I attended a panel discussion yesterday on the problems start-ups have in raising capital caused by securities regulation. Start-ups have to hire a lawyer before they raise the first dollar of capital. It’s a real catch-22.

Entrepreneurs are often surprised to find that raising capital means selling securities. They cannot legally sell securities to just anyone. They are restricted to Accredited Investors (basically people with high income or high net worth). Most young entrepreneurs don’t have a rolodex full of such investors. There are other restrictions, for example, they can’t hire someone to help them raise capital unless he has a license to sell securities.



Image credit: Simon & Schuster


Welcome to compliance hell. It’s perfectly legal to fail, to lose your own money and even your house. It’s fine by the law if your dream dies, your marriage fails, and all of the other negative consequences occur when a business does not succeed. But if you raise money, you better be fully compliant. Where’s the concern for people?

The stated purpose of regulation is to protect investors from fraud and bad actors. However, fraud was illegal even before regulation. It is already a crime to lie to someone to take his money. Regulation does not change that. It does not make crime more illegal.

Regulation offers a tantalizing promise. We don’t have to wait for criminals to strike their victims. We can make it impossible for them to commit the crime in the first place. We just force them to comply with regulations. No matter how many Enrons and Bernie Madoffs happen, few stop to ask if the theory is even valid. Can regulators proactively prevent bad things from happening?



Cartoon by Nate Beeler


Nor do people ask if investors deserve to be treated as children. It used to be (before the Nanny State) that once you reached the age of 18, your majority, you were able to enter into any contract or do anything that any adult could legally do. Now 18 is just one milestone. Until you have a million dollars net worth, you aren’t an adult investor and cannot invest in start-ups. It’s for your own good, you understand. You might make a bad investment.

While we’re at it, we should also ask the age old question: cui bono–who benefits? Lawyers are one obvious group. More importantly, it protects big and wealthy incumbents. Wall Street can easily afford compliance, unlike its small would-be competitors. More insidiously, regulation implicitly supports Wall Street’s model and makes it more difficult or impossible to develop a new one. This is why no one has done the Uber or AirBnB of the stock market yet.

I found it odd that when several speakers on that panel began with apologies, “of course, we want to protect investors.” They began with total capitulation, saying in effect, “I can’t be trusted without a government minder.”

Any reform based on this will be little more than deck chair rearrangement on the Titanic. There is a real solution, and it’s simple. The law should treat adults like adults. Let entrepreneurs raise capital without having to get permission at each step, so they can build new products to offer us, make money for themselves, and create jobs.


tumblr_my48k19apl1sjwxoco1_1280Cartoon by: Lisa Benson


Dr. Keith Weiner is the president of the Gold Standard Institute USA, and CEO of Monetary Metals.  Keith is a leading authority in the areas of gold, money, and credit and has made important contributions to the development of trading techniques founded upon the analysis of bid-ask spreads.  Keith is a sought after speaker and regularly writes on economics.  He is an Objectivist, and has his PhD from the New Austrian School of Economics.  He lives with his wife near Phoenix, Arizona.




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4 Responses to “Securities Regulation Harms Businesses”

  • VB:

    Yeah, and what is the alternative? No regulations? You only need to look at the Bitcoin world to see what that leads to. Basically EVERYTHING there is a scam. Even the non-criminal businesses eventually turn out to be lying or breaking the law in one way or another. The most honest ones are those who admit up-front that they are scams (e.g., a Ponzi scheme; there are several sites that accept bitcoins for what they honestly admit is a pyramid scheme).

    Regulations don’t make a crime more illegal but they make it more difficult to commit. Sure, there are still criminals (Enron, Madoff), but at least not so many!

    That’s the main problem I have with libertarian ideology. Yes, it is obvious that the current regulations environment is overdone and businesses are drowning in red tape. But the opposite situation is also very harmful for everyone. Clearly, what is needed is some kind of balance – some regulation but not excessively so; just enough to protect everyone’s property rights. But how to achieve this? You can’t trust potential scammers to regulate themselves, the free market works with too much delay and the moment you leave it to the government bureaucracy, things get out of control.

    • You are obviously advocating that it is better to centralise and institutionalise racketeering rather than let individuals take their own decisions and maybe be conned by other individuals.

      • VB:

        I am not advocating anything. I am acknowledging that if you relegate regulation to government bureaucracies, it always runs out of control – but I am also pointing out that a total lack of regulation leads to constant scamming that similarly harms everyone. I am also asking how exactly to strike a reasonable balance between the two. I haven’t seen a good answer to this question yet.

        • In my opinion, redress of the system can only be achieved by guaranteeing private property.

          What I find is the fundamental problem of our economic construct, is the asymmetrical exchange that is mandated by government and that precludes private property a priori.

          If you agree that our ideas and skills are our natural property, then the fact that an entity should mandate the manner in which individuals are to interact by imposing an arbitrary medium of exchange that is outside of the control of individuals, creates an asymmetrical exchange.

          By exchanging your skills and ideas for money, individuals exchange something they own outright for something they do not own and have no control over.

          By exchanging something owned outright for something that does not become your possession, you are immediately and unwittingly divested not only of property but also liberty. Since the money you accept in exchange for your work is continually devalued (and can be confiscated with no right of recourse), you arithmetically become progressively more indebted to the entity that controls the medium of exchange that is imposed upon you.

          So, it seems to me that the solution for a more equitable distribution of wealth and a more wholesome form of government, must go through guaranteeing that individuals can enjoy private property.

          It seems to me that this can only be achieved if individuals are free to chose what to exchange their labor for.

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