Posts Tagged ‘SOX’
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.
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
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.
According to the BBC article “Governments stifle hi-tech innovation, says trade group” , American believe innovation is critical to the US’s success as a world economic leader. The article states:
The weakening financial markets meant that in 2009 America was overtaken as the most competitive economy by Switzerland.
As regular readers of this blog know, In my opinion 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. The Decline and Fall of the American Entrepreneur: How Little Known Laws and Regulations are Killing Innovation, explains these problems in more detail.
According to the Wall Street Journal Article Big Business Creates Jobs Too, “ignoring the important role that big business plays in job creation is a short-sighted mistake.” The author also states
It is actually within large companies that an entrepreneur can find, already in existence, much of what it takes to insure a venture’s success. This includes the capital required to fund startup costs, the marketing presence to create a near-instant reach to customers, and the standing required to gain trust of both vendors and customers.
While it is true that large companies innovate, on a per employee basis they are much less innovative see SBA report on point. In addition, the reason for our economic woes are not that the government has failed implement policies that support large companies, but that it has implemented polices that inhibit technology start-ups. Only technological innovation results in real per capita increase income. The Wall Street Journal article is misleading at best.
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. The Decline and Fall of the American Entrepreneur: How Little Known Laws and Regulations are Killing Innovation, explains these problems in more detail.
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