Dear Fellow Americans,
I am writing this letter not only as an unrelenting advocate for Wall Street reform, but more poignantly as a concerned citizen and a devoted mother of two young children. Like me, my parents before me and my grandparents before them, I want to see my children grow up in a prospering America. Sadly though, unless significant change is made in all facets our culture, prosperity for future generations will remain a pipedream.
We can no longer tolerate our national debt spiraling out of control. We cannot afford to remain apathetic as our dysfunctional financial markets continue to serve a privileged few and fail the vast majority. Nor must we allow our leaders to instigate class rivalry over trivial dollar amounts incapable of solving the nation’s fiscal problems.
I realize that most of us are too busy sharing offensive but funny ecards on Facebook, voting for the next idol and cheering for an overweight contestant to burn off a recently eaten Oreo cookie to even notice how severely America is deteriorating, but the more oblivious we remain, the greater the likelihood of our children inheriting a financially and morally bankrupt country.
Although I am guilty of posting my fair share of distasteful ecards on Facebook, I simply won’t sit idly by while my children’s future is at risk. So today, instead of reading my cousin’s politically charged and radically biased Facebook posts, untagging unflattering photos of myself from my awkward teenage years or watching another episode of “How I Met Your Mother”, I am compelled to write this letter. You deserve to know why our economy is weakening, why our nation’s wealth disparity is widening and why our society is decomposing. But instead of hearing it from a politician or a partisan pundit, you are going to hear it from a Mom – a Mom with 20 years of extensive Wall Street experience. Unlike most of what you read in the mainstream media which is tainted red or blue, I am going to supply you with a sobering purple-tinged truth. Although some of it may be difficult to swallow, I will not sugarcoat it. For, unless we are bribing our children, sugar is useless to us Moms.
THE UNSWEETENED REALITY
Remember that nation that enabled waves of innovation to transform it from a vast farmland to an industrial power and then to global technology leader? Remember how throughout those transformations it was able to improve the quality of life and create substantial wealth for its citizens – even for those who were born into poverty? Remember how its patriots, trailblazers and dedicated workforce continued to persevere even through periods of war, depression, recession and inflation?
That nation consistently prevailed because it upheld one fundamental principle: the notion that the greater the risk, the larger the potential reward. By incentivizing its risk takers and not rewarding its risk averters, that nation encouraged the innovation and motivation that fueled economic prosperity for generations.
Regrettably, as soon as its citizens discovered ways to vote themselves riskless rewards, the very fabric of America began to unravel. The land of opportunity and the home of the brave became the land of opportunists and the home of the complacent. As the risk/reward ratio began to invert, America morphed into an entitlement society where both its poor as well as its rich expect some type of remuneration regardless of whether it was rightly earned.
Instead of the fruits of one’s labor, the impoverished have become accustomed to living off the handouts of others, while Wall Street’s elite comfortably pursue new ways of manipulating the markets in order to guarantee themselves larger investment returns for taking less and less risk. In some cases, they don’t even risk their own capital at all. They risk ours!
In much the same way that the poor have come to depend on their welfare checks, Wall Street’s privileged have come to rely on its ill-gotten gains. Unlike in Benjamin Franklin’s day where the only things certain in life were death and taxes, today people can count on death, taxes as well as entitlements and profits. Ain’t America grand?
Excuse the cliché, but would anyone, rich or poor, be dumb enough to pay cash for a cow when they can get the milk for free?
MEET AMERICA’S MIDDLE CLASS – THE SUCKERS BUYING THE COWS
In between the destitute and the affluent is a forsaken middle class that is too “well-off” to receive Government aid but not nearly wealthy enough to get in on the Wall Street freebies like hot IPOs, death spirals, and let’s not forget those bailouts.
These folks in the middle are just your average Americans, buying the cows and supplying the milk. They are the people struggling to save for retirement and longing for the double digit returns they were collecting back in the days when companies went public prior to major growth spurts and interest rates weren’t regularly being reduced to satisfy political agendas. These “middletons” are also America’s 27.9M small business owners willing to provide meaty returns in exchange for the expansion capital that would allow them to bring products to consumers and jobs to the underemployed.
Now, if only those Americans starving for yield were allowed to invest in those emerging growth companies desperate to replace the capital that the banks and public stock exchanges are no longer willing or able to provide.
If only we didn’t have impractical securities rules that prohibit the majority of Americans from investing their OWN money into private growth companies.
If only those middle class Americans weren’t confined to investing in conventional assets like publicly-traded stocks, bonds and mutual funds where appreciation has been hindered by the annihilation of small-cap IPOs and ineffectual monetary policies that keep interest rates low and the dollar devalued.
If only all Americans were granted the same investing freedoms.
If only I can stop myself from starting sentences with the phrase, “if only”.
America has made great progress eradicating religious, gender and racial persecution, yet it continues to allow discrimination based on net worth and income levels. Presently, only “accredited investors” – those persons possessing a net worth of at least $1M excluding the value of one’s primary residence or have annual income of at least $200,000 (or $300,000 together with his or her spouse) – are legally permitted to invest in private companies. Unaccredited investors are forced to wait until companies register with the SEC and begin trading on public stock exchanges.
20 years ago when companies went public as young emerging businesses, smaller investors weren’t put at a disadvantage by having to wait for an IPO in order to invest. In fact, 99% of Microsoft’s stock appreciation was realized after it had gone public. Conversely, by the time most of today’s companies go public, the bulk of their growth is long behind them. Case in point, 100% of Facebook’s stock appreciation was realized in the private markets prior to its IPO where only accredited investors were afforded the opportunity to partake in its dramatic climb. By the time America’s cow buyers were given the chance to own Facebook stock, its shares had already been put out to pasture.
In today’s topsy-turvy risk/reward environment where new issue upside has been dramatically curtailed, today’s average public market investor is left assuming more capital appreciation risk than ever before. It sickens me to think about all of the middle class wealth that might have been created from September 2004 to May 2012 when Facebook grew from a mere $5M in market capitalization to its IPO valuation of $104B.
Why would a statute as undemocratic as the accredited investor rule even exist at all? Because the Government seems to feel that certain investors require more “protecting” than others, particularly from small-cap issuers. You see, regulators are programmed to view entrepreneurs not as innovators or as job creators, but as shysters. To be frank, they believe that less-financially endowed Americans are too stupid to differentiate between a viable business opportunity and a con. Only in America would The Jersey Shore’s Snooki be considered more qualified to finance start-ups than a financially strapped, yet fully licensed, asset manager.
The great irony is that regulators are so bent on shielding investors from the young Steve Jobs’, Bill Gates’ and Mark Zuckerbergs of the world that they completely overlook the Enrons, Worldcoms and Madoffs. Regulators are authorized to police fraud, not to impose risk tolerances on the American people. Their job is to divert scams, not to prevent securities losses. Failure to make these distinctions is contributing to the erosion of our free-market system and impeding economic growth.
In the name of “protection”, the U.S. Government has effectively succeeded in denying its less affluent citizens the freedom to assume risk, thereby forcing them to forgo any possible upside. At the same time, it abets in securing riskless returns for its financially privileged. These policies, no matter how well-intentioned, have done nothing but help capsize the productive risk/reward ratio and ensure the widening of the nation’s wealth divide.
Ever wonder why the rich keep getting richer as more and more Americans are dropping out of the middle class? The answer does not lie in the 73,608 pages of U.S. tax code. Blaming tax structure for the wealth disparity is like blaming Denver’s high altitude on Obama’s poor first debate performance. Tax loopholes never have nor ever will produce new revenue for the wealthy. They merely allow them to keep more of their money previously earned through salaries, commissions and yes, good investment decisions. Although I am in favor of eliminating many of them, making people believe that simply removing loopholes and increasing tax rates will resolve America’s financial woes is not only disingenuous, it is obstructive. The solution is not forcing the rich to pay more but in empowering the non-affluent to earn more. It is both unproductive and fiscally irresponsible to be wasting valuable time and resources impugning tax structure instead of resolving the actual problem – unconstitutional market structure.
America desperately needs to open its financial markets and allow capital to flow back to its smaller investors and issuers. That is precisely what the Jumpstart Our Business Startups Act (the “JOBS Act”) was designed to accomplish. Even though it is one of the most economic restorative pieces of legislation in modern history, if you’re not reading political or financial trades, you’ve probably never even heard of it. What’s more, because it passed with an overwhelmingly bipartisan majority, the JOBS Act received limited main street media coverage. It is utterly shameful that the policies which divide us get more attention than the legislation that unites us.
The JOBS Act helps emerging businesses access capital by improving the “on-ramp” and making it easier for smaller companies to go public. And since, according to Forbes, small businesses generated over 65% of new jobs during the past 17 years, it is imperative that America’s capital markets serve as a conduit to small-cap funding, not as a barrier.
But, facilitating the IPO entrance is just not enough. The truth is, it is far less challenging for companies to become public than it is for them to stay public, particularly in a marketplace dominated by high frequency traders and inadequate aftermarket support. According to research conducted by David Weild IV, Head of Capital Markets at Grant Thornton and CEO of Capital Markets Advisory Partners, U.S. stock markets have lost 43.5% of all listed companies since 1997.
Without re-establishing an ecosystem to support companies being public at smaller valuations by enthusiastic investors as opposed to detached traders, the demand will never be strong enough to meet the supply in the marketplace. Hence, unless the “highway” is completely renovated, the public markets will remain dysfunctional.
The “Crowdfunding” component of the JOBS Act provides the most viable and democratic solution. Its community-style, social investing methodologies furnish built-in aftermarket support. “Crowdfund Investing” not only grants the 99% with the same investing freedoms as the 1%, it fortifies the relationship between investor and investment, encourages longer term investing principles and ultimately helps restore appropriate risk/reward ratios.
Although it was signed into law on April 5th, “Crowdfund investing” won’t be officially legal until the SEC implements the new rules. Given its history of failing to meet deadlines, it is most likely that the SEC will exceed its Government mandated January 1, 2013 deadline. To the further detriment of the middle class, many fear that regulators will attempt to drag their feet indefinitely. We simply cannot allow this to happen, for as long as one class of citizens continues to receive superior investment opportunities and better investing odds, there will never be true equality in the United States.
“UNLESS SOMEONE LIKE YOU CARES A WHOLE AWFUL LOT, NOTHING IS GOING TO GET BETTER. IT’S NOT.”- DR. SUESS
The United States will never be able to stabilize its deficit or neutralize its wealth imbalance without recalibrating its distorted risk/reward ratio. Re-indoctrinating an indulged nation could very well be our greatest and most crucial challenge. It may even take generations for people to re-learn how to value the effort as much as the prize.
We should begin by helping our children become self-reliant, encouraging them to take chances and allowing them to fail so that they can embrace failures for what they are: stepping stones to successes. As Robert F. Kennedy once said, “Only those who dare to fail greatly can ever achieve greatly.”
If not for the plight of the entrepreneur, it would be impossible for mankind to advance through innovation. Instead of condemning America’s entrepreneurs, we should be thanking them for assuming the risks most would never dare. They are the last of our true pioneers. Unlike salaried employees who have the luxury of safety nets, there are no unemployment checks awaiting entrepreneurs should they fail. It is our laws upholding capitalism – not our roads and bridges – that lay the foundation for small business success. As such, it is up to “we the people” to fight for legislation that emboldens America’s entrepreneurs and contest those laws which discourage them.
I urge you to write your local legislators and insist that they hold the SEC accountable for implementing the overwhelmingly bipartisan JOBS Act in a timely fashion. Demand that legislation be introduced to remove the unconstitutional Accredited Investor Rule 501(a) of Regulation D under the Securities Act of 1933.
If you really want to coerce Wall Street to change its gluttonous ways, rather than parade your discontent by camping out and getting high, simply refuse to support its mega-cap IPOs and prove that you are no longer willing to be the exit strategy for the 1%. We can succeed in bringing democracy to the financial markets by coming together and commanding equal investing privileges and access to comparable growth opportunities.
It wouldn’t be the first time in American history that unjust laws were amended. Prior to 1920, women were denied the right to vote. The same discriminatory logic that prohibits today’s middle class Americans from venture investing once banned women from the political process. Both instances delineate certain individuals as incapable of making intelligent decisions. Ironically, it’s an inflating government, not one’s poor judgment, that U.S. citizens need protection against.
In the same way that American women went on to redefine the political landscape and help our nation progress, it will be today’s middle class entrepreneurs and willing venture investors who will rebuild our economy and lead America back to prosperity. Our children’s tomorrow is depending on it.
A Wall Street Mom