Due to the SEC’s closing of Prosper I do think that it is time to address the SEC rules, which were created by FDR during the New Deal. It was a very different world then. Not that I think they did a lot of good at that time either.
We need the ability to innovate, even in the world of securities and investments. We need to lower the barriers to entry as the larger players who can cross them do not have real incentive to innovate.
The cost of creating a startup is lower now than ever. Often the cost of following existing security regulation is more than the amount sought.
Personal loans on an exchange are even less likely to ever pass existing securities law unless you happen to be David Bowie.
Here are my 3 basic ideas for innovation in securities and investments.
1. Warning labels
I know, I know. I hate warning labels as well. But I’d rather have warning labels and allow anyone to invest than the obnoxious innovation killing rule about Accredited Investors.
2. Special registration rules for micro securities
A $1000 loan should not have to follow the same rules as a $500,000 angel funding round. Why not just require them to be offered through a regulated exchange service instead. I think special rules should be in place for sub $100k securities. I’d be willing to accept sub $25k if it would allow it to be passed.
While I don’t think any kind of registration with the SEC really is needed, I could be persuaded to accept the idea of a very simple free REST based web service for registration of the security with the SEC.
Think tax id, amount, offer date, description and a url to more information on the exchanges web site. The SEC could publicize this information and allow queries of the data. Of course I really think this service should be offered to be run by a private industry organization and not the SEC or we would likely have to wait for 5-10 years for it to be implemented.
3. Regulate the exchanges and not the securities
While I personally don’t think we need any form of regulation. The realities of the day are not really about less regulation. An innovative approach would be for the SEC or congress to regulate a new form of exchange. This exchange would be regulated and have to follow certain rules, but would allow smaller micro securities to be exchanged.
I was working on a project with a couple of really smart people nearly 8 years ago for creating an equities market for micro financing in the 3rd world. The project never came out of prototype stage, but one idea that fascinated me was to tax and regulate the exchange rather than the startups offered within. This would allow developing world governments to achieve revenue and regulation, while keeping a low enough barrier of entry that even very small micro businesses (like these ones in Panama ) could utilize the exchange.
This was our solution to the problems that Hernando de Soto the brilliant Peruvian economist believes for the basis for most of the economic troubles in the developing world. I have written before in A global virtual shanty town about how similar issues stop innovation and growth even outside the developing world. The SEC/Prosper debacle is evidence of as much.