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Posts Tagged ‘Sarbanes Oxley’


A recent article in the Huffington Post suggests that the U.S. has become a third world country in terms of innovation.  The article states:

A report by the Information Technology and Innovation Foundation looked at the progress made over the last decade in the area of innovation. Out of the 40 countries and regions it examined, the U.S. ranked dead last.

A study on innovation by the Boston Consulting Group concluded that America is “disadvantaged in several key areas, including work force quality and economic, immigration, and infrastructure policies.”

In 2009, patents issued to American applicants dropped by 2.3 percent. Those granted to foreign-based applicants increased by over 6 percent.

The article suggests loosening up our immigration policy for highly trained individuals and increasing the quality of our educational institutions as solutions to this problem.  While there is nothing wrong with these suggestions, they fail to recognize the real changes in policy that we have made in the last decade that are killing innovation.  Specifically 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.

 
Da Vinci Institute: Night with a Futurist

Dale Halling will be speaking at the Night with a Futurist event at the Da Vinci institute on April 5, 2010 at the Madcap theater.   As a patent attorney, Dale Halling deals with start-up entrepreneurs on a daily basis.  He began noticing a significant difference between the types of projects his clients were involved with in the 1990s and 2000s. Clients, in the 90s, would come into his office with plans to build businesses that were disruptive or revolutionary.  The technologies underlying these companies held the potential to completely redefine a market.  Some of the ideas would increase the available bandwidth by 10x for minimal costs or allow data searches that were 10-100x faster than existing technologies.  It was very exciting talking with these entrepreneurs.  Their energy was infectious and the potential implications of their work was mesmerizing.  However, the tech downturn of 2000-2001 changed all that.

After 2002, the start-up companies he came into contact with were all looking for narrow niche markets.  Instead of trying to make dramatic changes to technology and go public, these companies were looking to develop incremental changes and be bought out by an existing company.

He started wondering if other people in the tech world were seeing similar trends.

Recent innovations like the iPod, the tremendous amount of money Intel was spending to build their next microprocessor plant, and the social media industry are certainly innovative, but they are not capable of altering the entire economy like the Internet of the 90s.  The Internet in the 90s affected almost every business in the U.S.  It drove PC sales, retail, electronics, telecommunications, professional businesses, marketing, newspapers, and much more.  It also redefined whole areas of life, with email, online shopping, and online advertising. It was impossible to escape the effects of the Internet unless you crawled under a rock.

The personal computer revolution of the 80s had a similar effect.  The iPod has been cool, but hasn’t affected the whole economy.

So what’s behind all this? The changes have seemed subtle from the outside, but the ripple effects have been huge.

Join us as we take a hard look at how the face of innovation has changed, and what we can do to turn it around.

EVENT: Night with a Futurist
DATE: April 5, 2010 – Monday
TIME: 6:30pm-9:00pm
WEBSITE: http://www.davinciinstitute.com/events/433/night-with-a-futurist-monday-april–5-2010

LOCATION: MADCAP Theater, 10679 Westminster Blvd, Westminster, CO 80020
DIRECTIONS: Driving Directions

COST: $25, Members: Free, SuperMembers: Free
REGISTER: Register here

PHONE: 303-666-4133

TOPIC: “The Decline and Fall of the American Entrepreneur: How Little Known Laws and Regulations are Killing Innovation”
SPEAKERS: Dale Halling, Allison Taylor, Catharine Merigold, Gene Branch, Mike Schmidt, Thomas Frey

 
Public vs. Private Action: Jobs Bill

The Obama administration is proposing a jobs bill or stimulus II bill. The fundamental question is whether the government should create jobs directly or pursue policies that allow private companies to increase employment. If the government were to spend its entire budget on jobs, it could only spend $3.5 trillion. If you eliminate “mandatory spending” which includes Social Security, Medicare, Medicaid, and interest expenses then you are left with only $1.3 trillion. This is essentially the amount of the projected deficit for 2010. Public action could result in $1.3 trillion spending on jobs at best. This spending is unsustainable since it is based exclusively on borrowed money.

 How much money could be invested in jobs if the U.S. were to pursue policies that encourage investment in job producing enterprises? The U.S. has a $14.0 trillion economy. If you assume that the U.S. earns 10% on capital, then there is $140 trillion in capital in the U.S. The U.S. represents 20% of the world economy, so there is at least $700 trillion in capital in the world. If the U.S. were to pursue policies that encouraged private investment in the economy, then it would not be surprising if it attracted 1% of the worldwide capital or $7.0 trillion. This would dwarf the $1.3 trillion that the government could spend on jobs. Private investment would create self sustaining jobs unlike government spending. In addition, the government would save the $1.3 trillion it would have otherwise spent so the country would be $8.3 trillion better off. These numbers are not exact but it clearly illustrates the point that private action is much more powerful than public action.

What policies would encourage this avalanche of private investment? The right policies would encourage investment in technology, since the only reason we are wealthier now than in the past is because of our level of technology. New technologies are capable of exponentially increasing our standard of living and create high quality, high pay jobs. The top three policies that would encourage private investment in new technologies are: 1) strengthening our patent laws (intellectual property), 2) repealing Sarbanes Oxley, and 3) repealing the capital gains tax. Patent laws are the method of obtaining title to technology. If a company cannot own its technology, then investors and inventors are unlike to invest in developing new technologies. Property rights (patents) are critical to attracting investment. Sarbanes Oxley makes it almost impossible for companies to go public. Access to public markets is critical for investors to monetize their returns. Capital gains reduce the return to investors and are a form of double taxation. The higher the capital gains the lower the level of investment.

Private action is significantly more effective at creating jobs and stimulating the economy. We need policies that encourage investment in technology, because advances in technology are the only way we increase real per capita income. These policies include strengthening our patent laws and repealing Sarbanes Oxley and capital gains taxes.

 
John Clemens Show – USA Radio

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.

 

An article in WSJ blogs is more evidence that Sarbanes Oxley has driven the investment banking business overseas.  This has significantly hurt the financial capital to technology startups.  According to the article:

A statue in the City of London of the authors of the 2002 Sarbanes-Oxley U.S. regulatory legislation?

Such a monument is worthy of consideration, joked Lord Levene, chairman of Lloyd’s of London, at a World Economic Forum panel discussion. His point was that tighter accounting and other corporate regulations delivered by the so-called SarbOx law drove business to the U.K. from the U.S. and helped London thrive before the more recent credit crisis.

Please read the full article, A SarbOx Statue in the City of London?

 
Grant Thorton on the IPO Crisis

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.

 

There has been a lot of discussion about whether the Venture Capital Model is dying. Some suggest that there is just too much money in venture capital other suggest that it is just a cyclical downturn. However, the evidence does not support this.  Click here to see the video

 
96% of Americans Believe Innovation is Critical

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.

 

Technology start-ups drive innovation.  According to the book, The Decline and Fall of the American Entrepreneur, a start-up needs almost a billion dollars in sales to justify going public because of the cost of complying with rules such as  Sarbanes Oxley, depriving our technology sector vital financial capital.

Decline and Fall clearly shows:

*Sarbox fails to achieve its goals;

*Thriving IPOs are critical to providing capital for technology companies, even if most of those companies never go public;

*The SEC estimates the cost of Sarbox compliance at $91,000/yr per company, the actual cost is closer to $4.0M/yr!!!

*Is the medicine worse than the disease!!

Percentage of World IPOs:

1996 – 60% in U.S.

2005 – 20% in U.S.

*Decline and Fall shows how we can turn this around- Make the US the world leader again in Innovation. Jobs. Capital.

Your copy of The Decline and Fall of the American Entrepreneur: How Little Known Laws and Regulations are Killing Innovation, by Dale B. Halling, is at Amazon.com.

 

Is Sarbox Constitutional?

The Supreme Court is reviewing whether the Public Company Accounting Oversight Board created by Sarbanes Oxley is Constitutional.

According to Yahoo Finance,

“A small Nevada accounting firm and an anti-tax group brought the challenge to the 2002 Sarbanes-Oxley law, arguing that the board created by the law violates the Constitution’s separation of powers mandate because the president cannot appoint or remove its members.”

“The board wields too much, unchecked power, Michael Carvin, the challengers’ lawyer told the court.”

I have discussed the untold damage Sarbanes Oxley has caused to U.S. innovation.  For more information see Sarbanes Oxley – the Medicine is Worse than the Disease and Sarbanes Oxley – the Medicine is Worse than the Disease-2 .

The Supreme Court in recent history has rarely found that there has been an unconstitutional delegation of power.  It is possible that Board may violate the Administrative Procedure Act, but I do not believe that this is the issue before the Supreme Court.  Even if the Supreme Court were to rule that the Board is unconstitutional, this is unlikely to significantly reduce the damage caused by Sarbox.  The good news is that Sarbox seems to be under attack on a number of different fronts.

 

Sarbanes Oxley (Sarbox) is starving high technology start-ups for capital.  Mathew Bandyk, in US News and World Report, suggests that not only has Sarbanes Oxley hurt venture capital, and decreased the number of IPOs, it is imposing costs on small businesses.[1] The reason that Sarbox is increasing the costs for small business, according to Bandyk, is that accountants are applying Sarbox rules to small businesses out of habit or conservatism.  In order for a company to go public nowadays, a company needs somewhere near $1 billion in annual revenue.  For more information on the damaging effects and absurdity of Sarbox see Sarbanes Oxley – The Medicine is Worse Than the Disease.  Since it does not appear likely that Washington is going to fix Sarbox anytime, how can we mitigate its damage?

 

According to the NYtimes the House Financial Services Committee approved an amendment to Sarbanes Oxley (Sarbox) that would allow some companies to be exempt from this legislation.  While the article implies that many companies would not be exempt under this amendment, the amendment only applies to companies worth less than $75 million and asks for a study of whether companies worth less than $250 million should be exempt.

Sarbanes Oxley has severely damaged the technology start-up market and the financial industry in the U.S.  Sarbox is very expensive: including enormous direct and indirect costs to our economy and to innovation.  It has not met its goals of improving the quality of auditing or preventing fraud.  The effects of this law include fewer public companies, fewer companies going public, more companies choosing to go public in foreign markets, absurdly high auditing expenses and a significant decrease in risk capital.

For More information see Sarbanes Oxley – Is the Medicine Worse Than the Disease – 1 and Sarbanes Oxley – Is the Medicine Worse Than the Disease – 2 .

 

 This post is the Introduction to my book, which should be available on Amazon.com in December of 2009.

This book started as a project based on my observations.  I deal with technology start-up entrepreneurs everyday as a patent attorney.  I noticed a difference between the sort of projects my clients were undertaking since the technology downturn of 2000-2001 and the 90s.  Clients, in the 90s, would come into my office with plans to build businesses that were disruptive or revolutionary.  The technologies underlying these companies held the potential to completely redefine a market.  Some of these of these ideas would increase the available bandwidth by 10x for minimal costs or allow data searches that were 10-100x faster than existing technologies.  It was extremely exciting talking with these entrepreneurs.  Their energy was infectious and the potential implications of their work was mesmerizing.  The technology downturn of 2000-2001 forced a reevaluation of these aggressive business plans.  I expected that after a couple years of the technology market taking a breath, I would again be working with companies trying to change the world. 

 

None of these securities laws were able to prevent the stock market decline of 2000.  Sarbanes Oxley was passed in 2002 in reaction to several corporate and accounting scandals including those affecting Enron, Tyco International, Adelphia, and WorldCom.  The legislation set new or enhanced standards for all U.S. public company boards, management, and public accounting firms.  The act contains 11 titles, or sections, ranging from additional corporate board responsibilities to criminal penalties, and requires the Securities and Exchange Commission (SEC) to implement rulings on requirements to comply with the new law.

 

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