When the New York Stock Exchange was bought by a much younger start-up, we pointed out that our government's power to regulate the stock exchange had led to its death as an independent business.
The NYSE was founded in 1792. Over the years of America's growth as an industrial nation and into a world power, buying and holding stocks represented the only practical way a middle-class person who didn't have the talent to start a high-growth business could accumulate serious wealth.
People who were smart enough or lucky enough to buy into start-ups like Ford Motor Company, Hewlett-Packard, or eventually Microsoft and Apple accumulated real money. Their wealth would be considered trivial by founders such as Bill Gates, but having a few million dollars worth of Apple, Microsoft, or IBM would be considered worthwhile by most middle-class people. The Henry Ford Museum lists the original twelve investors in Ford, one of whom is noteworthy:
James Couzens - Malcomson’s [Ford's partner] clerk. Invested $2,500 ($100 of which was borrowed from his sister Rosetta). Left the design and manufacturing of cars to Ford and concentrated on the sales and financial side of the business. Ford and Couzens were the only investors to take an active part in the daily management of the company. Sold his stock to Ford in 1919 for $29,308,857.90. His sister Rosetta received $262,036.67 for her $100 investment. [emphasis added]
And you thought the Yahoo millionaires were a new phenomenon!
Alas, our government in its wisdom has decided to shut off that avenue for ordinary people to accumulate wealth. The Wall Street Journal reports:
According to the Securities and Exchange Commission's most recent estimates, businesses have been raising more funds through private transactions than through debt and equity offerings registered under the securities laws and offered to the general public.
Overall public debt and equity issuances fell by 11% between 2009 and 2010, to $1.07 trillion, while private issues rose by 31%, to $1.16 trillion.
Stock exchanges like the NYSE used to offer the best opportunities for businesses to raise cash from investors and thus for individual small investors to buy into a businesses' growth prospects. For the first time, however, businesses raised more money through "private equity" than in the public markets:
This shift, which has been driven by the rising costs of public-market participation and regulation, will likely accelerate when the SEC implements reforms in the Jumpstart Our Business Startups Act, which the president signed into law last April. [emphasis added]
The crowdfunding provisions in the JOBS Act are intended to democratize investment opportunities using the Internet and have attracted the most public attention. But another part of the law may have the most impact...
Businesses have always been free to raise "private equity" from "sophisticated investors" who were defined as people having a million or more in net worth, not counting a house. The thought was that millionaires didn't need as much protection from bogus fund-raising as simple rubes who weren't worth as much.
There were two limitations - businesses couldn't advertise private offerings, and once they had a certain number of stockholders, they were subject to the same regulations as if they'd gone public.
The only reason Facebook went public, we're told, was that they had so many stockholders that they were going to be regulated as if they were public. They had to pay the costs of being public, so they might as well be public.
The Facebook IPO caused a huge hubbub because the stock went down instead of going up as IPO stocks often do. Facebook had signed up enough of the world's population by the time of the IPO that they simply can't grow as rapidly in the future as in the past. By IPO time, sophisticated investors had already captured most of the period of rapid growth, leaving none for mere mortals like us.
Having noticed that the traditional start-up path has essentially disappeared, our ruling elites changed the rules to make it easier to raise money - but again, only for sophisticated investors, not for the general public:
One of the most significant advantages that public markets have held over private markets is the ability to generate substantial market liquidity by advertising to a wider public. Once the SEC implements the legislation, that advantage will gradually fade away. [emphasis added]
Our past restrictions on advertising private placements meat that only the 3% of the people who are wealthy enough to be "sophisticated investors" are legally permitted to buy into private placements. Once the new law permits start-ups to advertise private placements, they won't have to raise money from Russian oligarchs as Facebook did.
Making it easier for start-ups to raise money will result in more start-ups, but the way our government did it will lock ordinary people out of the best opportunities. Start-ups won't go public until they're a lot bigger than in the past, which means that their fastest growth will have already happened. Unless you're a millionaire already, you won't be permitted to invest in the next Google or Facebook. That's for your own protection, of course.
Rather than encouraging start-ups by allowing them to advertise private equity but limiting the purchasers to those already wealthy, it would have been better for our legislators to have retracted a number of the regulations which make it so expensive to raise money on the public markets. Relaxing regulations is anathema to bureaucrats and to many politicians, however, so it hardly happens, no matter how destructive the regulations are.
Regulation not only killed the NYSE as an independent organization, it's locking you and me out of any possibility of participating in the next Apple or Google. Thanks, government.