- The best news we’ve told you in years…
- … if the government doesn’t screw it up
- The feds repeal a “for your own good” regulation? Say it ain’t so!
- How you can soon “be your own venture capitalist”
- The Fed still can’t get the inflation it wants
- The wisdom of Venezuela’s gold repatriation… the real reason governments and central banks want to ban cash… how “working your way through college” isn’t what it used to be… and more!
We interrupt what’s too often a daily dirge of economic and financial folly… to bring you what might be good news. Maybe even great news.
As we write this morning, members of the Securities and Exchange Commission are voting on — and every indication is they will approve — new rules with the potential to liberate small business… unleash the American spirit of innovation anew… and maybe even drag the nation out of its eight-year economic funk.
“What if you could be your own venture capitalist, risking a small chunk of your portfolio?” mused our executive publisher Addison Wiggin in 2013.
What if you wanted to invest in a new coffee shop around the block? Or what if you wanted to invest in that neighbor kid’s garage startup — the kid you always suspected might be the next Bill Gates or Steve Jobs?
Well, until today, you couldn’t unless you were rich. Since the 1930s, the SEC has forbidden you from doing so unless you were an “accredited investor” with a net worth of at least $1 million or a family income of at least $300,000.
Naturally, the government claimed it was for your own good.
“These laws were enacted to protect unsophisticated investors from fraud,” wrote Paul Spinrad at O’Reilly Media in 2011, “but they also prevent people from investing in small businesses in their own neighborhoods, or garage ventures launched out of communities of interest that they belong to — despite the likelihood that their personal ties to such investments [gives] them a better basis for evaluating risk (and contributing to success) than some mass of SEC filings cooked up in an office somewhere.”
In a brief and too-rare moment of collective sanity, Congress passed and President Obama signed the Jumpstart Our Business Startups (JOBS) Act in April 2012 — repealing those for-your-own-good rules.
“The act,” wrote Chris Anderson in his 2012 book Makers: The New Industrial Revolution, “makes it easier for small companies to use regulated Web-funded crowdfunding sites such as RocketHub, Crowdfunder and Launcht to raise up to $1 million in investment money from regular people.”
Just one problem: Congress delegated the responsibility for drawing up the regulations for crowdfunding sites to… the SEC.
The SEC chair at the time, Mary Schapiro, was openly hostile to the law, claiming it “would eliminate important protections for investors.” The crowdfunding provisions in particular got under her skin. “Internal emails made available after congressional requests suggest she may have helped derail rule-making in this area,” reported The Economist.
Having done her part to stymie small business on behalf of Wall Street, Schapiro left the administration at the end of 2012… and took a consulting gig on Wall Street.
It fell to her successor, Mary Jo White — herself no stranger to Wall Street — to implement the rules. In 2014, she called it “a priority for 2014.” This year she called it “a priority for 2015.”
The longer the feds dithered, the more it opened the door to fiascoes like Oculus.
Many startups have gone the crowdfunding route in recent years — they just couldn’t give their “investors” an ownership stake. Entrepreneurs would go to a website like Kickstarter and describe the gizmo they wanted to build. Ordinary people would then chip in money in exchange for dibs on the first models produced.
In August 2012, a plucky startup called Oculus made a pitch on Kickstarter for a virtual-reality gaming headset. Some people stumped up $25 and got a thank-you T-shirt. Thousands of others forked over $300 to receive an early “developer kit” with a prototype headset and access to software development tools to build games. The effort raised $2.4 million in seed money.
The headset was a smash hit. In March of 2014, Oculus agreed to be taken over by Facebook for $2 billion — 833 times the initial money raised.
The Oculus headset: A crowdfunding success — but not for the people who funded it.
And none of those early “investors” — 9,522 of them — would see a dime. We imagine more than one said, “I invested in an awesome startup and all I got was this lousy T-shirt.”
But at long last, “equity crowdfunding” — where early investors can have an ownership stake — is about to become reality.
As noted earlier, the SEC is voting this very day on the final version of its crowdfunding rules. “The new rule,” says The Wall Street Journal, “would allow anyone to invest up to $2,000 or 5% of their annual income or net worth, whichever is greater, in small-scale fundraising projects up to $1 million in a 12-month period.”
No longer will budding entrepreneurs have to prostrate themselves in front of bankers or hand over a stake in their company to venture capital investors before they ever get off the ground.
Of course, the devil will be in the details… and we’re still waiting for those details to be posted in the Federal Register.
An ominous sign: One proposed version of the rules last year ran 585 pages.
Said an article at the British website Every Investor, “Even when [the U.S. regulations] are implemented, experts widely think that they are so flawed that unless amended, they will prevent equity crowdfunding from emerging as a force there.”
The SEC even ran estimates of the costs entrepreneurs would have to fork over to lawyers, accountants and such to comply with the rules.
The numbers were forbidding: $39,000 in fees to raise only $100,000… and $150,000 in fees to raise $1 million.
And what hoops might investors have to jump through?
We’re always on the lookout for the best investing opportunities, and our hopes for equity crowdfunding have risen and fallen ever since its first mention here in The 5 nearly four years ago.
Right now our hopes are high… but they’re tempered by experience. We’ll keep you posted in the weeks and months ahead.
The major U.S. stock indexes are flat as the week stumbles to a close. As we check our screens, the S&P 500 sits at 2,086. If that holds, the S&P will post its strongest month since October 2011.
The Street buzz is about Chevron cutting as many as 7,000 jobs — more than 10% of its workforce. Capital spending will be slashed 25% next year. Crude, meanwhile, trades a few pennies below $46.
Treasury yields are backing down after a spike on Wednesday, fueled by the Fed’s latest interest-rate word games. The 10-year yield sits at 2.16%.
Gold keeps losing ground, now $1,142 an ounce.
The Federal Reserve’s preferred measure of inflation clocked in this morning at 1.3%.
The Commerce Department issued its “core PCE” figure for September this morning. The year-over-year change is still nowhere near the Fed’s 2% sweet spot.
Also in the report: Personal incomes grew 0.1% last month, and so did consumer spending. Both of those numbers were lower than the “expert consensus” was counting on.
So now we know why Venezuela repatriated its overseas gold way back in 2011. “Venezuela is running out of money fast and has started selling its gold,” CNN informs us. “The cash-strapped country could default by next year when lots of debt payments are due.”
Turns out almost all of Venezuela’s foreign-exchange reserves consist of gold. Good thing the nation’s late caudillo Hugo Chavez brought the government’s gold home from vaults owned by the Bank of England and JPMorgan Chase, among others.
Not that CNN made the connection between current events and the gold repatriation back then. So we’ll run a few numbers for perspective. The total amount of gold brought home was 160 metric tons, or 5,144,120 troy ounces. At today’s gold price, that’s about $5.874 billion in gold.
That wasn’t the entire gold stash… but every little bit helps. As of May, Venezuela still held $11.7 billion in gold total — after selling $14 billion to pay its bills. That’s what it takes when your economy’s been wrecked by socialism and low oil prices. Officially, the inflation rate is 69%. But according to the Troubled Currencies Project maintained by Johns Hopkins econ professor Steve Hanke, the real rate is north of 700%.
We’ll say again what we said about Chavez when he was still alive. He was an idiot… but he was no fool.
“I hate to criticize what was otherwise an outstanding issue of The 5,” hedge fund manager Erik Townsend writes us after our war-on-cash episode yesterday…
[Gee, even our friends and acquaintances can’t resist the time-honored tradition of “I like The 5, but…”
Still, Erik writes with a sorely needed addendum to our discussion of negative interest rates as a prelude to a ban on cash.]
“The whole financial system is based on fractional reserve banking,” he reminds us – “the crazy idea that it’s OK for the banks to not really have enough money to repay their depositors in the event of a run.
“If interest rates go negative by more than just a ‘nuisance degree,’ large account holders would be better off withdrawing all their savings in cash and putting that cash in a safe-deposit box, which yields zero instead of a negative rate offered by the bank thanks to central bank monetary policy.
“So the risk is if rates go too far negative, the entire system collapses and we enter financial Armageddon when everyone tries to withdraw money that isn’t there to put it in a safe deposit box or under the mattress instead. Banning cash solves the problem by eliminating the more favorable alternative.”
“I had two jobs during school,” writes a reader on our college-cost thread, “waiting tables at Chili’s and the school dining hall and two jobs over summer, waiting tables and hanging Sheetrock in West Texas (where it was routinely over 100 degrees, but with a nice breeze!).
“I earned nowhere near enough for all my college costs. My parents picked up a big part of that tab. If I wasn’t born so fortunate, I’d probably still have the debt. Anyone who says we need to just ‘pull up our pants’ should try working at Wal-Mart for a year and see how far that gets them.
“I did the math. Being generous and assuming you make $10 an hour and work 60 hours a week for all 52 weeks a year means you earn $31,200 pretax. The top schools now charge $60,000 a year = $240,000 for four years. A young person working 60 hours a week would need only 7.7 years to cover the tuition, assuming that person doesn’t pay taxes, has no health insurance, saves everything and doesn’t eat, drink, smoke, listen to music, drive, etc.
“I ignored overtime because no one at that wage pays overtime. You get two jobs that each employ you 29.5 hours to avoid the Affordable Care Act.”
“Most of the Texas students went to the wrong schools,” writes our final correspondent, adding to our school-acronym tangent.
“They should have gone to the Sam Houston Institute of Technology. Good old SHI. Well, you know the rest.”
The 5: And with that, another week comes mercifully to an end…
Have a good weekend,
Dave Gonigam
The 5 Min. Forecast
P.S. This just in: The SEC approved the new crowdfunding rules by a 3-1 vote. Fingers crossed for what the rules actually say…
P.P.S. We see the Republican presidential candidates gave a nod to the shrinking middle class during their CNBC debate the other night.
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