Creative Destruction When You Really Need It?

Filed under: Economics,Politics — The Professor @ 8:28 pm

Back in January, Tool Time star Tom Friedman lamented that Mr. Cool Awesome* had turned his back on the “amazing, young, Internet-enabled, grass-roots movement he mobilized to get elected.”  Friedman all but begged Obama to spur entrepreneurship and innovation:

Obama should launch his own moon shot. What the country needs most now is not more government stimulus, but more stimulation. We need to get millions of American kids, not just the geniuses, excited about innovation and entrepreneurship again. We need to make 2010 what Obama should have made 2009: the year of innovation, the year of making our pie bigger, the year of “Start-Up America.”

How’s that working out for you, Tom?  With all the taxes on capital in the health care law, and the implicit tax on business expansion in the law (e.g., insurance mandates on companies with more than 50 employees), and all the taxes to come (there are murmurs of a VAT), it is becoming the year of Shut-Down America.  The whole Obama program is poison to entrepreneurship.

And that’s just the start.  Dodd’s banking bill explicitly targets startups:

Dodd’s bill would require startups raising funding to register with the Securities and Exchange Commission, and then wait 120 days for the S.E.C. to review their filing. A second provision raises the wealth requirements for an “accredited investor” who can invest in startups — if the bill passes, investors would need assets of more than $2.3 million (up from $1 million) or income of more than $450,000 (up from $250,000). The third restriction removes the federal pre-emption allowing angel and venture financing in the United States to follow federal regulations, rather than face different rules between states.

And just what are the apparatchiks in the SEC going to do in that 120 days?  Just what knowledge and expertise can they bring to bear in evaluating the funding plans?  The question answers itself; this adds costs and delay, for no perceivable benefit.  And what reason is there to restrict the free flow of capital from consenting adults with over $1mm to startups?

The American system of financing entrepreneurial startups is one of the world’s wonders.  It has played a central role in stimulating amazing technological innovation that has brought us amazing new products and contributed to substantial productivity growth in the ’90s and ’00s.  It is in no way implicated in the financial crisis.

So if it ain’t broke, why mess with it?  [That’s the family friendly version.]

As Mrs. SWP says, this is so European, which makes it part of a trend.

The most fascinating question is the political economy one: whose interest is served by this provision?  The most likely explanation is that incumbents–including, no doubt, one-time startups–having made theirs prefer to make it harder for others to displace them.  They liked creative destruction on the way up, but the idea of being swept away in some future gale is far less appealing.  So hobble potential future competitors, future creative destroyers, by increasing the costs startups incur to raise capital.  This pernicious provision also gives advantages to big investors, venture capitalists, and existing companies who would face less competition in supplying capital to potential startups.

As Lily Tomlin said: “No matter how cynical you get, it is impossible to keep up.”

*Edited in deference to a real Mr. Cool.

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  1. […] to make sure that only those who are already Rich and Powerful will have a shot at being rich and […]

    Pingback by Chicago Boyz » Blog Archive » Senator Dodd’s Bill for the Establishment of an Oligarchy — April 5, 2010 @ 11:40 pm

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    Pingback by Tweets that mention Streetwise Professor » The Chris Dodd Strangle Entrepreneurship Act, or Where’s Creative Destruction When You Really Need It? -- — April 6, 2010 @ 9:16 am

  3. I resent the reference to Obama as Mr. Cool, you’re giving us a bad name! On the point, a large interconnected high speed rail system (and associated infastructure) could have been Obama’s ‘moon shot’, and could have been done immediately with technology currently available. Alas, that seems to logical and to make too much sense.

    I really don’t get what the hell Dodd is doing. There is just NO logical reason for limiting investing in startups, I mean, where is he thinking the money for these are going to come from, PE firms and IBs? Aren’t we trying to limit their role in the economy?

    Comment by Jack — April 6, 2010 @ 10:28 am

  4. LOL, Jack. Didn’t think about that. All apologies (to quote Nirvana:)

    I have no clue about what Dodd is doing either, except my cynical take that by limiting startups you protect incumbents, and incumbents can give campaign contributions in the here and now.

    The ProfessorComment by The Professor — April 6, 2010 @ 4:22 pm

  5. I’m glad you chose the word “apparatchiks”. This topic burns me to no end. With this direction, I can already see Obama and his minions yelling at us Americans for not doing what they want like Medvedev does in Russia. (Well, actually, I think they already do) It’s pathetic. Let the people do what they will like it has always been. This economic and social engineering from above is simply a disaster. As you said, what the hell does creating legislation for startups have to do with anything? I didn’t realize that was part of Obama’s campaign and is a concern of the American people. Give me a break. Dodd is a nut.

    Comment by Howard Roark — April 7, 2010 @ 4:11 am

  6. Start-ups are quite prone to misuse/abuse. I know several people who lost all their money investing inappropraitely in very risky start-ups and several people who lost all their money investing safely in “CD’s” from Stanford’s offshore bank. I can’t say the start-ups were any less abusive than Stanford’s ponzi scheme. Also, isn’t the old $1,000,000 completely unadjusted for inflation and if it where to be adjusted wouldn’t it be much more than the new $2.3? From a streetwise perspective aren’t old unadjust arbitrary numbers held in relatively low regard?

    Comment by Frank the salesforecaster — April 7, 2010 @ 4:22 pm

  7. Frank, of course people lose money in startups, but what about your Microsofts and your Apples? Who is Dodd to put an artificial cap on what we can do with our money? If I want to invest in some random company in a garage, I should damn well be allowed to, regardless of if my bank account says $1,000,000 or $2,300,000 (I think $1M is a stupid number anyways).

    Thanks SWP for the change!

    Comment by Jack — April 8, 2010 @ 2:01 pm

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