While this regulation will clearly be disastrous for America, can you imagine the windfall of campaign contributions and lobbying frenzy that will ensue as a result of this thing passing?
Timothy Geithner or whoever is crafting this proposal is probably licking his/her lips at the thought of a $200bln industry on their knees willing to write a check to anyone who has the power to decide who are the winners and who are the losers in this regulation madness.
Administration: 1, Rest of America: 0
Could it be that the political system in Washington is corrupt beyond belief?
OMG, this is the most absurd thing I've heard in a long time.
I think it's really a symptom of a much deeper problem with American government and that is that the "system" is getting so big that no one really knows how to fix it. I see this kind of thing happen with software too. Your IT department buys software or adopts a new platform and builds all these great interconnected applications with messaging busses and information silos and then one day everyone who knows anything about the system is gone and what to do now?
Well, you start building systems on the platforms that are easier to understand and try to work around problems and in the meantime, the people who don't know what to do are trying to keep their jobs by doing something at all which is just making the whole package even worse!
At some point, a company has to make a very tough decision to "rip and replace." It's costly. It takes time. And while you are ripping and replacing you have to try to do the best with what you have working now. But the consequences of not ripping and replacing are just going to continue crippling you and eventually, you are going to be leap frogged by an agile startup who doesn't have the legacy deficit you've run up by not doing things right in the first place!
Another problem is that the majority of policy makers don't have a business background (most are analysts, lawyers or career politicians), and thus don't have that unique entrepreneurial experience required to fully grasp the impact of their policies on new high-growth businesses.
I would bet that many politicians in Congress or the Treasury couldn't tell you how a VC firm operates, let alone how their actions would affect future new-technology incubation and growth. If this wasn't the case, SOX would never have passed in its current form.
In short, we have too many "Nancy Pelosis" and "Timothy Geitners" with not enough "Jared Polises" in Congress today.
Agreed this is a completely absurd move by the Treasury Department. What brought the financial industry to its knees was too much leverage. Venture capital firms don't use leverage, so they can't be a systemic risk.
Except no one knows how to rip and replace in this case. There are governments out there that are less complicated but offer more to their constituents than the US government does. And no one in the US government wants to give up power or funding.
From the article: Treasury’s position is that if it doesn’t drag VC firms into the bureaucratic swamp, then high-rolling hedge funds playing with borrowed money will present themselves as venture funds to avoid regulation.
How does this work? Isn't there a clear distinction between hedge funds and venture funds?
I note that the relatively little regulated hedge funds did NOT collapse and need a taxpayer bailout in the current recession.
Folks like to trot out hedge funds as bad guys, but in fact they do a ton of good, and prove that a lightly regulated environment works as well (or much better) than operating with the government's hands all over them.
Politicians, lawyers, and regulators impeding entrepreneurs and investors in the name of protecting against non-existent systematic risks to our economy.
This type of regulation originated many years ago with the broad idea that unsophisticated persons (the "little guy") needed various forms of disclosure to enable them to make informed decisions about their investments. How that rationale can even begin to apply to VCs and their LPs (who are typically large institutional investors) is an absurdity only Washington could possibly begin to fathom.
The article nails it when viewing this development as a further extension of Sarbanes-Oxley and other recent regulatory changes: much more of this and it will be time to put the IPO on the endangered species list.
This will definitely hurt startups in the long run.
It's already pretty bad -- one firm I talked to was planning an IPO last October, which they pulled after the markets sank. Prior to pulling, they had to spend $2.5mm preparing for the IPO in legal and regulatory fees (not including bank's underwriting fees).
Think about what that means: for a firm worth $100mm, they would have to spend 2.5% of their net worth just paying lawyers and accountants to comply with regulations. Never mind the ongoing costs of SOX implementation after the IPO.
Non-existent systemic risks???? Did you suddenly forget about the last year. Have you been asleep for the last 18 months? Systemic risks are very much existent.
And if banks and financial institutions are going to cry for federal bailouts every time a "systemic risk" rears its ugly head, the only thing any responsible government official can do is put in regulation to make sure that the systemic risks are controlled.
The financial industry loves to complain about regulation but it is the financial industry that brought this on their own heads by (1) fuckign up, and (2) asking the taxpayer to pay for their fuckup.
As far as the rationale, it is different from what you said. The rationale is that certain parts of the economy are so intertwined that if one financial company craters it can cause a chain reaction disaster for multiple other completely healthy financial institutions. I am not sure I buy this logic, but again the financial industry used this very same logic to say it was not their fault when the economy imploded, so it is only fair that the same thinking should be applied to them now that the feds are starting to regulate them.
Now you could make somewhat of an argument that VCs are not systemic risks, and that may be true if they were mostly owned by wealthy individuals, but that's not the case. VCs are mostly owned by financial institutions that may borrow against their property, so if the value of a VC craters they may cause a sell off spiral in a larger financial institution. Again, I am not I believe the above sentence, but if you buy into the theory of systemic risks, it is pretty obvious that VCs are one.
I always wonder if the cost of complying with new regulations is contemplated. If I think of how long our family take just to do stupid and inane administrative tasks (VAT, Union payments, tax, unemployment insurance, etc…). All this administration is really hampering small businesses.
Why aren’t these regulations simplified? Why aren’t employees paid on a
cost to company” basis and are responsible for their own administration (i.e. own union payments, own unemployment insurance, own health insurance, etc…).
Maybe it is just because I hate admin – but I doubt that admin should take up 40% of a small business owner’s time.
"As part of their regulatory redesign, Team Obama and Congress still don’t have a plan for reforming the giant taxpayer-backed institutions like Fannie that caused the credit crisis. Yet they’re moving to rewrite the rules for investing in tiny technology companies that had nothing to do with the meltdown. Under the proposed rules, venture firms will be declared systemic risks until they can prove themselves innocent."
[+] [-] tici_88|16 years ago|reply
Timothy Geithner or whoever is crafting this proposal is probably licking his/her lips at the thought of a $200bln industry on their knees willing to write a check to anyone who has the power to decide who are the winners and who are the losers in this regulation madness.
Administration: 1, Rest of America: 0
Could it be that the political system in Washington is corrupt beyond belief?
[+] [-] pj|16 years ago|reply
I think it's really a symptom of a much deeper problem with American government and that is that the "system" is getting so big that no one really knows how to fix it. I see this kind of thing happen with software too. Your IT department buys software or adopts a new platform and builds all these great interconnected applications with messaging busses and information silos and then one day everyone who knows anything about the system is gone and what to do now?
Well, you start building systems on the platforms that are easier to understand and try to work around problems and in the meantime, the people who don't know what to do are trying to keep their jobs by doing something at all which is just making the whole package even worse!
At some point, a company has to make a very tough decision to "rip and replace." It's costly. It takes time. And while you are ripping and replacing you have to try to do the best with what you have working now. But the consequences of not ripping and replacing are just going to continue crippling you and eventually, you are going to be leap frogged by an agile startup who doesn't have the legacy deficit you've run up by not doing things right in the first place!
[+] [-] feverishaaron|16 years ago|reply
I would bet that many politicians in Congress or the Treasury couldn't tell you how a VC firm operates, let alone how their actions would affect future new-technology incubation and growth. If this wasn't the case, SOX would never have passed in its current form.
In short, we have too many "Nancy Pelosis" and "Timothy Geitners" with not enough "Jared Polises" in Congress today.
[+] [-] ricaurte|16 years ago|reply
[+] [-] _pi|16 years ago|reply
[+] [-] matt1|16 years ago|reply
How does this work? Isn't there a clear distinction between hedge funds and venture funds?
[+] [-] tjic|16 years ago|reply
Folks like to trot out hedge funds as bad guys, but in fact they do a ton of good, and prove that a lightly regulated environment works as well (or much better) than operating with the government's hands all over them.
[+] [-] grellas|16 years ago|reply
This type of regulation originated many years ago with the broad idea that unsophisticated persons (the "little guy") needed various forms of disclosure to enable them to make informed decisions about their investments. How that rationale can even begin to apply to VCs and their LPs (who are typically large institutional investors) is an absurdity only Washington could possibly begin to fathom.
The article nails it when viewing this development as a further extension of Sarbanes-Oxley and other recent regulatory changes: much more of this and it will be time to put the IPO on the endangered species list.
This will definitely hurt startups in the long run.
[+] [-] mediaman|16 years ago|reply
Think about what that means: for a firm worth $100mm, they would have to spend 2.5% of their net worth just paying lawyers and accountants to comply with regulations. Never mind the ongoing costs of SOX implementation after the IPO.
[+] [-] hristov|16 years ago|reply
And if banks and financial institutions are going to cry for federal bailouts every time a "systemic risk" rears its ugly head, the only thing any responsible government official can do is put in regulation to make sure that the systemic risks are controlled.
The financial industry loves to complain about regulation but it is the financial industry that brought this on their own heads by (1) fuckign up, and (2) asking the taxpayer to pay for their fuckup.
As far as the rationale, it is different from what you said. The rationale is that certain parts of the economy are so intertwined that if one financial company craters it can cause a chain reaction disaster for multiple other completely healthy financial institutions. I am not sure I buy this logic, but again the financial industry used this very same logic to say it was not their fault when the economy imploded, so it is only fair that the same thinking should be applied to them now that the feds are starting to regulate them.
Now you could make somewhat of an argument that VCs are not systemic risks, and that may be true if they were mostly owned by wealthy individuals, but that's not the case. VCs are mostly owned by financial institutions that may borrow against their property, so if the value of a VC craters they may cause a sell off spiral in a larger financial institution. Again, I am not I believe the above sentence, but if you buy into the theory of systemic risks, it is pretty obvious that VCs are one.
[+] [-] catzaa|16 years ago|reply
Why aren’t these regulations simplified? Why aren’t employees paid on a cost to company” basis and are responsible for their own administration (i.e. own union payments, own unemployment insurance, own health insurance, etc…).
Maybe it is just because I hate admin – but I doubt that admin should take up 40% of a small business owner’s time.
[+] [-] kirubakaran|16 years ago|reply
[+] [-] bokchoi|16 years ago|reply
[+] [-] rottencupcakes|16 years ago|reply
Please make it more clear, since this is a great article that everyone should read.
[+] [-] unknown|16 years ago|reply
[deleted]
[+] [-] AndrewWarner|16 years ago|reply
[+] [-] joubert|16 years ago|reply