Posts Tagged ‘SOX’
Congressman Paul Ryan has been selected as the vice presidential running mate of Mitt Romney. Many in the Republican Party have hailed him as true advocate of free market principles. Unfortunately, his voting record is much more conventional than we have been led to believe.
Congressman Ryan voted for the America Invents Act (AIA). This Act was laden with crony capitalist gifts for Wall Street, Big Pharma, and large corporations at the expense of startups and individual inventors. The Act was widely criticized as being unconstitutional. This was more than enough reason to vote against the AIA, but Paul Ryan led the charge to gut the only redeeming feature of the Act – namely ending fee diversion. When I called Congressman Ryan’s office to ask why they were doing this, they responded that it was important to balancing the budget. REALLY, in a $3 trillion federal budget the $100M or so you are stealing from inventors is going to make the difference? This is less than 0.1% of the federal budget. This is less than we give to Egypt or the UN or any number of other extra-Constitutional spending.
I pointed out that the PTO was a self funded agency, meaning no tax dollars are used to fund its operation. Diverting the money of inventors and using it for another purpose is conversion (stealing). Their response was how is this any different than putting the fee you pay to enter a National Park going into the general treasury? There are a number of differences. First, when I pay a fee to enter a National Park, I immediately get the service I paid for. In the case of patents, inventors have to routinely wait from three to ten years to get the service they paid for. Second, National Parks were created with federal funds, but inventions are created with private funds. Even the Patent Office was created with private funds, since it is a self funded agency and always has been. If a private company or an attorney did what the federal government does with patent fees it would charged with fraud and conversion. This attitude that the federal government is above the law is exactly what is wrong with our country Mr. Ryan.
Ryan is bad for patents
Congressman Ryan voted for Sarbanes Oxley. SOX has made it impossible for startups to go public, which has made it very difficult for startups to raise money. Historically, most of the growth and job creation of startups occurs after they go public. The Kaufman Foundation has shown that all net new jobs since 1972 have been created by startups. To the best of my knowledge, Congressman Ryan has not said he is in favor of repealing SOX. This means he is bad for technology startups and bad for job creation.
Ryan is bad for startup funding
Paul Ryan is widely praised for coming up with a plan to reduce our budget deficit. Since government spending crowds out money that could be used to fund startups, this is good. As part of this proposal he has a plan to rein in entitlements, such as medicare, medicaid and social security. In spite of this, Congressman Ryan voted for medicare part D. The question is which Paul Ryan will show up if he becomes VP.
Ryan also voted for TARP, for the bailout of GM and Chrysler, for the economic stimulus of 2008 and 2009, and for extending unemployment benefits to 59 weeks.
Ryan deserves credit for advancing a fairly realistic plan to reduce the budget deficit, but even this plan does too little to cut the deficit. It’s goal is to reduce federal spending to 20% of GDP in about four years. It is unlikely that we have four years before we are hit with massive inflation, which will more than double our interest payments on our debt and break our budget. In addition, his voting record shows that he is unlikely to have the backbone to follow through with even this weak proposal.
Ryan is not a fiscal Conservative
Ryan has put forth a moderate plan to rationalize our tax system. It does not go far enough, but it is his most pro-growth proposal.
The Problem with Supply Side Proponents
Supply side proponents (SSP) such as Larry Kudlow are ecstatic with the choice of Paul Ryan. The problem with SSPs is that they do not understand that the only way to continually increase real per capita income is to continually increase our level of technology. This means we need to eliminate the barriers to the capital markets for technology startups. This means we need a well functioning system of property rights for inventions. It also means we need to reduce the tax burden on startups, reduce their regulatory burden, legal risks, and accounting rules biased against them. But Paul Ryan does not seem to understand this and neither do most supply siders. As a result, it is unlikely that Paul Ryan and Mitt Romney will be able to put the US on a sustainable path to growth.
Paul Ryan will be better than Obama or Biden
Unfortunately, this is damning him with faint praise. Don’t be surprised if Paul Ryan turns into a Bush disappointment instead of a Ronald Reagan. (Note I hope I am wrong and have to eat my words)
In 2002 Jack Kemp wrote a prescient article on Sarbanes Oxley, entitled Criminalizing Corporate Behavior. He correctly predicted,
The greatest harm caused by Sarbanes-Oxley, though, will be to small firms that are pushed over the edge into oblivion or nascent public firms that are never born because of legal fees, accounting fees and other exorbitant costs piled on by the regulators!
This is exactly what has happened under SOX. Since it was passed, the number of companies going public has dropped by over seventy percent. The US is the only major country in the world with fewer public companies today than it had a decade ago. The average cost of complying with SOX is over $4M per year per public company. Sarbanes Oxley has failed to achieve any of its stated objectives. Its proponents said it would increase investor confidence in the stock market, eliminated accounting fraud, and decrease the cost of raising capital. I doubt that anyone would say they have more confidence in the stock market today than they had ten years ago. It clearly did not stop accounting fraud or reduce the cost of raising capital.
Jack Kemp explained the media lies used to pass Sarbanes Oxley.
First, instances of corporate fraud and misconduct are quite rare, occurring in less than one-quarter of 1 percent of all companies. Second, contrary to how the media portrays corporate scandals, accounting fraud and sweetheart financial deals are not the result of too little government intervention into the marketplace and insufficient government oversight of an unfettered capitalist system.
Political opportunists exploit the media fiction to play the politics of envy and convince the public that stringent, far-reaching government action is required to stop this “epidemic” of corporate criminality. Rather than a dispassionate examination of the problem, Congress hurriedly enacts ill-advised legislation like the Sarbanes-Oxley Act, which essentially criminalizes accounting mistakes and poor management.
The political demagogues who have used the collapse of Enron, Global Crossing and a few other high-profile business failures as an excuse to criminalize corporate mistakes and poor management ignore the fact that over the last two years there have been more than 70 major bankruptcies in the communications industry, with at least 23 more expected. There have been more than $100 billion in corporate defaults and $7 trillion worth of losses in asset values. A few of these bankruptcies may have resulted from accounting shenanigans, and a few more may be explained by poor business judgment, but with bankruptcies running through an entire industry, and indeed, an entire sector of the economy, the evidence is clear that we confront a problem beyond telecom monopolies or greedy and shady corporate executives. Moreover, in 2001 more than 60 percent of all corporate defaults were outside the telecom sector.
By focusing on accounting scandals and criminalizing corporate mistakes, we divert attention away from the fact that in most cases it was excessive taxation, deflationary monetary policy, and overbearing regulatory policy that undermined companies and entire industries that otherwise were thriving and had a bright future. Political demagogues who play the politics of fear and envy confuse cause and effect when they blame catastrophic business failure on accounting gimmicks. In fact, it was usually the prospect of catastrophic business failure brought on by horrible government policy that created the pressures to cut corners, engage in accounting irregularities and commit outright fraud.
Congressman Kemp debunks the nonsense that the late 90s were a bubble created by the Federal Reserve. He correctly points out that the Federal Reserve actual caused deflation, which resulted in the collapse of so many productive companies and the recession of 2000. If you don’t believe me look at chart of the price of gold. Its price declined from $400 per ounce in 1996 until 2001 when it hit a low of $271 and did not get back to $400 and ounce until 2004. Unfortunately, the myth of a Federal Reserve created bubble in the late 1990s serves the agenda of both groups on the right and on the left.
Jack Kemp’s prescience on Sarbanes Oxley was amazing. It’s too bad we did not listen to him and avoid all the pain of the last decade.
In an article entitled “Sheila Bair: Two Years After Dodd-Frank, Why Isn’t Anything Fixed? , it points out that the LIBOR scandal, the MF Global’s bankruptcy, JP Morgan Chase’s “London Whale” and his trading losses, Barclays’ rate fixing, Peregrine Financial’s fraud have all happened despite the 2,319 page Dodd Frank Act has not stopped. A decade earlier we passed Sarbanes Oxley, which according to its sponsors was going to stop financial fraud, increase investor confidence in the market and in the accounting statements of public companies, and lower the cost to raise capital. But SOX did not accomplish any of this. It did not stop Lehman Brothers, AIG or any of the other financial problems uncovered in the 2008 meltdown. Even more ironic is that no one has gone to jail from these scandals, despite the CEO and others executive officers having to swear that their financial statements were accurate. So what is Ms. Bair, the 19th Chairman of the FDIC, solution – MORE REGULATION. Has Ms. Bair ever heard of the definition of insanity?
Ms. Bair argues that this proves that markets are not “self correcting.” But she fails to note that the US Government always bails out big Banks and Wall Street. Since the crisis of 2008, we have bailed on the banks with TARP, with zero interest rate loans from the Federal Reserve, and with QE1-3. Pat Choate has shown that we bailed on banks and Wall Street at least eight times in the thirty years before that. The markets are not self correcting because the Government does not allow them to work. The Federal Reserve is nothing more than a Bank bailout protection mechanism. Wall Street got special provisions in the America Invents Act to exempt them from competition from innovative startups. Wall Street is acting rationally, because it knows there are no consequences to for failure, but huge upsides if they succeed. That is not how the MARKET works Ms. BAIR – but it is how government works.
Every academic study has shown that Financial Regulation fails to achieve its goals and in fact hurts investors. For instance, see Liu, Tung, Santoni, Gary J., Stone, Courtenay C., Federal Securities Regulations and Stock Market Returns. This paper surveys several papers that all show securities regulation has been a failure. Here are some of the effects of SOX. In 1996 60% of worldwide IPOs went public in theUS. In 2005 only 20% of worldwide IPOs were in theUS. TheUS is the only major country to have fewer public companies today than a decade ago. There has been more than a 90% decline in the number of IPOs. This particularly hurts the technology startup market. It costs around $3 Million a year to comply with SOX as a publicly traded company.
What financial regulation does is increases the cost of obtaining funding for startup and eliminates competition among financial companies.
The Senate passed the JOBS (Jumpstart Our Business Startups) Act, H.R. 3606 and President Obama is likely to sign it. The goal of the legislation is to reduce some of the regulatory burdens in raising capital for startups. The Act exempts small firms from Section 404 of the Sarbanes-Oxley Act for up to five years according to Wikipedia. It also includes some of the crowdfunding ideas of HR 2930. This legislation is a positive step in the right direction. Unfortunately, it is a pebble in Sea of laws, regulations, and taxes strangling technology startups in the US. My guess is that the reason this legislation is passing has little to do with what is good for the country, but what is good for Wall Street banks.
In my book The Decline and Fall of the American Entrepreneur I show that every academic study of the effectiveness of our Securities Laws shows that they have been either totally ineffective at protecting investors or worse counterproductive. The real answer to the lack of funding for start-ups would be to repeal all Securities Laws and Regulations except the common law requirements under contract and tort law.
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.
*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
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.
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.
Peter Thiel, an early investor in Facebook, said that Facebook will not go public until late in the game. He explained that regulations such as Sarbanes Oxley are causing Facebook to delay their IPO. He talks about this at 5:10 into the Fox Business Network Video. The rest of the interview is well worth listening to also.
My book, The Decline and Fall of the American Entrepreneur, argues that SOX significantly undermined the financial capital on which technology start-up companies are built. SOX was only 60 pages long, the new financial reform bill is well over 2000 pages. Imagine the damage it will cause.
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.
Dale Halling is on the John Clemens show on USA Radio Network which is syndicated around the country. The transcript of the show is provided below.
With a nine-point-seven percent unemployment rate, many Americans are asking, “where are the jobs?” Business-policy expert, entrepreneur, patent attorney and author Dale Halling says politicians should begin to look at where the real jobs can be created. John Clemens reports.
3:00 Standard close
Dale Halling is the author of the book, “The Decline and Fall of the American Entrepreneur.” Halling writes if Washington wants to create real jobs, they should look at technology where 70 percent of new jobs will be found.
:20 “advances in technology”
He says entrepreneurs have been stifled by legislation over the last two decades.
:11 “number of entrepreneurs”
Dale Halling says over the last decade foreign countries have made great advances in technology, while the number of American patents issued has been flat.
:26 “to their inventions”
Dale Halling has a four step plan to get America back on track.
:30 “stock options”
It has been both legal rulings as well as legislation that has placed road blocks in front of many potential entrepreneurs and with that the loss of potential jobs for Americans
:26 “to grow”
Dale Hallings is doing his best to get the attention of not only politicians but those Americans witnessing the Decline and Fall of the American Entrepreneur.
:13 “Halling b l o g-dot-com”
This is John Clemens.
Grant Thornton has prepare a paper entitled Market Structure is Causing the IPO Crisis . Here is my understanding oftheir position. The IPO market, especially for small IPOs started to decline before Sarbanes Oxley. The Manning Rule and Order Handling Rule and decimalization decreased the margin for handling illiquid securities by brokerage houses. Finally, online brokerage accounts have killed quality research and encouraged speculation.
The things that effect the IPO market are the cost of going public, the return for going public, the alternatives to going public, and the willingness of an investment bank to take you public (might be part of the cost). While not stated explicitly in the report, they seem to imply that there is little incentive for investment banks to take small companies public or to create a market in their securities after the fact. If true, I think this would contribute to the IPO downturn, but I do not think they have stated their case very strongly.
According to the Brenner Banner article Where Have All the Public Companies Gone, since, 1997 ”the number of listings (of public companies) has declined by almost 40%. This is especially remarkable as listings on other global stock exchanges have increased: the number of listed companies in Hong Kong has almost doubled.” The article states that Grant Thornton says this is not due to Sarbanes Oxley, but the advent of online trading. I do not find this credible. Online trading should effect all the other stock exchange also.
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