Sunday, April 8, 2012

Quis custodiet ipsos custodes?

The JOBS (SWINDLE) Act Revisited

Obviously people who have forgotten that fallaces sunt rerum species et hominum spes fallunt (Appearances are deceiving and the hope of men is thus deceived).

I was supposed to be marginally impressed with the President’s signing of the Jumpstart Our Business Startups (JOBS) Act this week. After all, who could be opposed to something called a “JOBS Act” when so many Americans are without work. And in a world in which employment woes are impacting so many, how could anyone not be patriotic and celebrate this Act which, according to the President, addresses the “attack” on the American Middle Class and its sense of balance and fairness. Heck, even retyping these words makes my chest fill with an emotion that wants to croon, “I’m Proud to be an American, where at least I know I’m free…”

Having read this Act, I think it should be called the Subtle Wealth Inducement Neatly Delivering Losses to Everyone (SWINDLE) Act and given the boisterous celebrations surrounding the Act’s passage, I’m amazed at the number of advocates for change who are celebrating its signing with Hemlock-laced Kool-Aid.

The American JOBS Act is not good for our economy. In fact, it reinforces one of the most compelling sirens whose melodious songs have crashed aspiring economies around the world. Tragically, it cements the illusion of capital and wealth creation that was started in the 1930s by the 99%-friendly Guggenheim and Rockefeller families. And why we think that somehow democratizing an opaque system so that more losses can be accelerated is a good idea seems…, well…, NOT like a good idea.

A little history. Funding start-up businesses with venture capital and private investment has NOT been the magic bean that has lead to the Golden Goose. In fact, while I don’t wish to belabor a point I’ve made in the past, it was tax policy enabling the one-percenters to lose money in new ventures and deduct the losses from their ordinary income tax that seduced wealthy families into funding the technological run up to the World War II technology boom. Remember that it was 1938 E.I. Nemours du Pont Corporation President Lammot du Pont who stated that “Venture Capital” was needed address the inability for banks to meet the needs of new companies. And Congress responded by giving the wealthy tax breaks for loosing money in speculative ventures – a policy that over 70 years later justifies the adage – invest in 10 deals so that you win in 1. For the average investor, this doesn’t work. And the JOBS Act is more appropriately the SWINDLE Act because losing in one deal will crash the small investor. “Losing” in 90% of the deals in which you invest doesn’t tank the wealthy investor because he or she WINS with the tax loss!

It was military and science nationalist (I hesitate to call it what it really was…industrial collectivism with state-sponsored inducements… can anyone say socialism?) policy that took the Small War Plants Corporation legislation (1942) – the direct forerunner of the Small Business Administration – and the Defense Advanced Research Projects Administration (DARPA) authorized by the Department of Defense in 1958 and used these two government procurement incentive programs to create non-competitive consumer subsidies for small corporations who flowed their income back to the tax-incented wealthy that led to the birth of today’s venture capital. And even that was not enough. Much of the technology that was funded in the early years of the “Silicon Valley” miracle was the product of Third Reich German innovations taken as war reparations at the end of World War II and placed in California and Massachusetts-based firms. Government-backed Small Business Investment Corporations (SBIC) which, at their initiation, provided more than three times the funding than their venture capital peers were expressly enabled not by the joy of entrepreneurship but by the promotion of a pathway to generate tax deferrals and losses.

There is no question that capital access – as a utility – is vital for the creation and nurturing of new ventures. But unimaginative capital access that seeks to white-wash an ill-conceived model of tax incentives for greater wealth hording is far from something to celebrate. The JOBS / SWINDLE Act is equivalent to setting up more slot machines and Crap tables in casinos in Las Vegas, Atlantic City and on reservations across the country and lowering the minimum bet. We are stimulating the creation of greater opacity in disclosure; promoting greater democratization of participation with lower minimum bets; and, doing NOTHING to inform the public that the system in which they’re participating did NOT make millions of people wealthy – it made millionaires and billionaires out of a few people – most of whom were already there or well on their way.

Now I know, here come all the anecdotal rotten tomatoes. “I know somebody who…”, and that’s somehow supposed to justify a system that is built on one of the greatest illusions of all times. Remember, it was not until the Employee Retirement Income Security Act (ERISA) of 1974 that the venture capital industry really started to soar. And that was when “professional investment advisors” industrialized taking the public’s money that came from – you guessed it, tax-deferral inducements – and pumped it into transactions which created the – you guessed it – ONE PERCENT!

What would help kick-start our economy would be legislation which would allow new ventures to partner (without tax or licensing penalties) with companies with excess capacity and get off the ground without defining their corporate status for extended periods of time. In some instances, we would find that the new venture isn’t really a stand-alone company at all – rather a component that helps build relevance in someone else’s ecosystem. What would really help would be reforms that would not tax illiquid values so that collaboration without basis could happen without creating corporate and tax burdens. What would really help is a reform of our accounting and regulatory regimes that would recognize that many ventures do not fit into Internal Revenue Code-defined structures and, as such, should be able to operate in forms that are suitable to a changing world. What would help is the ability to compensate members of an enterprise in ways that don’t have to require monetary consideration for the taxation on things that don’t involve monetary transfers. What would really help would be a government who required truth in innovation, accounting, finance, and law rather than being a party to the perpetration of fraud and illusion. But these things would help the people – yes, ordinary humans. I, for one, will not be counted among Qui tacet consentire (The silent give consent). Have the courage to stand up for a future that is built on a foundation of transparency. Send this around and get the word out!

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Thank you for your comment. I look forward to considering this in the expanding dialogue. Dave