Posts Tagged ‘Sarbanes Oxley’
According to US News. Newt Gingrich is proposing to repeal Sarbanes Oxley and Dodd Frank on his inaugural day. SOX has killed innovation by making it impossible for technology startups to get funding.
At his speech at the Republican Jewish Coalition’s 2012 Republican Presidential Candidates Forum this afternoon, Gingrich urged attendees to help vote a large Republican majority into the House and Senate in
2012 so Congress could immediately pass repeals of the Affordable Care Act and the financial regulations Sarbanes-Oxley and Dodd-Frank.
This would be an excellent start, now we just need him to repeal the America Invents Act and roll back spending to 2007 levels.
“Do Government Regulations Really Kill Jobs?” opinion November 14,2011 Washington Post by Jia Lynn Lang, explores the concept that one industry’s losses on overbearing regulations are another industry’s boon. Leaving aside the Broken Window Fallacy introduced by Bastiat that’s been around over 160 years for the moment, let’s look into the brilliant mind of Roger Noll, an economics professor at Stanford and co-director of the university’s program on regulatory policy. “Some people identify with the beneficiaries, others identify with those who bear the cost, and no amount of argument is ever going to change their minds.” This is a leading economist paid by a major university to come up with this explanation to downplay the absolute economic wreck the US regulation and tax policies have had on our country. You cannot make this stuff up. By “some people” identifying with the beneficiaries, is the esteemed professor suggesting parasites are interchangeable with producers? Some will identify with thieves, others with the victims, according to the Stanford professor. Since the author of this article has only plumbed the depths of a few 
“economists, ” I’d like to introduce her to some basic facts in from a relatively short snapshot in History.
From 1998-2000, the US saw 4470 IPOs or Initial Public Offerings. From 2001-2010, that number fell almost 4/5th in ONE DECADE. What the heck happened?? A little beauty of a regulatory law, just under 60 pages, sponsored by legislators Sarbanes and Oxley in 2002. What about that horrible tech bubble that caused the stock market to tumble in 2000? That “bubble” was the strongest contributor to the U.S.’s position as the undisputed economic and technological leader of the world. It resulted in disruptive technologies that changed the world and every one of our lives and is still doing so today. Then we passed SOX. This was supposed to stop bubbles from occurring. Fast forward to 2008. Well, there weren’t many IPOs for your money to invest in-which left real estate all by its lonesome. Hmmm, that SOX sure did work on real estate.
Today, we are getting ready to face the regulatory tsunami of Dodd-Frank. This nifty law is over 2300 pages. What sane US company wants to stay on this island?
Well, it’s possible Sarbanes, Oxley, Dodd and Frank might cook up a new law to force them to stay here. Slavery, 2012 style.
I wrote about the damaging effects of Sarbanes Oxley in my book, The Decline and Fall of the American Entrepreneur. It appears that the Republican presidential candidates have read my book. See this video, J. W. Verret Discusses Sarbanes-Oxley on Fox News, which shows the candidates explaining that we need to repeal SOX. Let’s hope that they don’t just tinker 
around the edges with SOX and while they are at it they need to repeal Dodd Frank. This would be a big step toward restoring innovation and getting the economy growing again.
The The Decline and Fall of the American Entrepreneur: How Little Known Laws and Regulations are Killing Innovation , is now available in Kindle format for only $7.99.
Book Highlights:
*New US laws since 2000 are killing US Innovation
*Explains why the venture capital model is dying.
*Innovation is key to creating high quality jobs
*Innovation is key to increasing real per capita incomes of Americans
*How to make the US the innovation leader of the world again
What others are saying about the book
Mr. Halling combines two topics — the impediments to entrepreneurship that have been created by the U.S. government as an unintended consequence of its pursuit of other goals and the systemic weakening of the U.S. patent system by the U.S. Supreme Court and the Congress.
The resulting technological stagnation is a major reason the U.S. has gone from producing 25 percent of the World’s Gross Product in the mid 1990s to about 20 percent today. The loss is significant – about $3 trillion of U.S. GDP in 2009 alone.
He demonstrates in clear terms the linkages between economic growth, productivity, and income. And he lays out how technological advancement has always been the American advantage in global competition, an advantage that the U.S. is squandering.
Dr. Pat Choate, economist, former Vice Presidential running mate of Ross Perot 1996, Director of the Manufacturing Policy Institute, Phd. Economics University of Oklahoma
“Dale Halling’s Decline and Fall of the American Entrepreneur makes a compelling case for the need to reform regulatory and other policies that hamstring entrepreneurial innovation in our country. Everyone concerned about the decline in American innovation should read this book.”
David Kline, Coauthor of “Rembrandts in the Attic” and “Burning the Ships”
The Decline and Fall of the American Entrepreneur presents the issues facing technology start-up companies in today’s environment. The book sheds light on the underpinnings of these issues and is enthralling. Halling’s tight, accessible and personal style make this a fast and compelling read. His book is a political clarion call that should be heard now.
Greg Jones, Former President Ramtron International (RMTR) and CEO Symetrix Corporation. Both companies founded on IP.
This book conclusively establishes the link between innovation and per capita income, and shows that we have recently entered into a time in which innovation is under assault. This assault has resulted in a predictable loss of income and contributed significantly to the economic woes we are experiencing right now. The book’s sound policy recommendations suggest a way to turn the economic ship around to set a course for a return to prosperity.
Peter Meza,Patent Attorney – Counsel Hogan & Hartson, Attorney for Alappat – In re Alappat
Henry R. Nothhaft author of the book Great Again was interviewed on the Dylan Ratigan show on MSNBC and the Harvard Business Review blog radio. The Dylan Ratigan show focused on job creation and how all new jobs are created by startups not by small business or large corporations. Mr. Nothhaft argues thatWashington is forcing a once size fits all government on American businesses. He wants an immediate freeze on new regulations on startup business and a carve out from Sarbanes Oxley and Dodd Frank for companies with a market capitalization less than $500M. He explains that multinational companies have choices to create jobs in theUS or outside the US and 
suggests that large companies have decided to create jobs outside the US. While I think it is important to point out the current business climate in the US is causing companies to move overseas, the reality is that large corporations never produce large numbers of net new jobs and they are not the engine of innovation. The host attempts to argue that labor rates are the only reason that companies are relocating outside the US. Mr. Nothhaft explains that for high technology companies labor costs only represent 3% of their total expenses and it is the US tax and regulatory structure that are killing startups.
One of the panel members suggests that Google, Facebook, Twitter, etc show thatSilicon Valleyand innovation in the US are doing just fine. First of all, Google was started in the late 1990s before SOX, other regulatory burdens and before the patent system in this country was undermined. SOX and the changes to our patent system have destroyed the venture capital market in theUS. Second, social media companies have not driven the entire economy like the Internet did in the 1990s and the personal computer did in the 1980s. These companies and the social media industry are isolated islands of success that have little significance to the broader economy. If the panel member had any insight to the US economy he would known that the number of technology startups has declined precipitously. The Information Technology and Innovation Foundation index ranked the US dead last among 40 countries in the change in our rate of innovation last decade and many other indicators show the US is falling behind technologically.
The host of the show and the panel seemed to have no idea what Mr. Nothhaft was talking about. My guess is that the host and panel are all Wall Street experts who believe finance is the American economy. They believe in Keynesian economics in which manipulating the money supply and increasing demand by increasing government spending are all that matters. They have no idea what affects technology startups and they do not really believe they are important. They do not understand that technology startups create the inventions that increase our real per capita income.
The Harvard Business Review interview again focused on how startups create jobs. Mr. Nothhaft again argues for a two-tiered approach to SOX and other financial regulations. He argues that technology startups do not use leverage and do not pose a threat to the financial system of the US. He also points out that Lehman Brothers, AIG, Goldman Sacs, etc. were all SOX compliant going into the current financial crisis.
He later explains that the patent system has been undermined by the theft of user fees from the Patent Office by Congress to the tune of over $1B in the last two decades. Congress just stole another $100M from the Patent Office in the continuing resolution bill – See Stealing From Inventors.
The HBR interviewer is also ignorant of the US’s lack of innovation in the last decade. She does not understand that increases in technology are the only way to increase real per capita income. The host ends the interview with the condescending comment that it’s clearly a very complex issue. It is not complex! When the government interferes with property rights (particularly patents) and imposes absurd regulatory burdens (SOX, Dodd Frank) and the US has the highest corporate tax rate in the World it is straight forward that the result will be fewer businesses, fewer jobs, and a lower standard of living for all.
I respectfully disagree with Mr. Nothhaft’s two-tier approach to SOX and other financial regulation. First of all, Mr. Nothhaft points out that SOX failed to stop financial fraud and the 2008 financial meltdown. He points out that the companies he believes should be subject to SOX were all SOX compliant, but they were also the ones that caused the financial meltdown. So if SOX does not work, why have a two-tiered approach? SOX should be repealed – period. Second, laws that only apply to certain people or businesses are the essence of tyranny. A good law should apply to all people equally, much like a law of physics/nature. When Congress exempts itself from certain laws (e.g., antidiscrimination, Social Security, Obama Care, etc) and makes convoluted tax laws to help the politically connected at the expense of the rest of the country, you know that you are on the path to tyranny. Adding another law that only applies to certain businesses will only accelerate the US’s decline into despotism.
Hear is an excellent article, IT’S OFFICIAL: The IPO Market Is Crippled — And It’s Hurting Our Country in the Business Insider, on the damage we have done to our capital markets. The article starts out by showing that many of our biggest companies went public when they were very small. At the time there were numerous underwriters and often the main inventors were individual investors. For instance, the article explains:
As recently as 1986 Adobe had an IPO raising $6M. None of these companies could have gone public in today’s environment even adjusting for inflation. Virtually all the buyers at the time were individuals and there was a robust “over the counter” after market for young companies.
The article then explains that a company has to have a market valuation of $250M or more to be viable in today’s market. My estimates are higher. The article points out that a major reason for this change in the market is because of Sarbanes Oxley or SOX, which imposes onerous accounting requirements on companies. The article then discusses some attempted solutions to this problem. (I have suggested an alternative in my post Circumventing Sarbox and the IPO drought)
This has been a disaster for the venture capital industry. As a result, VCs are looking for companies that can exit by M&A at earlier states. VCs are also not investing in capital intensive companies.
Unfortunately, the article calls for half measures of curtailing but not eliminating SOX. They suggest this course of action despite the fact that they do not single benefit provided by SOX. The authors point out that:
The number of annualU.S.issuers listing IPOs onU.S.exchanges has declined since 1996 from 756 to a low of 36 in 2008 and 50 in 2009 and 120 last year according to Dealogic. By contrast, there have been 346 Chinese issued IPOs listed onChinaexchanges in 2010 even though the U. S. GDP is 3x larger thanChina’s.
This is just one more example of how were are exporting our innovation and jobs overseas.
The insane thing about our securities laws is that in the U.S. you have to hire a lawyer to invest in a non-public company, but you can blow your money in Vegas, Atlantic City, etc freely. One activity creates jobs and wealth and creates value. The other is a less than zero sum that destroys wealth.
This intriguing question and its implications for US economic policy are tackled in the groundbreaking book Great Again, by Henry R. Nothhaft with David Kline. They answer the above query with a series of questions:
Could a twenty-year-old college dropout, just back from six months in an ashram somewhere, attract funding for a capital-intensive venture based on the manufacture (yes, the manufacture) and sale of a $2,500 consumer product unlike any that had ever been bought by consumers before? One whose potential uses were at best unknown, and possibly nonexistent? And one for which the total current market size was exactly zero?
Not only could Apple not get funded today, it probably could not go public. Nor would Apple have received its first patent (USPN 4,136,359) in only 20 months. The book asks “how many of today’s Apples are not getting a chance?”
The authors use the above example to make a broader point that theUSis failing economically and technologically because of the policies we are pursuing. They show that all net new jobs created in theUSsince 1977 (and possibly longer) were created by startups like Apple. All increases in real per capita income are due to new technologies and most revolutionary/disruptive technologies are created by startups and individual inventors. So what are the policies that have undermined our economy, by undermining technology startups?
The book examines five areas:
1.Role of regulations. The Authors show that our tax policies, Sarbanes Oxley and our indifferent (some might say arrogant) regulators’ application of well meaning regulations to startups is driving them either overseas or out of business.
2. Underfunding the patent office. This is costing theUS millions of jobs and billions in GDP. According to the authors, each issued patent is worth 3-5 jobs on average, particularly patents issued to startups.
3. Manufacturing policies in the US. Manufacturing is key, particularly in a world that does not respect property rights in inventions, to ensuring that theUS profits fromUS innovation and not other countries. TheUS is also losing the global battle for human talent.
4. Battle for global talent. Our restrictive immigration policies are depriving theUS of talented entrepreneurs such as Andy Grove, founder of Intel.
5. Funding for research. The book shows that our spending on basic science and engineering is not only declining as a percentage of GDP, but the system has become short-term oriented and bureaucratic.
While this book tackles complex issues, it is a quick easy read. It is full of interviews from entrepreneurs, venture capitalists, and technologists who built America’s technology startups over the last three decades. Great Again provides numerous real life examples to illustrate its points.
This pioneering book shows how the US can create jobs and increase per capita income. The policy prescriptions are based on solid science. Just cutting government spending (balancing the budget) will not cause theUSeconomy to grow vigorously, we need pro-growth policies. The authors are some of the few people that understand what policies are needed for the US to be GREAT AGAIN.
Great Again: Revitalizing America’s Entrepreneurial Leadership, by Henry R. Nothhaft and David Kline
Michele Bachmann has introduced a bill repeal the massive and widely criticized Dodd-Frank financial (see Newsmax story and Stillwater Gazette story). This is a good first step, but she should have also included the repeal of Sarbanes Oxley. Ms. Bachmann has correctly criticized SOX as ineffective and overly expensive.
When Sarbanes Oxley was passed, the SEC (Securities and Exchange Commission) estimated the cost of compliance would be $91,000.00 per year for each public company. The most recent estimates for the cost of compliance are between $4.0 million and $5.0 million per year for publicly traded companies. This clearly has an affect on the number of IPOs.
Is the cost of this law worth its incredible price? Has Sarbanes Oxley achieved its goal of protecting investors from fraud? Sarbanes Oxley has cost the U.S. economy at least $400 billion since it passage. This is just the direct costs and does not include the opportunity costs, which are most likely substantially higher. The stock market has been flat or declining since its passage. As a result, it is hard to argue that this legislation increased shareholder value. The banking scandals of 2008 & 2009 that included Bear Sterns, Lehman Brothers, American International Group (AIG), Merrill Lynch, and the Bernie Madoff fraud make it impossible to suggest that Sarbanes Oxley has protected investors from fraud.
Background
It has been a year since I published my book The Decline and Fall of the American Entrepreneur: How Little Know Laws and Regulations are Killing Innovation. The book explains that the only way to increase real per capita income is by increasing our level of technology. This can be accomplished by capital equipment purchases, which upgrade plant and equipment with newer technologies or by creation of inventions. Since the United States is a leader in technology, we do not have the choice of just upgrading to new technologies produced in another country. So we must create new technologies if we want our economy to grow. There are two ways to encourage the creation of new technologies; government funding or private investment in inventions. Government spending on research and development is not 
nearly as effective as private spending for all the same reasons that government spending is always wasteful. A study by the Small Business Administration shows that most emerging technologies are invented by small entrepreneurial start-ups. Unfortunately, since 2000 the U.S. has undermined the three foundations on which technology start-ups are based. Those three foundations are intellectual capital, financial capital, and human capital. We weakened the intellectual capital foundation by weakening our patent system, we weakened the financial capital foundation with the passage of Sarbanes Oxley, and the human capital foundation was weakened by the accounting rules that required the expensing of stock options.
Since my book was published the financial capital foundation has been further undermined by the passage of the financial reform bill. There has been no change on the human capital front. There is mixed news on the intellectual capital front. The good news is that David Kappos replaced the incompetent and traitorous Jon Dudas as the head of the Patent Office. The bad news is that Supreme Court again illustrated their utter incompetence in the Bilski decision. For more information, see The US Economy and the State of Innovation.
These problems are being exacerbated by the budgetary issues associated with aging baby boomers. The Obama and Bush administrations compounded these problems by expanding Medicare to prescription drugs and the passage of Obama Care. Presently, Medicare/Medicaid and the Children’s Health Insurance Program (CHIP) represent 21 percent of the federal budget. Social Security represents about 20 percent of the federal budget and interest payments represent about 8 percent of the federal budget. It is estimated that about 10,000 baby boomers will go on Medicare per day for the next twenty years. However, about 5000 seniors are dying per day. Each Medicare recipient costs about $10,500, so Medicare costs will expand by $185 billion dollars (today’s dollars) or another 5% of the federal budget. Roughly, the same calculation applies to social security. So Medicare and Social Security will consume approximately 50% of the U.S. federal budget by 2020. In addition, the interest payments are likely to consume around 30% of the U.S. federal budget. This means that 80% of the federal budget will be spoken for. This does not include any additional costs for Obama Care. It is unlikely that the federal budget as a percentage of the economy can grow, since the U.S. had to borrow one third of the federal budget in 2010.
Here are my predictions for the next decade based on this background. I provide an optimistic, most likely, and pessimistic scenarios. Note these scenarios are based on what I believe is most likely to occur, not what I believe is the best that could be done or the worst that could be done to the U.S. economy.
Predictions Common to all Scenarios
Properties rights of all kinds will continue to be weakened. It appears that you can get a PhD. in economics (or even win the Nobel Prize) without understanding even the most basic ideas of property rights and how they affect a free economy. Even so called free market economists forget that Reagan not only cut tax rates, he strengthened property rights. Particularly he strengthened patent rights – for more information click here. He also strengthened property rights by weakening regulations and weakening the power of unions. A number of so-called free market economists do not understand that property rights are based on productive activity. As a result, they have joined in an all attack on property rights for inventions – patents. For more information see Scarcity Does it Prove Intellectual Property is Unjustified.
There does not appear to be any meaningful ground swell against Sarbanes Oxley[1] and the Financial Reform Bill. As a result, entrepreneurial companies will be starved for financial capital. Because it appears very unlikely we will strengthen property rights for inventions or property rights generally or strengthen our capital markets so they work for start-up companies, the most optimist scenario is limited to subpar growth.
The growth of the Internet will result in a continued decline in commercial real estate values under all scenarios. Commodity prices are likely to increase, inflation adjusted, under all circumstance. Growth in China and inflation will drive this increase in commodity prices.
Optimistic Scenario
This scenario assumes that the U.S. faces up to its budgetary problems, repeals Obama Care, and rationalizes it tax structure. This scenario assumes that Obama is not elected for a second term. Government spending will grow slightly as a percentage of GDP. Supply Side economists would probably consider this enough to create vigorous economic growth. However, it does nothing to really encourage investment in new technologies. As a result, real inflation adjusted GDP growth over the decade will probably be around 2%. Median household family income after taxes will be stagnant. This will be two decades during which median household income has not grown in the U.S. I believe that will be the first time in the history of the U.S. this has occurred.
The housing market is likely to be stagnant since family incomes will be stagnant. Inflation is likely to run 4-6%, but this will not be enough to cause appreciation in housing prices. In fact, inflation adjusted housing prices will likely decline.
The best economic opportunities will be in government related jobs or businesses. Commodity based business will also prosper. Technology entrepreneurs will be few and far between. Unemployment numbers will hover between 7-9% throughout the whole decade – this will be the new normal. The U.S. will no longer be the largest economy in the world and based on per capita income among large countries the U.S. may fall below the top ten in the world. The U.S. will also be one among many equals in technological and scientific leadership. All social ills will increase slowly including crime, number of welfare dependents, and black market transactions.
Most Likely Scenario
This scenario assumes that the U.S. will not face up to its budgetary problems and Obama Care will not be repealed completely. Under this scenario, the U.S. will go from financial crisis to financial crisis. Each financial crisis will be meet with a short term band-aid solutions. Federal government spending will grow to at least 30% of GDP and total government spending will be 50-60% of GDP. Inflation will grow to 10-14% by the end of the decade. Despite this, housing prices will not keep up with inflation. Median household family income after taxes will decline by 2-7%. Official GDP numbers will show slightly negative growth, but this will over state the actual growth rate.
The best economic opportunities will be in government related jobs or businesses. Commodity based business will also prosper. The financial differences between those who are in the government’s favor and those who are not will be huge. Technology entrepreneurs will be almost nonexistent. The brain drain from the U.S. will be apparent and a cause for anxiety. Unemployment numbers will hover between 9-15% throughout the whole decade. The U.S. will no longer be the largest economy in the world and based on per capita income among large countries the U.S. will fall well below the top ten in the world. The U.S. will also be a declining power in technology and science. All social ills will increase moderately including crime, number of welfare dependents, and black market transactions. The chance of a major war in the world will be moderate.
Pessimistic Scenario
The U.S. will not face up to its budgetary issues even to get through a crisis. The U.S. will either literally default on its debt or inflation will be over 20% or both. Multiple states will go bankrupt and be bailed out by the federal government. Tax burdens will skyrocket as will the black market. Housing prices will decrease significantly except in extremely exclusively neighborhoods. Social order will collapse. The pretense that the U.S. is a nation of laws or that the Constitution has any meaning will be completely destroyed. There is a possibility (15%) that there will be a military coup. Alternatively or in combination there is a possibility that the U.S. will break up into a number of separate countries. Many parts of the U.S. will decide that it no longer makes sense to support Washington, Wall Street and parts of California that have become use to crony capitalism and government handouts. The brain drain from the U.S. will be well known and huge. This may be the driver for politicians and voters to demand real reform. China and India will dominate the world economy. Unfortunately, neither will likely fill the U.S.’s shoes and become a technological and scientific leader. Singapore will likely be the richest country in the world on a per capita basis by a large margin. They will be the major center of technological and scientific research. The chance of a major war in the world will be probably.
Caveats
The best reason to be more optimistic is that the U.S. has never had two bad decades in a row. In the late 1930s and late 1970s there was no reason to suppose that the U.S. would right itself economically. We pulled out the 1930s because Roosevelt realized that he had to adopt pro-business policies if the U.S. was to have any chance of winning World War II and so did the voters. In the 70s, there was little hope that the U.S., let alone England, would pull out of the inflationary spiral, increase unionization, increased regulation, increasing government spending and entitlements. However, there was the glimmer of Ronald Reagan and a surge of free market economists such as Milton Friedman, who still understood property rights. Unfortunately, I do not see a Ronald Reagan on the horizon and many of today’s free market economists are overly focused on the detrimental effects of Federal Reserve and high marginal tax rates. Very few seem to understand the importance of strengthening property rights, particularly for inventions or the need to free up our capital markets from regulation. I hope I am wrong and there is a politician who understands property rights, particularly for inventions, and the need to free up our capital markets, while having the strength to stand up to government unions and special interests.
I cannot decide if we are seeing the collapse of Western Civilization under the weight of the welfare state (socialism) or if we are seeing the last hurrah of the welfare state.
[1] Ron Paul and Newt Gingrich have advocated eliminating SOX.
Many entrepreneurs, inventors, and economists complain about the Patent System and intellectual property rights. However, when you examine their complaints they are often concerned about how the patent system is implemented as opposed to the concept of property rights for inventions – patents. For instance, an extremely successful entrepreneur and angel investor I know complained that patents increase the uncertainty when investing in a start-up company. Because of the long time that it takes patents to issue, he protested that it is difficult to know when a patent might suddenly issue, affecting the business plan of a start-up in which he has invested. Other common complaints include that the patent system is expensive, time consuming, and difficulties in determining the boundaries of a patent. Some 
people go so far as to suggest that this shows that patents are not a true property right. After all, they reason, it is easy to determine the boundaries of real property and obtaining title to real property (land) is a straight forward process.
Here, the complainers show that their ignorance of history. Before title insurance buyers of real property paid an attorney a lot of money to determine if they would receive “good title” to land if they bought it from the seller. This title opinion did not come with a guarantee and it was not cheap. In addition, you would have to pay a surveyor to determine the boundaries of your real property. The survey process was expensive and fraught with problems until the advent of modern technology, such as GPS. Our ancestors fought each other tooth and nail over the boundaries to their land. In fact, court battles over land are a great way to trace your ancestry, because these battles were so common.
While the critics are wrong in their comparison between real property and patents, they are correct that we need systems that reduce the cost and uncertainty of determining the boundaries of patents (inventions) and whether the owner has good title (102, 103 issues). In short, we need the equivalent of title insurance for patents. I believe that standards committees (e.g., IEEE 802.11 WiFi) are acting like title insurance companies. They determine which patents are essential to practice the invention. In effect, they determine the boundaries of patents with respect to the standard and to some extent determine if these patents have good title to an invention. I also believe that NPEs (Non-Practicing Entities) also act like title insurance companies. Of course, many of the critics of the patent system do not like NPEs either.
I, too, agree that the patent system takes too long to issue patents. However, the problem is not with the concept of a patent system but with a government that has failed to fully fund the Patent Office. In the last two decades, about billion dollars in user fees have been diverted from the Patent Office to Congressional pet projects. In the US, the Patent Office has always been funded by user fees, which are the fees that inventors pay to the Patent Office when they file for a patent. However, when an inventor writes a check to the Patent Office the money is deposited directly to the general treasury account of the federal government. Congress then appropriates these fees back to the Patent Office. When Congress diverts (steals) a billion dollars of user fees from the Patent Office, it is not surprising that the Patent Office will take longer to determine issues of patentability, increasing uncertainty for start-ups. If Congress was subject to Sarbanes Oxley, they would all be thrown in jail for this diversion of fees. In my opinion, the patent process has also become too formalistic and complicated.
These complaints that I have cataloged here are not about patents per se, but with the implementation of the patent system. I agree that the present patent system is overly cumbersome, too formalistic, too expensive, and takes too long. As an aside, I will point out that the critics of patents (IP) complain about their complexity but raise just a peep about a tax system that is over 10,000 pages and a new securities law that is over 1400 pages. There appears to be a disconnect in their thinking.
Some of the solutions to the problems with our patent system will occur if the free market is allowed to create solutions like title insurance for patents. Fully funding the Patent Office will solve many of the other problems, such as the lengthy pendency times. Patents are completely consistent with Locke’s formulation of property. Patents like real property rights are fundamental to economic progress and human rights.
AWall Street Journal article discusses how a number of European companies are delisting from US stock exchanges. The article points out 
that cost of complying with US law is outweighs any benefits derived by being listed on a US stock exchange. It also explains that the cost of Sarbanes Oxley is increasing, despite earlier predictions that the cost of SOX would decline over time. The new financial reform bill does nothing to address these problem. In fact the present financial reform bill, at over 1400 pages, is going to make it more difficult for start-ups to raise money and more costly to go public in the US.
I had an excellent interview with JJ on a Session w/JJ on Voice on the net. For the full interview click here.
Senator Chris Dodd’s 1,400-page financial reform bill contains many economic land mines, and here’s one of the worst: Provisions that would make it harder for business start-ups to raise seed capital. Currently, wealthy individuals who want to invest directly in a new business can do so with minimum interference from regulators. The law requires only that the investor be “accredited” by meeting thresholds for net worth ($1 million) or income ($250,000). Entrepreneurs depend on these “angel” investors, since many new businesses lack the collateral for bank loans and are too small to interest venture capitalists.
Mr. Dodd’s bill would change all this for the worse. Most preposterously, it would require that start-ups seeking angel investments file with the Securities and Exchange Commission and endure a 120-day review. Rare is the new company that doesn’t need immediate access to the capital it raises, and a four-month delay is the kind of rule popular in banana republics that create few new businesses.The legislation also removes a federal pre-emption that prevents start-ups and investors from being subject to 50 different state regulators. The North American Securities Administrators Association, which represents state regulators, argues that federal pre-emption contributes to fraud. But angel investors don’t use broker-dealers and other middlemen linked to recent investment scandals. Nascent companies often seek financing from multiple investors in different states, and a state-by-state regulatory regime would mean higher compliance costs and more legal risks.The Dodd bill also raises the net worth and income thresholds to $2.3 million and $450,000, respectively. The Angel Capital Association, a trade group, estimates that these provisions would disqualify about 77% of current accredited investors. Accreditation matters in luring other potential investors, such as venture capitalists who enter the picture once a company begins to mature.
Please see the full Article
Local author, “The Decline and Fall of the American Entrepreneur: How Little Known Laws and Regulation are Killing Innovation”.
Dale B. Halling is a patent attorney located in Colorado Springs. His book, “The Decline and Fall of the American Entrepreneur: How Little Known Laws and Regulation are Killing Innovation“, explains that innovation is the key to getting out economy growing again. Unfortunately, since 2000 we have passed a number of laws and regulations that are killing innovation in the US. The incredible innovation of the 90s was based on technology start-up companies built on intellectual capital, financial capital, and human capital. All three of the pillars have been under attack since 2000. Our patent laws have been weakened reducing the value of intellectual capital. Sarbanes Oxley has made it impossible to go public reducing financial capital for start-ups and the FASB rules on stock options have made it harder to attract human capital to start-ups.
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The Financial Crisis Inquiry Commission, being members of congress, are trying their best to pin the financial crisis on anyone but Congress. It appears the favorite whipping boys are Alan Greenspan and unfettered capitalism. Congress conveniently forgets that between Fannie, Freddie, FHA loans, Veterans Housing Administration, and the Community Reinvestment Act we don’t have unfettered capitalism. Not to mention to the Federal Depository Insurance Corporation, the Office of the Comptroller of the Currency, the Office of Thrift Supervision, the National Credit Union Association, the Board of Governors of the Federal Reserve, the Department of Housing and Urban Development, the Federal Financial Institutions Examination Council, the Financial Crimes Enforcement Network, and state banking regulatory agencies. The only way someone can call that unfettered capitalism is to propagate The Big Lie: that the US is a bastion of unfettered capitalism, which causes all our problems.
As Alan Greenspan pointed out:
the surge in demand was the heavy purchases of subprime securities by Fannie Mae and Freddie Mac, the major U.S. Government Sponsored Enterprises (GSE). Pressed by the Department of Housing and Urban Development and the Congress to expand “affordable housing commitments,” they chose to meet them by investing heavily in subprime securities. The firms accounted for an estimated 40% of all subprime mortgage securities (almost all adjustable rate), newly purchased, and retained on investors’ balance sheets during 2003 and 2004. That was an estimated five times their share of newly purchased and retained in 2002, implying that a significant proportion of the increased demand for subprime mortgage backed securities during the years 2003-2004 was effectively politically mandated, and hence driven by highly inelastic demand.
As Greenspan points out Congress had no interest in reining in the subprime mortgage party or the securitization of these mortgages (CMO). In addition, Greenspan did warn about both the problems with Fannie and Freddie. In 2002, he expressed concerns to the FOMC, noting that “…our extraordinary housing boom…financed by very large increases in mortgage debt – cannot continue indefinitely.” It did continue for longer than he would have forecast at the time, and it did so despite the extensive two-year -long tightening of monetary policy that began in mid-2004. See Greenspan’s complete analysis at http://fcic.gov/hearings/pdfs/2010-0407-Greenspan.pdf.
Greenspan then points out that there “was a pronounced fall from 2000 to 2005 in both global real long-term interest rates and nominal long-term rates, which indicated that global saving intentions, of necessity, had chronically exceeded global intentions to invest. Yet the ex post global saving – investment rate in 2007, overall, was only modestly higher than in 1999, suggesting that the uptrend in the saving intentions of developing economies tempered declining investment intentions in the developed world. This statement is the most interesting and important statement in all of Greenspan’s testimony. Why had and has the developed world reduced its rate of investment? Why has investment not grown since 1999?
Has the rate of investment in the developed world stagnated because we have run out of businesses and ideas? No, since 2000 we have passed a number of laws and regulations that are killing innovation in the US. The incredible innovation of the 90s was based on technology start-up companies built on intellectual capital, financial capital, and human capital. All three of the pillars have been under attack since 2000. Our patent laws have been weakened reducing the value of intellectual capital. Sarbanes Oxley has made it impossible to go public reducing financial capital for start-ups and the FASB rules on stock options have made it harder to attract human capital to start-ups. If we want to create jobs, we need to have laws that encourage entrepreneurial start-ups.
These issues are discussed in more detail in my book The Rise and Fall of the American Entrepreneur: How Little Known Laws and Regulations are Killing Innovation – http://www.amazon.com/Decline-Fall-American-Entrepreneur-Regulations/dp/1439261369/ref=sr_1_1?ie=UTF8&s=books&qid=1262911287&sr=8-1
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