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Showing posts with label regulation. Show all posts
Showing posts with label regulation. Show all posts
Wednesday, November 29, 2023
Friday, March 25, 2016
Tuesday, January 26, 2016
Regulatory Risks Of Leveraging Federal Lab Innovation
The Federal Laboratory Consortium is a gold mine begging for exploration. Technology gathering dust in lab basements and filing cabinets needs entrepreneurs to make it economically viable. The regulatory landscape has holes at the federal level that beg to be filled. Here are some Alfidi Capital tips for small and medium-sized businesses (SMBs) looking to make tech innovation work while avoiding regulatory traps.
The Brookings Institution published "Going Local" in 2014 about how DOE's labs should support regional economic growth. White papers are full of ideas that gather dust, just like great tech ideas without people implementing them. The lead time for processing a cooperative research and development agreement (CRADA) or a work for other agreement (WFO) may be too long for specific product development but just right for a basic tech demonstration. The SMB moving a tech concept out of the lab's basement may be suited for small-scale funding typical of the NREL's technical and analytical service agreements.
The President's Council of Advisors on Science and Technology (PCAST) report "Big Data: A Technological Perspective" from 2014 will set federal policy on data privacy for years. Government regulations crossing multiple agencies' jurisdictions has a way of guaranteeing a market for products. Large firms faced with the regulatory risk of meeting Big Data privacy mandates will need solutions. Small firms should factor privacy compliance into their product development milestones.
The American Academy of Arts and Sciences report "Restoring the Foundation" in 2014 recommended permanent Presidential attention to R+D spending. Federal tech funding as a GDP percentage cannot stagnate forever. Its eventual recovery will provide funding opportunities for SMBs ready to jump into grants and contracts.
Watching the slow progress in implementing all of these reports' recommendations is disheartening. Untangling the jumble of federal advisory committees shepherding regulatory reform is outside the private sector's control, unless the President appoints business-friendly people to run the process. American SMBs cannot wait for reform. They should master the funding application system now and gain experience working through the system.
The Brookings Institution published "Going Local" in 2014 about how DOE's labs should support regional economic growth. White papers are full of ideas that gather dust, just like great tech ideas without people implementing them. The lead time for processing a cooperative research and development agreement (CRADA) or a work for other agreement (WFO) may be too long for specific product development but just right for a basic tech demonstration. The SMB moving a tech concept out of the lab's basement may be suited for small-scale funding typical of the NREL's technical and analytical service agreements.
The President's Council of Advisors on Science and Technology (PCAST) report "Big Data: A Technological Perspective" from 2014 will set federal policy on data privacy for years. Government regulations crossing multiple agencies' jurisdictions has a way of guaranteeing a market for products. Large firms faced with the regulatory risk of meeting Big Data privacy mandates will need solutions. Small firms should factor privacy compliance into their product development milestones.
The American Academy of Arts and Sciences report "Restoring the Foundation" in 2014 recommended permanent Presidential attention to R+D spending. Federal tech funding as a GDP percentage cannot stagnate forever. Its eventual recovery will provide funding opportunities for SMBs ready to jump into grants and contracts.
Watching the slow progress in implementing all of these reports' recommendations is disheartening. Untangling the jumble of federal advisory committees shepherding regulatory reform is outside the private sector's control, unless the President appoints business-friendly people to run the process. American SMBs cannot wait for reform. They should master the funding application system now and gain experience working through the system.
Sunday, November 01, 2015
Inside Information Is Worthless And Illegal
Every analyst on Wall Street has access to the same public information about corporate performance and the economy's health. Just like in school, when every student has access to the same course material, a few with superior abilities will get the top grades just by bringing better insights to bear. Financial analysis works the same way. Intellectual firepower and solid character are the top investor's primary tools. Only criminals resort to insider trading. Competent investors never use inside information.
Any US government intelligence analyst who has ever held a security clearance and handled classified information can draw analogies between their responsibilities and those of a Wall Street analyst. Intelligence professionals cannot discuss their classified work in public. Only very privileged insiders at higher levels of the government can make policy using classified information. Policy actions for classified information must adhere to FedRAMP security protocols and Freedom of Information Act (FOIA) disclosure procedures. These legal controls on the use of classified government information are just as stringent as legal controls on the use of inside information from public companies.
The best deep dives highlight the uselessness of any and all so-called privileged information in making financial decisions. Everything relevant to a public company's performance is found in its published financial statements. The superior analyst ignores management spin in conference calls. The classic ratios of fundamental analysis reveal everything. The intelligence community's experience also offers another valid analogy. Somewhere between 80-85% of actionable intelligence is available through open sources. Collection is as easy as parsing a Google Search result.
Warren Buffett ranks among history's best money managers precisely because he bases all of his decisions on the study of publicly available information. He pals around with America's top CEOs and could probably find out anything he wants about what goes on behind closed doors. He doesn't need to poke behind the curtains because he can't use any of that information in his investment decisions anyway. Knowing how to read financial statements, industry reports, and government statistics is always good enough for Mr. Buffett. It's good enough for me too.
The SEC enforces its rules against insider trading. Regulators take the misuse of material, nonpublic information very seriously. Harvard Law School's 2014 article "Hedge Funds and Material Nonpublic Information" covers the case law establishing liability for various parties in a tipping chain. Huge legal fees at best, and prison time at worst, await any financial titan who trades on some tidbit the public can't discover. I want very much to catch some negligent hedge fund misusing information so I can turn them in to the SEC for prosecution and collect a bounty. I attend San Francisco's tech and finance conferences with just such an intention. Call me the financial bounty hunter.
Any US government intelligence analyst who has ever held a security clearance and handled classified information can draw analogies between their responsibilities and those of a Wall Street analyst. Intelligence professionals cannot discuss their classified work in public. Only very privileged insiders at higher levels of the government can make policy using classified information. Policy actions for classified information must adhere to FedRAMP security protocols and Freedom of Information Act (FOIA) disclosure procedures. These legal controls on the use of classified government information are just as stringent as legal controls on the use of inside information from public companies.
The best deep dives highlight the uselessness of any and all so-called privileged information in making financial decisions. Everything relevant to a public company's performance is found in its published financial statements. The superior analyst ignores management spin in conference calls. The classic ratios of fundamental analysis reveal everything. The intelligence community's experience also offers another valid analogy. Somewhere between 80-85% of actionable intelligence is available through open sources. Collection is as easy as parsing a Google Search result.
Warren Buffett ranks among history's best money managers precisely because he bases all of his decisions on the study of publicly available information. He pals around with America's top CEOs and could probably find out anything he wants about what goes on behind closed doors. He doesn't need to poke behind the curtains because he can't use any of that information in his investment decisions anyway. Knowing how to read financial statements, industry reports, and government statistics is always good enough for Mr. Buffett. It's good enough for me too.
The SEC enforces its rules against insider trading. Regulators take the misuse of material, nonpublic information very seriously. Harvard Law School's 2014 article "Hedge Funds and Material Nonpublic Information" covers the case law establishing liability for various parties in a tipping chain. Huge legal fees at best, and prison time at worst, await any financial titan who trades on some tidbit the public can't discover. I want very much to catch some negligent hedge fund misusing information so I can turn them in to the SEC for prosecution and collect a bounty. I attend San Francisco's tech and finance conferences with just such an intention. Call me the financial bounty hunter.
Monday, May 18, 2015
Financial Sarcasm Roundup for 05/18/15
Behavioral finance research discovered that good financial decisions are often counterintuitive. Sarcasm can also be counterintuitive but that is not an iron law.
Credit card companies love doing business in hyperinflationary Venezuela. Charging fees to banks that pay in hard currency (the US dollar at present) is the key to success. When hyperinflation comes to the US, expect card companies to charge banks using Australian and Canadian currency. Americans won't know the difference because they'll be swiping that card for a jar of peanut butter priced at $10M of worthless US currency.
Critics of the TPP's fast-track bill may be right about some of its risks. The business elites pushing the trade deal don't care much for Dodd-Frank rules. Wall Street sees the rules as little more than a nuisance because its lobbyists helped write the law. Sleepwalkers at the SEC have little incentive to enforce rules that will harm their chances for future employment on Wall Street. Waving a weakened Dodd-Frank in the progressive Left's face is a cheap tactic for policymakers who know how banks get around rules.
Fannie and Freddie securities will soon be one combined issue. The sucker institutional investors who buy MBS will now have an easier time going bankrupt. They only have to buy one product full of subprime mortgages for people who can't pay bills. No one learned anything from the mortgage loan nonsense of the last housing crash. The chase for yield in a zero interest rate world now means dumb fixed-income portfolio managers will pile into MBS all at once.
I have spent way too much time lately dealing with trivial things and people. I must now make more effort to ignore those things and avoid those people. I will soon discover whether a small amount of time I spent on a high-payoff opportunity was time well spent.
Credit card companies love doing business in hyperinflationary Venezuela. Charging fees to banks that pay in hard currency (the US dollar at present) is the key to success. When hyperinflation comes to the US, expect card companies to charge banks using Australian and Canadian currency. Americans won't know the difference because they'll be swiping that card for a jar of peanut butter priced at $10M of worthless US currency.
Critics of the TPP's fast-track bill may be right about some of its risks. The business elites pushing the trade deal don't care much for Dodd-Frank rules. Wall Street sees the rules as little more than a nuisance because its lobbyists helped write the law. Sleepwalkers at the SEC have little incentive to enforce rules that will harm their chances for future employment on Wall Street. Waving a weakened Dodd-Frank in the progressive Left's face is a cheap tactic for policymakers who know how banks get around rules.
Fannie and Freddie securities will soon be one combined issue. The sucker institutional investors who buy MBS will now have an easier time going bankrupt. They only have to buy one product full of subprime mortgages for people who can't pay bills. No one learned anything from the mortgage loan nonsense of the last housing crash. The chase for yield in a zero interest rate world now means dumb fixed-income portfolio managers will pile into MBS all at once.
I have spent way too much time lately dealing with trivial things and people. I must now make more effort to ignore those things and avoid those people. I will soon discover whether a small amount of time I spent on a high-payoff opportunity was time well spent.
Tuesday, April 14, 2015
DOL Fiduciary Rule Brings Tougher Times for Financial Advisers
The US Department of Labor's EBSA proposed a new fiduciary standard today for financial advisers giving advice on retirement plans. Read the proposed rule on EBSA's site for the large amount of background material. Prohibitions of conflicting interests will be tougher. Disclosure will be more thorough. The bottom line for advisers is a higher standard of care for the clients paying their fees. Many advisers will not prove themselves up to the task despite the exemptions available.
Most wirehouse advisers push retirement plans populated with actively managed mutual funds. These funds are more expensive than passive index funds and tend to underperform their benchmarks. These same funds pay 12b-1 fees to advisers and their branch offices. Fiduciaries have built-in conflicts tied to the financial products with the largest market share in retirement planning. The SEC has recently placed 12b-1 fees under close scrutiny. Any regulatory change that discourages 12b-1 fees will reduce product selection in retirement planning. Less profitable products and tighter fiduciary standards will deter many advisers from offering retirement advice.
Clients seeking retirement solutions in this changing landscape have reason for optimism. Robo-advisers are coming. The AIs at automated brokerages work non-stop for zero pay. Automated advisers can accommodate dirt-cheap, plain vanilla index funds in tax-advantaged retirement plans. They also have negligible potential for fiduciary conflicts because they are programmed to do precisely what the client wants. Coding DOL rule changes into an AI is much cheaper than retraining human advisers and funding a human compliance function.
Human beings always seek the path of least resistance. Advisers are only human and plenty of them will get out of the retirement planning lane if reduced fees and more regulation make it unattractive. Clients still need advice and they will not have the patience for human relationship managers who must explain conflicts before deciding what role they may play in a transaction. Fiduciary rule changes are one more force pushing humans out of finance. Automated advisory programs will fill the gap.
Most wirehouse advisers push retirement plans populated with actively managed mutual funds. These funds are more expensive than passive index funds and tend to underperform their benchmarks. These same funds pay 12b-1 fees to advisers and their branch offices. Fiduciaries have built-in conflicts tied to the financial products with the largest market share in retirement planning. The SEC has recently placed 12b-1 fees under close scrutiny. Any regulatory change that discourages 12b-1 fees will reduce product selection in retirement planning. Less profitable products and tighter fiduciary standards will deter many advisers from offering retirement advice.
Clients seeking retirement solutions in this changing landscape have reason for optimism. Robo-advisers are coming. The AIs at automated brokerages work non-stop for zero pay. Automated advisers can accommodate dirt-cheap, plain vanilla index funds in tax-advantaged retirement plans. They also have negligible potential for fiduciary conflicts because they are programmed to do precisely what the client wants. Coding DOL rule changes into an AI is much cheaper than retraining human advisers and funding a human compliance function.
Human beings always seek the path of least resistance. Advisers are only human and plenty of them will get out of the retirement planning lane if reduced fees and more regulation make it unattractive. Clients still need advice and they will not have the patience for human relationship managers who must explain conflicts before deciding what role they may play in a transaction. Fiduciary rule changes are one more force pushing humans out of finance. Automated advisory programs will fill the gap.
Monday, July 14, 2014
Financial Sarcasm Roundup for 07/14/14
Open your mouths for a big, fat, heaping spoonful of financial sarcasm. It's good for you and you'll get used to the taste in no time flat.
The Trans-Pacific Partnership is getting hung up on the US's domestic election calendar. That would not be such a big deal if the negotiators stick to their regular meeting calendar. I remember how NAFTA's negotiations had periodic hangups over domestic political pressures but the parties still got a deal done. If the TPP dealers can't even agree on their next meeting date then they've got more severe problems than one country's elections. I say dress up some actors in a Chinese New Year dragon dance costume and have them throw some firecrackers into the TPP's next press conference. That will wake everyone up about the urgency of creating a trade bloc countering China.
A new Great Wall of China is going up around "wealth management" services. Here's why it's very important for the rest of the Pacific Rim to ring-fence China's economy. China has obviously not fully identified the problems in the risky wealth management products (WMPs) that channeled its middle class savings into failed infrastructure and empty residential projects. The inevitable defaults of these WMPs will destroy any Chinese banks that have not pushed them off their balance sheets. China's obvious hope that FTZs will attract enough FDI to soak up WMP demand is not realistic. Western banks with any sense will keep their FTZ branches away from the Chinese wealth management chop shops.
The silver fix is getting a new caretaking team. There will never be a perfect way to set any daily commodity price. Moving the silver fix to exchanges that habitually make pricing transparent is better than leaving it in the hands of collusive bankers. The gold fix is the obvious next candidate, and then currencies and interest rate benchmarks. Regulators are probably tiring of the vast investigations they must launch every time a bank's misbehaving whale trader nearly causes a systemic lock-up. Taking a global pricing fix away from bank trading desks is like taking the car keys away from a drunk teenager. Someone has to be the adult on the scene.
I would like to thank several hot San Francisco women for making my day a bit less sarcastic. They know who they are. I'm always up for harmless flirtation and the ladies do swoon from my attention.
The Trans-Pacific Partnership is getting hung up on the US's domestic election calendar. That would not be such a big deal if the negotiators stick to their regular meeting calendar. I remember how NAFTA's negotiations had periodic hangups over domestic political pressures but the parties still got a deal done. If the TPP dealers can't even agree on their next meeting date then they've got more severe problems than one country's elections. I say dress up some actors in a Chinese New Year dragon dance costume and have them throw some firecrackers into the TPP's next press conference. That will wake everyone up about the urgency of creating a trade bloc countering China.
A new Great Wall of China is going up around "wealth management" services. Here's why it's very important for the rest of the Pacific Rim to ring-fence China's economy. China has obviously not fully identified the problems in the risky wealth management products (WMPs) that channeled its middle class savings into failed infrastructure and empty residential projects. The inevitable defaults of these WMPs will destroy any Chinese banks that have not pushed them off their balance sheets. China's obvious hope that FTZs will attract enough FDI to soak up WMP demand is not realistic. Western banks with any sense will keep their FTZ branches away from the Chinese wealth management chop shops.
The silver fix is getting a new caretaking team. There will never be a perfect way to set any daily commodity price. Moving the silver fix to exchanges that habitually make pricing transparent is better than leaving it in the hands of collusive bankers. The gold fix is the obvious next candidate, and then currencies and interest rate benchmarks. Regulators are probably tiring of the vast investigations they must launch every time a bank's misbehaving whale trader nearly causes a systemic lock-up. Taking a global pricing fix away from bank trading desks is like taking the car keys away from a drunk teenager. Someone has to be the adult on the scene.
I would like to thank several hot San Francisco women for making my day a bit less sarcastic. They know who they are. I'm always up for harmless flirtation and the ladies do swoon from my attention.
Monday, July 07, 2014
Financial Sarcasm Roundup for 07/07/14
I expect the amount of nonsense reaching my inbox to increase as the ancien regime of our global financial system approaches its crack-up point. The crescendo should be deafening when it hits.
Japan is having second thoughts about jumping on board with the Asia Infrastructure Investment Bank. China will make a lot of its neighbors reluctant to co-invest in anything it sponsors. It would be funny if China asked Japan to put up ownership of the Senkakus as collateral for its participation. The Asia Development already works just fine. Leave it to China to copy something and pass it off as original work.
China's securities regulators think they can smooth the number of IPOs each month. These people still have no clue how capitalism works. Demand for new issues should drive the supply of new shares. Some regulatory impulse to dress up capital markets is probably a reaction to lack of investor interest outside China. American investors have been burned by fraudulent Chinese companies making questionable ADR debuts on US exchanges. Chinese founders thus need a domestic outlet to cash out their stakes before fleeing the country.
The businesses community wants the Ex-Im Bank to stick around. Forget the rhetoric disparaging it as a fountain of handouts for big corporations. That is just for the low-information voters in some districts who get riled up about any government program. If corporate money is behind some government agency, it will continue to operate. The Ex-Im Bank's outstanding loan portfolio is a small amount of the nation's outstanding credit burden. It is unlike the mortgage lending for house-flipping and the revolving credit card debt for mindless consumption. This bank's loans drive export earnings. It's a winner, for crying out loud.
The White House is backtracking on comments about more bank regulation. It's so hilarious whenever a politician's handlers bend over backwards to ensure moneyed backers don't take rhetoric seriously. Here's a lesson in politics for anyone who knows nothing. Political comments to the general public are just noise to fill space. Business lobbies should not be so easily fooled, yet the decline in competence I have witnessed among America's elite class in my lifetime indicates that some of them do fall for the common rhetoric. A few trust fund babies running lousy hedge funds must have made some panicked phone calls to Washington.
The dumb things I've noted above happen all the time. The dumb people doing these things will be even dumber in a big crisis. That will be time for me to make some money at their expense by trading against stupidity. Bring on the panic.
Japan is having second thoughts about jumping on board with the Asia Infrastructure Investment Bank. China will make a lot of its neighbors reluctant to co-invest in anything it sponsors. It would be funny if China asked Japan to put up ownership of the Senkakus as collateral for its participation. The Asia Development already works just fine. Leave it to China to copy something and pass it off as original work.
China's securities regulators think they can smooth the number of IPOs each month. These people still have no clue how capitalism works. Demand for new issues should drive the supply of new shares. Some regulatory impulse to dress up capital markets is probably a reaction to lack of investor interest outside China. American investors have been burned by fraudulent Chinese companies making questionable ADR debuts on US exchanges. Chinese founders thus need a domestic outlet to cash out their stakes before fleeing the country.
The businesses community wants the Ex-Im Bank to stick around. Forget the rhetoric disparaging it as a fountain of handouts for big corporations. That is just for the low-information voters in some districts who get riled up about any government program. If corporate money is behind some government agency, it will continue to operate. The Ex-Im Bank's outstanding loan portfolio is a small amount of the nation's outstanding credit burden. It is unlike the mortgage lending for house-flipping and the revolving credit card debt for mindless consumption. This bank's loans drive export earnings. It's a winner, for crying out loud.
The White House is backtracking on comments about more bank regulation. It's so hilarious whenever a politician's handlers bend over backwards to ensure moneyed backers don't take rhetoric seriously. Here's a lesson in politics for anyone who knows nothing. Political comments to the general public are just noise to fill space. Business lobbies should not be so easily fooled, yet the decline in competence I have witnessed among America's elite class in my lifetime indicates that some of them do fall for the common rhetoric. A few trust fund babies running lousy hedge funds must have made some panicked phone calls to Washington.
The dumb things I've noted above happen all the time. The dumb people doing these things will be even dumber in a big crisis. That will be time for me to make some money at their expense by trading against stupidity. Bring on the panic.
Monday, May 05, 2014
Financial Sarcasm Roundup for 05/05/14
I have been quite busy these past few weeks and I have not had much time to generate a whole lot of analysis. You people will have to busy yourselves with my haiku until things settle down. Here's some sarcasm to keep you motivated or make you upset. I truly don't care how any of you feel after reading my genius language.
The National Stock Exchange is preparing to cease operations. Who are these people anyway? I've never heard of them and I'm really in step with the markets. They should have done what IEX Group did to beat the dark pools at their own game but I guess routing slower trades never occurred to them. Maybe a couple of squirrels could use their system to trade acorns after they turn the lights out.
Norway is transferring its sovereign wealth fund from JPMorgan to Citigroup. Oh for crying out loud, that is a dumb move. Switching from the Rockefeller's family bank to a bank that needed massive government bailouts shows how little the Norwegians understand about the American aristocracy. The Rockefeller institutions have proven remarkably resilient. JPM is one domino that will stick straight up as others fall thanks to its elite connections. Just ask Warren Buffett, who has owned JPM in his personal portfolio.
American banks are cutting their exposure to Russian transactions. I think a lot of bicoastal preppies will run short of imported caviar if Russian exporters can't get credit lines at US banks. Further sanctions could very well force these banks to sell off what remains of their Russian loan portfolios, in a discounted gift to any European banks able to line up bids. Our banks have very limited exposure to Russia anyway.
Here's something that America's home-grown conspiracy nuts won't like. Deutsche Bank is telling its US clients to close their accounts because FATCA's reporting requirements are too onerous. Our Treasury notes these concerns by saying it won't stringently enforce FATCA through 2015. That noise is small consolation for non-US banks that don't want to comply with US assertions of sovereignty outside American borders. The stupid Americans who opened accounts overseas thinking they can escape federal tax scrutiny are about to get their fingers broken hard as foreign doors slam shut. American citizens will comply with federal tax reporting and they will learn to like it.
There hasn't been a whole lot in the news lately to make me angry. I have been quite happy lately noting that there are a lot of attractive women walking around my local area wearing shorts, tight skirts, and yoga pants. I just might invite them over to my place where they can unburden themselves of said clothing, if I can find the time in my schedule.
The National Stock Exchange is preparing to cease operations. Who are these people anyway? I've never heard of them and I'm really in step with the markets. They should have done what IEX Group did to beat the dark pools at their own game but I guess routing slower trades never occurred to them. Maybe a couple of squirrels could use their system to trade acorns after they turn the lights out.
Norway is transferring its sovereign wealth fund from JPMorgan to Citigroup. Oh for crying out loud, that is a dumb move. Switching from the Rockefeller's family bank to a bank that needed massive government bailouts shows how little the Norwegians understand about the American aristocracy. The Rockefeller institutions have proven remarkably resilient. JPM is one domino that will stick straight up as others fall thanks to its elite connections. Just ask Warren Buffett, who has owned JPM in his personal portfolio.
American banks are cutting their exposure to Russian transactions. I think a lot of bicoastal preppies will run short of imported caviar if Russian exporters can't get credit lines at US banks. Further sanctions could very well force these banks to sell off what remains of their Russian loan portfolios, in a discounted gift to any European banks able to line up bids. Our banks have very limited exposure to Russia anyway.
Here's something that America's home-grown conspiracy nuts won't like. Deutsche Bank is telling its US clients to close their accounts because FATCA's reporting requirements are too onerous. Our Treasury notes these concerns by saying it won't stringently enforce FATCA through 2015. That noise is small consolation for non-US banks that don't want to comply with US assertions of sovereignty outside American borders. The stupid Americans who opened accounts overseas thinking they can escape federal tax scrutiny are about to get their fingers broken hard as foreign doors slam shut. American citizens will comply with federal tax reporting and they will learn to like it.
There hasn't been a whole lot in the news lately to make me angry. I have been quite happy lately noting that there are a lot of attractive women walking around my local area wearing shorts, tight skirts, and yoga pants. I just might invite them over to my place where they can unburden themselves of said clothing, if I can find the time in my schedule.
Friday, March 21, 2014
Success Metrics In South Carolina And California
I attended the San Francisco Republican Party's annual Lincoln / Reagan Dinner last night. Governor Nikki Haley of South Carolina spoke about her efforts to improve conditions in her state. It's appropriate to compare that state to California so we can figure out what we're doing wrong.
The Tax Foundation's 2014 State Business Tax Climate Index shows that South Carolina is #37 and California is #48. That's a notable difference and it's embarrassing to see California near the bottom. The top states are those that do without one of several major taxes. That means even California's Proposition 13 limits on property taxes can't make up for high taxes in other areas. Tax burden isn't everything in measuring a state's economic health. Governing's 2013 analysis revealed that the above tax index had little relation to levels of wages or employment.
If taxes don't tell the whole story on a state's competitiveness then we need broader measures. The Mercatus Center's "Freedom In The 50 States" index ranks South Carolina 15th and California 49th. Gee, that's a huge difference in personal and economic freedom. The Cost of Government Center's assessment of each state's contribution to an individual's regulatory burden shows that Californians have to work 20 days longer than South Carolinians each year to be free of regulations. The invisible tax of regulation matters as much as the formal tax burden.
The US Chamber of Commerce Foundation's Enterprising States project ranks states across a number of economic measures. California beats South Carolina in Performance and Talent Pipeline, but loses to that smaller state in the other four broad categories. My state's ranking in the Talent Pipeline sub-categories reveal that we're eating our seed corn. The state does well in high school AP but poorly in college affordability and degree output. I expect our most talented high school students to exit California for cheaper colleges elsewhere. Blame our state's teachers' unions for this likelihood.
One very important measure of a state's ability to manage its affairs is its credit rating for general obligation bonds. Pew Charitable Trusts tracks the US states' S&P credit ratings in a handy infographic. South Carolina has been consistently high at AAA or AA+ for over a decade. California is at the absolute bottom of all of the states. It is shameful to see developing nations with higher sovereign credit ratings than the US's most populous state. Compare our state's debt burden to the poor results we obtain in the rankings above to see the extent of our dysfunction. If our tax burden according to the Tax Foundation is so high, we should have no difficulty repaying our state's debt and earning a higher credit rating. The persistently high tax burden and low credit rating indicate uncontrolled state spending that is not moving the needle up in the other indexes' very important success metrics.
In fairness to alternative views, Good Jobs First's "Grading Places" 2013 report objects to the findings of the Tax Foundation and other business climate indexes. I don't think any single index will ever perfectly describe a state's KPIs but we have to start somewhere. Some states have unique natural resources that confer windfall advantages, like North Dakota's shale boom. California has abundant natural resources, so we should be experiencing perennial financial windfalls instead of persistent budget deficits. Our state's problems stem from its people. California has become home to too many dingbats, bums, and morons. We elect leaders in Sacramento who reflect those degraded tendencies. The US federal system of government allows the states to be laboratories for policy innovations. California's lab experiments need a reset at the ballot box.
The Tax Foundation's 2014 State Business Tax Climate Index shows that South Carolina is #37 and California is #48. That's a notable difference and it's embarrassing to see California near the bottom. The top states are those that do without one of several major taxes. That means even California's Proposition 13 limits on property taxes can't make up for high taxes in other areas. Tax burden isn't everything in measuring a state's economic health. Governing's 2013 analysis revealed that the above tax index had little relation to levels of wages or employment.
If taxes don't tell the whole story on a state's competitiveness then we need broader measures. The Mercatus Center's "Freedom In The 50 States" index ranks South Carolina 15th and California 49th. Gee, that's a huge difference in personal and economic freedom. The Cost of Government Center's assessment of each state's contribution to an individual's regulatory burden shows that Californians have to work 20 days longer than South Carolinians each year to be free of regulations. The invisible tax of regulation matters as much as the formal tax burden.
The US Chamber of Commerce Foundation's Enterprising States project ranks states across a number of economic measures. California beats South Carolina in Performance and Talent Pipeline, but loses to that smaller state in the other four broad categories. My state's ranking in the Talent Pipeline sub-categories reveal that we're eating our seed corn. The state does well in high school AP but poorly in college affordability and degree output. I expect our most talented high school students to exit California for cheaper colleges elsewhere. Blame our state's teachers' unions for this likelihood.
One very important measure of a state's ability to manage its affairs is its credit rating for general obligation bonds. Pew Charitable Trusts tracks the US states' S&P credit ratings in a handy infographic. South Carolina has been consistently high at AAA or AA+ for over a decade. California is at the absolute bottom of all of the states. It is shameful to see developing nations with higher sovereign credit ratings than the US's most populous state. Compare our state's debt burden to the poor results we obtain in the rankings above to see the extent of our dysfunction. If our tax burden according to the Tax Foundation is so high, we should have no difficulty repaying our state's debt and earning a higher credit rating. The persistently high tax burden and low credit rating indicate uncontrolled state spending that is not moving the needle up in the other indexes' very important success metrics.
In fairness to alternative views, Good Jobs First's "Grading Places" 2013 report objects to the findings of the Tax Foundation and other business climate indexes. I don't think any single index will ever perfectly describe a state's KPIs but we have to start somewhere. Some states have unique natural resources that confer windfall advantages, like North Dakota's shale boom. California has abundant natural resources, so we should be experiencing perennial financial windfalls instead of persistent budget deficits. Our state's problems stem from its people. California has become home to too many dingbats, bums, and morons. We elect leaders in Sacramento who reflect those degraded tendencies. The US federal system of government allows the states to be laboratories for policy innovations. California's lab experiments need a reset at the ballot box.
Friday, March 07, 2014
Bad Infrastructure Grades Include Pipelines And Electricity Transmission Lines
It is very depressing to read the poor grades the ASCE gives to America's infrastructure. The organization's Infrastructure Report Card for 2013 shows that most of this country's public facilities earn D's. That is embarrassing. It's also a serious disconnect from the World Bank's LPI, which rates America's transportation infrastructure as having the 9th best infrastructure worldwide in 2012.
The LPI ranking is a more comprehensive score that includes human competencies in processing and tracking movements. The ASCE's report card addresses only the physical quality of infrastructure, but this does not explain its mismatch with the World Bank's data. Adjusting the LPI rankings so that the "Infrastructure" column achieves primacy elevates the US to the fourth-highest overall score just for that category. That is an even more severe divergence from the ASCE's opinions. This disconnect's underlying cause becomes apparent once we delve into the World Bank's "Domestic LPI" data. Clicking the "Infrastructure" link there shows that the LPI scores are based on self-reported assessments from respondents. Compare this with the ASCE's more scientific assessment of physical deficiencies. The ASCE's report card assesses investment need while the World Bank's surveys assess operating capacity. The Alfidi Capital conclusion is that the US economy can continue to perform at the high proficiency that the LPI scores indicate, right up to the point everything falls apart if the US does not correct the glaring deficiencies the ASCE noted.
The ASCE report card thankfully addresses energy infrastructure. Pipelines and electricity transmission lines are significant infrastructure categories, and many of these assets are privately owned. USDOE's EIA tracks the natural gas pipeline grid but regulatory oversight for new investment is distributed among several federal agencies. USDOT maintains the National Pipeline Mapping System for the most complete picture of the network's physical layout. FERC has the most regulatory control over the pipeline operating companies when they address markets. The AOPL's industry facts and policy issues do not address the overall physical condition of the nation's network. Assessing the sectors' investment needs means examining the annual reports of the major pipeline operators.
FERC completed a comprehensive study of the electricity transmission grid in 2002. The most important takeaway from any study of the nation's electric grid is that there is little connectivity between the east and west halves of the country. The next most important takeaway is that there is little connectivity to the most promising undeveloped sites for wind farms in the north-central US. The Edison Electric Institute tracks investments in the electric transmission grid. The US Bureau of Land Management has a plan to accelerate permitting on land designated as corridors for transmission lines. The need for additional investment is as obvious as the need for multi-jurisdictional regulatory coordination.
The US clearly needs to upgrade its physical infrastructure. The ASCE's estimated bill for $3.6T could probably have been paid with the cost of our wars in Iraq and Afghanistan plus the Wall Street TARP bailout. America instead chose to delay urgent investments in its public commons. This huge bill for infrastructure must now compete with middle class entitlements that the Bowles-Simpson NCFRR report determined to be unsustainable. America is in for a hard core wake-up. The bill for infrastructure is due now.
The LPI ranking is a more comprehensive score that includes human competencies in processing and tracking movements. The ASCE's report card addresses only the physical quality of infrastructure, but this does not explain its mismatch with the World Bank's data. Adjusting the LPI rankings so that the "Infrastructure" column achieves primacy elevates the US to the fourth-highest overall score just for that category. That is an even more severe divergence from the ASCE's opinions. This disconnect's underlying cause becomes apparent once we delve into the World Bank's "Domestic LPI" data. Clicking the "Infrastructure" link there shows that the LPI scores are based on self-reported assessments from respondents. Compare this with the ASCE's more scientific assessment of physical deficiencies. The ASCE's report card assesses investment need while the World Bank's surveys assess operating capacity. The Alfidi Capital conclusion is that the US economy can continue to perform at the high proficiency that the LPI scores indicate, right up to the point everything falls apart if the US does not correct the glaring deficiencies the ASCE noted.
The ASCE report card thankfully addresses energy infrastructure. Pipelines and electricity transmission lines are significant infrastructure categories, and many of these assets are privately owned. USDOE's EIA tracks the natural gas pipeline grid but regulatory oversight for new investment is distributed among several federal agencies. USDOT maintains the National Pipeline Mapping System for the most complete picture of the network's physical layout. FERC has the most regulatory control over the pipeline operating companies when they address markets. The AOPL's industry facts and policy issues do not address the overall physical condition of the nation's network. Assessing the sectors' investment needs means examining the annual reports of the major pipeline operators.
FERC completed a comprehensive study of the electricity transmission grid in 2002. The most important takeaway from any study of the nation's electric grid is that there is little connectivity between the east and west halves of the country. The next most important takeaway is that there is little connectivity to the most promising undeveloped sites for wind farms in the north-central US. The Edison Electric Institute tracks investments in the electric transmission grid. The US Bureau of Land Management has a plan to accelerate permitting on land designated as corridors for transmission lines. The need for additional investment is as obvious as the need for multi-jurisdictional regulatory coordination.
The US clearly needs to upgrade its physical infrastructure. The ASCE's estimated bill for $3.6T could probably have been paid with the cost of our wars in Iraq and Afghanistan plus the Wall Street TARP bailout. America instead chose to delay urgent investments in its public commons. This huge bill for infrastructure must now compete with middle class entitlements that the Bowles-Simpson NCFRR report determined to be unsustainable. America is in for a hard core wake-up. The bill for infrastructure is due now.
Monday, February 17, 2014
Financial Sarcasm Roundup for 02/17/14
I'm actually having a hard time getting sarcastic this week. Nah, just kidding. Sarcasm comes naturally to me after years of practice. I barely have to try anymore.
The G-20 claims to have a newfound concern for financial market turbulence. Yeah, sure. Don't expect them to own up to the years of misapplied monetary and fiscal stimulus that contributed to the growing risk of market collapse. It's really funny to think the US will lecture Europeans on fixing their banking system when we haven't even fixed our own. Those of us in the know about the US-UK bank resolution plan, which IMHO is a much better concept than anything policymakers did in 2008, can ignore the hot air from the G-20.
The G-20's FSB is just now getting around to examining foreign currency benchmarks. They sure took their sweet time. It's been like, what, months since this scandal broke? Regulators are not serious at all about stopping market manipulation. The multiple ongoing investigations would duplicate effort without the FSB's oversight, but maybe that was the plan until someone decided the FSB could lend the whole mess a veneer of credibility. Developing countries who complain about being left out of this action would be better off starting their own economic bloc.
If you need more evidence that the developed economies aren't serious about solving problems, note that the EU is delaying action on a new law to curb financial benchmark abuse. The need for more study is a silly excuse. The law's authors have plenty of data from the Libor probe. The lessons for investors are clear. Nothing is fixed and no one is serious about fixing anything.
If you miss the LOLcats I used to put in here for a few roundups, I don't want to hear about it. Make your own LOLcat blog if you're upset.
The G-20 claims to have a newfound concern for financial market turbulence. Yeah, sure. Don't expect them to own up to the years of misapplied monetary and fiscal stimulus that contributed to the growing risk of market collapse. It's really funny to think the US will lecture Europeans on fixing their banking system when we haven't even fixed our own. Those of us in the know about the US-UK bank resolution plan, which IMHO is a much better concept than anything policymakers did in 2008, can ignore the hot air from the G-20.
The G-20's FSB is just now getting around to examining foreign currency benchmarks. They sure took their sweet time. It's been like, what, months since this scandal broke? Regulators are not serious at all about stopping market manipulation. The multiple ongoing investigations would duplicate effort without the FSB's oversight, but maybe that was the plan until someone decided the FSB could lend the whole mess a veneer of credibility. Developing countries who complain about being left out of this action would be better off starting their own economic bloc.
If you need more evidence that the developed economies aren't serious about solving problems, note that the EU is delaying action on a new law to curb financial benchmark abuse. The need for more study is a silly excuse. The law's authors have plenty of data from the Libor probe. The lessons for investors are clear. Nothing is fixed and no one is serious about fixing anything.
If you miss the LOLcats I used to put in here for a few roundups, I don't want to hear about it. Make your own LOLcat blog if you're upset.
Sunday, February 16, 2014
Top Challenges Facing Crowdfunding In 2014
Crowdfunding is here to stay. We can thank a nimble small business lobby and some hardworking people in Congress and the SEC for getting the ball rolling. Okay, maybe more private groups than just the small business lobby work hard, because it sure takes a long time for the policy framework to accommodate reality. Here's my rundown of where policy needs more work right now.
The SEC must finalize Reg A+. This proposed regulation allows a hybrid public/private securities offering beneath a specified cap. I think this helps get around the difficulties small companies will face if they present pitches at public events. Offering the securities under Reg A+ will alleviate some of the heartburn investors like me feel at pitchfests when a startup shows ignorance of offering circulars and blue sky requirements.
Reduce market barriers to SPOs. I'm painting with a broad brush here because there isn't just one fix. OECD Corporate Governance Working Paper No. 10 addresses the decline in IPOs on US exchanges. Venture-backed startups with large addressable markets have no problem going IPO once they've crossed the chasm to market adoption. They know there will be a large demand for aftermarket trading. There is little such aftermarket for those small companies that go IPO under the gradations of the JOBS Act and its supporting regulations like Reg A+. I do not agree with some analysts who think the decimalization of tick size is deterring IPOs. I like decimalization because it makes prices less sticky in the market and allows for more accurate price discovery. My preferred solution is to allow companies that go IPO to continue to issue secondary shares under the JOBS Act. I see resource companies presenting PIPEs all the time. Tech companies should be able to do that with an SPO that works the same way as a direct public offering (DPO). Crowdfunding portals associated with FINRA broker-dealers can easily handle DPO and SPO volume, and can develop aftermarkets that encourage more IPOs. Portals like SecondMarket are already out in front.
Stick with the changes to Reg D. The investor community has had enough time to adjust to the SEC's repeal of the ban on advertising and general solicitation of Reg D offerings. Some critics still haven't made the adjustment. Tough luck. There shouldn't be any going back now and the SEC should stick to its guns.
Bring policy innovation to Canada. Our friends in the Great White North should share in the new era of blessings that crowdfunding brings to investing. Canada already has a robust reporting regime that allows for nuanced classifications of mineral and energy deposits. This allows young companies to report results that can help them raise capital. It's time the capital raising regime caught up to the mineral classification regime. Canada's Venture Capital Markets Association (VCMA) is trying to move that country in the right direction.
Simplify restricted stock rules. Rule 144 still contains minefields for investors holding restricted stock. I believe the SEC should simply the processes available for owners to remove the "restricted" legend from a stock. If I could wave a magic wand, I would eliminate the one year minimum that shell companies must wait after filing Form 10. I also see no reason why the SEC requires an attorney's opinion prior to lifting a Rule 144 restrictive legend. I do not expect the SEC to move on these matters until it is done wrangling with more pressing JOBS Act rules.
Publicize "reasonable steps" and "bad actor" provisions. The startup community is still woefully unprepared to take the SEC's "reasonable steps" to verify an investor's accredited status. They may also not know that getting involved with "bad actors" can destroy their ability to raise capital if the SEC discovers such a relationship and imposes a sanction. The SEC could make it easier by publishing description of those two concepts in big, bold letters on its JOBS Act pages. I don't expect that to happen, so these subjects will remain lucrative practice areas for law firms that pitch services to startups.
Clarification on Edgar filings. The SEC requires publicly traded companies to file their financial statements on Edgar. Startups who migrate entirely to capital raising via crowdfunding portals will IMHO become de facto publicly traded companies. I do not know whether this means they will have to file on Edgar. The SEC should get ahead of this now and issue some regulatory guidance. It shouldn't have to wait until investors start suing small companies for not publishing on Edgar if they are supposed to be exempt.
The SEC has a small business guide and IMHO it should clarify the topics I discussed above. Crowdfunding is the latest policy innovation that follows naturally from the success of the Small Corporate Offering Registration (SCOR) regime. The NASAA guidelines on SCOR are far simpler than anything the SEC has put in place for the JOBS Act. It would be nice if everything in finance were so simple.
The SEC must finalize Reg A+. This proposed regulation allows a hybrid public/private securities offering beneath a specified cap. I think this helps get around the difficulties small companies will face if they present pitches at public events. Offering the securities under Reg A+ will alleviate some of the heartburn investors like me feel at pitchfests when a startup shows ignorance of offering circulars and blue sky requirements.
Reduce market barriers to SPOs. I'm painting with a broad brush here because there isn't just one fix. OECD Corporate Governance Working Paper No. 10 addresses the decline in IPOs on US exchanges. Venture-backed startups with large addressable markets have no problem going IPO once they've crossed the chasm to market adoption. They know there will be a large demand for aftermarket trading. There is little such aftermarket for those small companies that go IPO under the gradations of the JOBS Act and its supporting regulations like Reg A+. I do not agree with some analysts who think the decimalization of tick size is deterring IPOs. I like decimalization because it makes prices less sticky in the market and allows for more accurate price discovery. My preferred solution is to allow companies that go IPO to continue to issue secondary shares under the JOBS Act. I see resource companies presenting PIPEs all the time. Tech companies should be able to do that with an SPO that works the same way as a direct public offering (DPO). Crowdfunding portals associated with FINRA broker-dealers can easily handle DPO and SPO volume, and can develop aftermarkets that encourage more IPOs. Portals like SecondMarket are already out in front.
Stick with the changes to Reg D. The investor community has had enough time to adjust to the SEC's repeal of the ban on advertising and general solicitation of Reg D offerings. Some critics still haven't made the adjustment. Tough luck. There shouldn't be any going back now and the SEC should stick to its guns.
Bring policy innovation to Canada. Our friends in the Great White North should share in the new era of blessings that crowdfunding brings to investing. Canada already has a robust reporting regime that allows for nuanced classifications of mineral and energy deposits. This allows young companies to report results that can help them raise capital. It's time the capital raising regime caught up to the mineral classification regime. Canada's Venture Capital Markets Association (VCMA) is trying to move that country in the right direction.
Simplify restricted stock rules. Rule 144 still contains minefields for investors holding restricted stock. I believe the SEC should simply the processes available for owners to remove the "restricted" legend from a stock. If I could wave a magic wand, I would eliminate the one year minimum that shell companies must wait after filing Form 10. I also see no reason why the SEC requires an attorney's opinion prior to lifting a Rule 144 restrictive legend. I do not expect the SEC to move on these matters until it is done wrangling with more pressing JOBS Act rules.
Publicize "reasonable steps" and "bad actor" provisions. The startup community is still woefully unprepared to take the SEC's "reasonable steps" to verify an investor's accredited status. They may also not know that getting involved with "bad actors" can destroy their ability to raise capital if the SEC discovers such a relationship and imposes a sanction. The SEC could make it easier by publishing description of those two concepts in big, bold letters on its JOBS Act pages. I don't expect that to happen, so these subjects will remain lucrative practice areas for law firms that pitch services to startups.
Clarification on Edgar filings. The SEC requires publicly traded companies to file their financial statements on Edgar. Startups who migrate entirely to capital raising via crowdfunding portals will IMHO become de facto publicly traded companies. I do not know whether this means they will have to file on Edgar. The SEC should get ahead of this now and issue some regulatory guidance. It shouldn't have to wait until investors start suing small companies for not publishing on Edgar if they are supposed to be exempt.
The SEC has a small business guide and IMHO it should clarify the topics I discussed above. Crowdfunding is the latest policy innovation that follows naturally from the success of the Small Corporate Offering Registration (SCOR) regime. The NASAA guidelines on SCOR are far simpler than anything the SEC has put in place for the JOBS Act. It would be nice if everything in finance were so simple.
Monday, January 27, 2014
Financial Sarcasm Roundup for 01/27/14
The turmoil in global markets that began last week is wonderful news, from my perspective. This means I can't afford to let up on the sarcasm directed against anyone who went all-in on any asset class this month.
Argentina is liberalizing its restrictions on foreign currency. IMHO that signals the beginning of that country's hyperinflation end game but we're nowhere near the denouement. Argentina would have to reduce the currency transaction tax to zero and allow other currencies as legal tender to truly end its crisis. The Fernandez administration isn't ready to throw in the towel on its failed micromanagement of Argentinians' economic choices. Argentina could have been a contender for world domination a century ago with its rich agricultural resources but its potential has been comatose since after World War II. Maybe it's all the fault of the bizarre Peronist combination of incompatible ideologies.
Central bankers at the WEF in Davos are warning banks to quit playing games with rate benchmarks. Global regulators are promising us even better benchmarks. Well, sheesh, if they would have invited me to Davos I would have sold them on my idea for GIBOR as a benchmark. These people need to appreciate my genius. It's easy for banks subscribing to one benchmark to manipulate it, but a benchmark of benchmarks like GIBOR would be harder to peg. I'm way more awesome than these global bank regulators.
The global elite confab is studying more than just rate benchmarks. The Davos crowd sees broader risks in the emerging market sell-off. They give themselves too much credit. The crowd in the eye of the pyramid may be blind. The biggest risk right now is the lack of confidence investors have in the transparency of markets and the trustworthiness of institutions. The inability of elites to prosecute their own kind for financial malfeasance is the source of market distrust. Solve that with prosecutions and trust will gradually reappear.
I have a couple of meetings this week in the San Francisco Bay Area with some business folks and an event to attend. I'll let you all know what happens. Alternatively, maybe I won't let you know what happens.
Argentina is liberalizing its restrictions on foreign currency. IMHO that signals the beginning of that country's hyperinflation end game but we're nowhere near the denouement. Argentina would have to reduce the currency transaction tax to zero and allow other currencies as legal tender to truly end its crisis. The Fernandez administration isn't ready to throw in the towel on its failed micromanagement of Argentinians' economic choices. Argentina could have been a contender for world domination a century ago with its rich agricultural resources but its potential has been comatose since after World War II. Maybe it's all the fault of the bizarre Peronist combination of incompatible ideologies.
Central bankers at the WEF in Davos are warning banks to quit playing games with rate benchmarks. Global regulators are promising us even better benchmarks. Well, sheesh, if they would have invited me to Davos I would have sold them on my idea for GIBOR as a benchmark. These people need to appreciate my genius. It's easy for banks subscribing to one benchmark to manipulate it, but a benchmark of benchmarks like GIBOR would be harder to peg. I'm way more awesome than these global bank regulators.
The global elite confab is studying more than just rate benchmarks. The Davos crowd sees broader risks in the emerging market sell-off. They give themselves too much credit. The crowd in the eye of the pyramid may be blind. The biggest risk right now is the lack of confidence investors have in the transparency of markets and the trustworthiness of institutions. The inability of elites to prosecute their own kind for financial malfeasance is the source of market distrust. Solve that with prosecutions and trust will gradually reappear.
I have a couple of meetings this week in the San Francisco Bay Area with some business folks and an event to attend. I'll let you all know what happens. Alternatively, maybe I won't let you know what happens.
Saturday, January 18, 2014
Thursday, January 02, 2014
Non-Financial Companies Should Not Operate Crowdfunding Portals
I attended a holiday party last month where one of the nameless wheeler-dealer types in attendance bragged that his technology company was planning to launch a crowdfunding portal. His logic was that developers using his startup's tech could help build their ecosystem by attracting investment partners. He shrugged his shoulders when I told him that FINRA regulates portals and will probably mandate more formal affiliations. I was really put off by his nonchalance. Needless to say, he never followed up with me but eagerly took business cards from suckers in attendance.
That conversation left me wondering whether it is appropriate for a non-financial company to own and operate a crowdfunding portal independent of a broker-dealer. I totally understand the need for technology companies to develop ecosystems of partners and developers. That's what enables app stores' success. The difference is that app stores merely display retail products and don't raise investment capital. An app store is not a fundraising platform for companies offering ownership of their future revenue.
FINRA is still soliciting interim funding forms from portals. These animals called "crowdfunding portals" still don't have the SEC's equivalent of a zoological classification. That allows everyone and their cousin to create their own platforms from white-label technology providers like Launcht with no regulatory supervision. The first lawsuit from a disgruntled investor who invested through an unregistered crowdfunding portal run by a non-financial company will ruin the operations of every other portal that didn't seek FINRA registration or brokerage affiliation. The portals that don't take those steps may be ignorant of the auditing and recordkeeping requirements that come with fiduciary duties for investors.
I almost phrased the title of this article as a question: Should non-financial companies operate crowdfunding portals? I decided that I had to come down firmly on the "no" side of that question because that's the only way I can think of to protect investors from predators running baloney portals. It's the Wild West out in crowdfunding land and these tumbleweed towns called portals really need a sheriff. The SEC proposed a 585-page crowdfunding regulation last October and it is still not finalized. Portal operators need to read the fine print of this soft law starting right now. It currently exempts portals from registering as brokers and allows them to collect "success fees" instead of brokerage commissions. I don't know what the final regulation will say but there's a lot of minutiae buried in those 585 pages that will trip up anyone not paying attention.
The freewheeling dude I met was with a tech startup that does not have the internal risk management and recordkeeping architecture common to financial service providers. Anyone who thinks companies making software and hardware can run their own portals is in for a rude awakening when financial regulation compliance smacks their company hard.
That conversation left me wondering whether it is appropriate for a non-financial company to own and operate a crowdfunding portal independent of a broker-dealer. I totally understand the need for technology companies to develop ecosystems of partners and developers. That's what enables app stores' success. The difference is that app stores merely display retail products and don't raise investment capital. An app store is not a fundraising platform for companies offering ownership of their future revenue.
FINRA is still soliciting interim funding forms from portals. These animals called "crowdfunding portals" still don't have the SEC's equivalent of a zoological classification. That allows everyone and their cousin to create their own platforms from white-label technology providers like Launcht with no regulatory supervision. The first lawsuit from a disgruntled investor who invested through an unregistered crowdfunding portal run by a non-financial company will ruin the operations of every other portal that didn't seek FINRA registration or brokerage affiliation. The portals that don't take those steps may be ignorant of the auditing and recordkeeping requirements that come with fiduciary duties for investors.
I almost phrased the title of this article as a question: Should non-financial companies operate crowdfunding portals? I decided that I had to come down firmly on the "no" side of that question because that's the only way I can think of to protect investors from predators running baloney portals. It's the Wild West out in crowdfunding land and these tumbleweed towns called portals really need a sheriff. The SEC proposed a 585-page crowdfunding regulation last October and it is still not finalized. Portal operators need to read the fine print of this soft law starting right now. It currently exempts portals from registering as brokers and allows them to collect "success fees" instead of brokerage commissions. I don't know what the final regulation will say but there's a lot of minutiae buried in those 585 pages that will trip up anyone not paying attention.
The freewheeling dude I met was with a tech startup that does not have the internal risk management and recordkeeping architecture common to financial service providers. Anyone who thinks companies making software and hardware can run their own portals is in for a rude awakening when financial regulation compliance smacks their company hard.
Sunday, December 29, 2013
Health Risks of Cell Phones and Wearable Devices
The mobile tech revolution has moved so fast that health and safety risks are playing catch-up. I attended a public forum earlier this month at the Commonwealth Club that opened my eyes to unassessed risks in mobile devices. The bottom line is that cellular devices operate on low-power microwave frequencies. Extended exposure to low-power microwaves may have human health consequences, which suggests the precautionary principle for technology use while research develops more definitive conclusions.
The scientists and medical experts on that panel presented evidence that a cell phone's intermittent pulse and wavelength variation are the source potential hazards. These hazards may persist even when the device is at low power. I took special note of one statistic presented on "digital dementia" diagnosed in South Korean children. South Korea is the most saturated mobile market on the planet, according to every tech conference I've attended in 2013. Putting a mobile device into the hands of everyone in emerging markets may magnify health risks.
The panelists weren't the only ones doing their homework. WHO's IARC published a monograph this year (Volume 102) on the possibility of carcinogenic risk from cell phones' radiofrequency (RF) electromagnetic fields. The UC Berkeley Center for Family and Community Health published a meta-analysis in 2009 on the risk of tumors from cell phone use.
Early regulation of cell phone risks has mostly fallen on deaf ears (pun intended). San Francisco's "Cell Phone Right to Know" ordinance lost a court challenge in 2012. The FCC does mandate specific absorption rate (SAR) guidelines for cell phones, but it still mentions the further precautions of holding the phone away from the human body and using accessories. The federal government does not at this time speak with a unified voice on RF radiation, although FCC guidelines on wireless exposure purport to include guidance from the EPA, FDA, and OSHA. Those other agencies have slightly different approaches. The FDA has wireless standards for medical devices that IMHO can be adapted for cell phones and other devices used outside the human body. OSHA defers to the FCC by restating the absence of a federal RF exposure standard but nonetheless provides a good summary of scientific literature on RF exposure. The trouble with implementing more stringent guidelines at this stage is the lack of independent research on dose-response relationships. Industry-funded research tends to minimize the hazards while independent research has begun to confirm hazards. More funding for research means better knowledge of how to manage risk.
The implications of these risks for IoT devices and wearables are huge. Google Glass, FitBit, and wireless chargers are designed to be next to the human body all day long! Where's the Consumer Product Safety Commission in this controversy? If the telecom industry and phone makers don't voluntarily dial down the radiation from their products, they won't like it when the CPSC hammers them later. It's better for industry to get out in front of this now before they face multi-billion dollar class action lawsuits from cancer victims. Who holds the patents for low-radiation phones and antennas? Those innovations may prove to be very valuable if carriers and makers bring them to market. The evolution of mobile phone standards offers industry a way to reduce RF exposure. GSM is the most widely adopted standard for 1G and 2G networks but it may generate higher RF exposures than CDMA for 3G and later networks. I think GSMA and CDG should have a chat about public-interest solutions before lawyers start trolling through cancer cases.
Civilization needs mobile tech, so to keep it we need to manage its risks. The Environmental Health Trust has developed a knowledge base on the safe use of cell phones. The International Institute for Building Biology and Ecology wants us to read the instructions and labels on our wireless devices. The National Cancer Institute has a fact sheet on the cancer risk from cell phones. The National Consumer Advocacy Commission maintains a cell phone safety website that mostly covers accident prevention, although it does admit the need for further research on RF health hazards.
The experts at the CW Club also advocated some simple rules for minimizing exposure that I'll repeat here. Use earpieces and speakerphones whenever possible. Don't use a cell phone in areas with weak signals because it must work harder to generate more power. Use the phone's "airplane mode" to turn off microwave signaling. Don't keep a cell phone directly on your body. That last one matters very much for women, because there is evidence showing that women who keep cell phones in their bras experience increased risk of breast cancer. I keep my own powered off when it's in my jacket pocket.
Technology marches on and so must human health. I believe there is a role for institutional investors to play in this debate by pushing publicly traded tech companies to raise the bar on safety. Cell phone RF risk is a perfect test case for applying corporate social responsibility policies. Risk demands regulation, but regulation needs data. If government agencies can't or won't fund research on RF health hazards, there's an entrepreneurial opportunity for tech companies that market safer devices. This has been your public health message for the day from Alfidi Capital.
The scientists and medical experts on that panel presented evidence that a cell phone's intermittent pulse and wavelength variation are the source potential hazards. These hazards may persist even when the device is at low power. I took special note of one statistic presented on "digital dementia" diagnosed in South Korean children. South Korea is the most saturated mobile market on the planet, according to every tech conference I've attended in 2013. Putting a mobile device into the hands of everyone in emerging markets may magnify health risks.
The panelists weren't the only ones doing their homework. WHO's IARC published a monograph this year (Volume 102) on the possibility of carcinogenic risk from cell phones' radiofrequency (RF) electromagnetic fields. The UC Berkeley Center for Family and Community Health published a meta-analysis in 2009 on the risk of tumors from cell phone use.
Early regulation of cell phone risks has mostly fallen on deaf ears (pun intended). San Francisco's "Cell Phone Right to Know" ordinance lost a court challenge in 2012. The FCC does mandate specific absorption rate (SAR) guidelines for cell phones, but it still mentions the further precautions of holding the phone away from the human body and using accessories. The federal government does not at this time speak with a unified voice on RF radiation, although FCC guidelines on wireless exposure purport to include guidance from the EPA, FDA, and OSHA. Those other agencies have slightly different approaches. The FDA has wireless standards for medical devices that IMHO can be adapted for cell phones and other devices used outside the human body. OSHA defers to the FCC by restating the absence of a federal RF exposure standard but nonetheless provides a good summary of scientific literature on RF exposure. The trouble with implementing more stringent guidelines at this stage is the lack of independent research on dose-response relationships. Industry-funded research tends to minimize the hazards while independent research has begun to confirm hazards. More funding for research means better knowledge of how to manage risk.
The implications of these risks for IoT devices and wearables are huge. Google Glass, FitBit, and wireless chargers are designed to be next to the human body all day long! Where's the Consumer Product Safety Commission in this controversy? If the telecom industry and phone makers don't voluntarily dial down the radiation from their products, they won't like it when the CPSC hammers them later. It's better for industry to get out in front of this now before they face multi-billion dollar class action lawsuits from cancer victims. Who holds the patents for low-radiation phones and antennas? Those innovations may prove to be very valuable if carriers and makers bring them to market. The evolution of mobile phone standards offers industry a way to reduce RF exposure. GSM is the most widely adopted standard for 1G and 2G networks but it may generate higher RF exposures than CDMA for 3G and later networks. I think GSMA and CDG should have a chat about public-interest solutions before lawyers start trolling through cancer cases.
Civilization needs mobile tech, so to keep it we need to manage its risks. The Environmental Health Trust has developed a knowledge base on the safe use of cell phones. The International Institute for Building Biology and Ecology wants us to read the instructions and labels on our wireless devices. The National Cancer Institute has a fact sheet on the cancer risk from cell phones. The National Consumer Advocacy Commission maintains a cell phone safety website that mostly covers accident prevention, although it does admit the need for further research on RF health hazards.
The experts at the CW Club also advocated some simple rules for minimizing exposure that I'll repeat here. Use earpieces and speakerphones whenever possible. Don't use a cell phone in areas with weak signals because it must work harder to generate more power. Use the phone's "airplane mode" to turn off microwave signaling. Don't keep a cell phone directly on your body. That last one matters very much for women, because there is evidence showing that women who keep cell phones in their bras experience increased risk of breast cancer. I keep my own powered off when it's in my jacket pocket.
Technology marches on and so must human health. I believe there is a role for institutional investors to play in this debate by pushing publicly traded tech companies to raise the bar on safety. Cell phone RF risk is a perfect test case for applying corporate social responsibility policies. Risk demands regulation, but regulation needs data. If government agencies can't or won't fund research on RF health hazards, there's an entrepreneurial opportunity for tech companies that market safer devices. This has been your public health message for the day from Alfidi Capital.
Tuesday, December 10, 2013
Investors Getting Complacent Near Year's End
Investors continue to misread the massaged "official" statistics that overstate economic growth and understate both inflation and unemployment. That's why they're less concerned about the possibility of the Fed tapering its quantitative easing program. Well, folks need to get concerned about the stock market. Equity valuations are so high that Dr. John Hussman estimates forward returns will underperform Treasuries. He's not alone in suspecting the Greater Fool Theory is at large once again.
One black swan that could destabilize this market is the passage of an unadulterated Volcker Rule. Big banks are already getting nervous that regulators will approve the Volcker Rule in a form that prevents them from disguising their proprietary trading as "portfolio hedging." A flat-out ban on shenanigans could roil fixed-income derivatives as banks scramble to close out open positions.
I've stayed away from broad market ETFs since 2007. The phantom gains investors have seen since 2009 don't make me feel like I've missed anything. I'd rather take my chances finding underpriced individual stocks in the hard asset sector. I say bring on the Volkcer Rule's hard-core disruption to banks' prop trading. Getting them out of gambling to go cold turkey is welcome even if stock and bond markets crash. Markets need transparent price discovery more than investors need unsustainable gains.
One black swan that could destabilize this market is the passage of an unadulterated Volcker Rule. Big banks are already getting nervous that regulators will approve the Volcker Rule in a form that prevents them from disguising their proprietary trading as "portfolio hedging." A flat-out ban on shenanigans could roil fixed-income derivatives as banks scramble to close out open positions.
I've stayed away from broad market ETFs since 2007. The phantom gains investors have seen since 2009 don't make me feel like I've missed anything. I'd rather take my chances finding underpriced individual stocks in the hard asset sector. I say bring on the Volkcer Rule's hard-core disruption to banks' prop trading. Getting them out of gambling to go cold turkey is welcome even if stock and bond markets crash. Markets need transparent price discovery more than investors need unsustainable gains.
Monday, November 04, 2013
Sunday, October 20, 2013
Alfidi Capital Heard Roger Royse at Idea to IPO's Current State of Crowdfuning
I'm always checking out startup action in Silicon Valley. The JOBS Act of 2012 was supposed to make that easier. Performing due diligence online is one thing but actually closing an investment round is quite another. The Idea to IPO Meetup group presented Roger Royse of Royse Law Firm last week down at Menlo College to give us all a rundown of the current state of crowdfunding.
The JOBS Act was intended to further democratize the venture investment playing field so that securities laws could catch up to technology. Roger mentioned that the cost of fundraising has dropped in recent years and technology has expanded the types of offerings available. He's published some good info on crowdfunding at his Royse University site. The complications for startups raising money through crowdfunding portals can be tricky if those portals are open to any investors other than venture capital funds or angel groups.
The JOBS Act was supposed to make venture investing easier for individual investors but the SEC's rule changes so far are intended to apply to accredited investors. Roger mentioned that Title III of the JOBS Act for retail investors does not yet have the force of law because the SEC has not yet finalized regulations.
Roger noted that venture capital firms have already begun stigmatizing crowdfunded companies as being otherwise unfundable. Crowdfunded companies may find themselves in a "market for lemons" if they cannot obtain a subsequent funding round, forcing them to focus on an exit strategy. I've heard VCs on public panels mention crowdfunding as marginally useful in extending the life of a startup that could fail prematurely, but that is probably a minority opinion.
Companies can advertise on crowdfunding portals for accredited investors now that the SEC has lifted the general solicitation prohibition. The challenge for startups is that the SEC's rules are still in a state of flux and FINRA is still working on certifying crowdfunding portals that comply with the rules. The SEC may be considering easing some investor verification requirements. Roger thinks this environment is why startups need to get more conservative and refrain from discussing their financial status until the SEC finalizes more rules. Pitchfests in front of investor panels may be considered a general solicitation.
I appreciated Roger's revelation that the SEC now considers a one-time placement fee for locating funding to be a transactional relationship requiring a registered broker. I used to hear stories from old finance hands about how they earned finder's fees for connecting deal flow to investment banks on a freelance basis. I had considered doing that myself for a while but I elected not to keep my securities licenses active once I launched into public commentary in 2008. I was very aware (during my financial advisor days) of the SEC's guidance on public commentary for those who maintained securities licenses and fiduciary relationships. Assuming a role as public commentator required me to surrender any and all means of maintaining fiduciary relationships or mediating transactions. There are ways to navigate conflicts of interest but I'd prefer to avoid conflicts entirely. I don't play games with my career or the law. All I do now is speak my mind and invest my own money, any way I like.
Roger's talk was awesome and he covered way more legal ground than I can summarize here. I spoke with him and some other entrepreneurs afterwards on the future usefulness of crowdfunding in such a complex regulatory environment. I now believe the main advantages of crowdfunding for startups are the reduction of friction in closing deals and the compressed time windows for feedback. Friction is lower on those portals that have broker/dealer affiliations, because accredited investors can theoretically complete a transaction online. Feedback times are shorter because a startup can now appear in front of the entire early-stage investor universe simultaneously instead of spending months getting on the meeting calendars of angel groups up and down California. The speed of feedback from investors, either positive or negative, will help startups pivot earlier if they combine it with feedback from their CustDev efforts. BTW, I'm still convinced that those portals showing early success in generating deal flow will become acquisition targets for major brokerages. They will be even more attractive if they add microfinance and P2P lending functions.
I'm already applying some of the insights Roger shared. I've been attending pitchfest and business plan competitions for years. I even pitched a tech startup idea myself as an undergrad at the University of Notre Dame in 1995. I didn't state any disclaimers back then and neither have any of the entrepreneurs I've heard since then. That is all going to have to change very quickly. I attended a pitchfest in San Francisco last Friday and noticed that the startups in attendance need to get legal advice, get their paperwork in order with the SEC, and start using legal disclaimers that investors like me will respect. They also need to be mindful of the FTC's privacy policy guidance if they handle customer data. Failure to do so can subject them to severe regulatory sanctions. I care as much about my own portfolio as entrepreneurs do about their startups, which is why early stage founders need to mitigate regulatory risk by keeping top advisers like Roger Royse in their hip pockets.
Full disclosure: I have received no compensation from Roger Royse, his corporate entities, or the Idea to IPO Meetup organizers for this article. This article, or anything else published under the auspices of Alfidi Capital, does not constitute legal or financial advice.
The JOBS Act was intended to further democratize the venture investment playing field so that securities laws could catch up to technology. Roger mentioned that the cost of fundraising has dropped in recent years and technology has expanded the types of offerings available. He's published some good info on crowdfunding at his Royse University site. The complications for startups raising money through crowdfunding portals can be tricky if those portals are open to any investors other than venture capital funds or angel groups.
The JOBS Act was supposed to make venture investing easier for individual investors but the SEC's rule changes so far are intended to apply to accredited investors. Roger mentioned that Title III of the JOBS Act for retail investors does not yet have the force of law because the SEC has not yet finalized regulations.
Roger noted that venture capital firms have already begun stigmatizing crowdfunded companies as being otherwise unfundable. Crowdfunded companies may find themselves in a "market for lemons" if they cannot obtain a subsequent funding round, forcing them to focus on an exit strategy. I've heard VCs on public panels mention crowdfunding as marginally useful in extending the life of a startup that could fail prematurely, but that is probably a minority opinion.
Companies can advertise on crowdfunding portals for accredited investors now that the SEC has lifted the general solicitation prohibition. The challenge for startups is that the SEC's rules are still in a state of flux and FINRA is still working on certifying crowdfunding portals that comply with the rules. The SEC may be considering easing some investor verification requirements. Roger thinks this environment is why startups need to get more conservative and refrain from discussing their financial status until the SEC finalizes more rules. Pitchfests in front of investor panels may be considered a general solicitation.
I appreciated Roger's revelation that the SEC now considers a one-time placement fee for locating funding to be a transactional relationship requiring a registered broker. I used to hear stories from old finance hands about how they earned finder's fees for connecting deal flow to investment banks on a freelance basis. I had considered doing that myself for a while but I elected not to keep my securities licenses active once I launched into public commentary in 2008. I was very aware (during my financial advisor days) of the SEC's guidance on public commentary for those who maintained securities licenses and fiduciary relationships. Assuming a role as public commentator required me to surrender any and all means of maintaining fiduciary relationships or mediating transactions. There are ways to navigate conflicts of interest but I'd prefer to avoid conflicts entirely. I don't play games with my career or the law. All I do now is speak my mind and invest my own money, any way I like.
Roger's talk was awesome and he covered way more legal ground than I can summarize here. I spoke with him and some other entrepreneurs afterwards on the future usefulness of crowdfunding in such a complex regulatory environment. I now believe the main advantages of crowdfunding for startups are the reduction of friction in closing deals and the compressed time windows for feedback. Friction is lower on those portals that have broker/dealer affiliations, because accredited investors can theoretically complete a transaction online. Feedback times are shorter because a startup can now appear in front of the entire early-stage investor universe simultaneously instead of spending months getting on the meeting calendars of angel groups up and down California. The speed of feedback from investors, either positive or negative, will help startups pivot earlier if they combine it with feedback from their CustDev efforts. BTW, I'm still convinced that those portals showing early success in generating deal flow will become acquisition targets for major brokerages. They will be even more attractive if they add microfinance and P2P lending functions.
I'm already applying some of the insights Roger shared. I've been attending pitchfest and business plan competitions for years. I even pitched a tech startup idea myself as an undergrad at the University of Notre Dame in 1995. I didn't state any disclaimers back then and neither have any of the entrepreneurs I've heard since then. That is all going to have to change very quickly. I attended a pitchfest in San Francisco last Friday and noticed that the startups in attendance need to get legal advice, get their paperwork in order with the SEC, and start using legal disclaimers that investors like me will respect. They also need to be mindful of the FTC's privacy policy guidance if they handle customer data. Failure to do so can subject them to severe regulatory sanctions. I care as much about my own portfolio as entrepreneurs do about their startups, which is why early stage founders need to mitigate regulatory risk by keeping top advisers like Roger Royse in their hip pockets.
Full disclosure: I have received no compensation from Roger Royse, his corporate entities, or the Idea to IPO Meetup organizers for this article. This article, or anything else published under the auspices of Alfidi Capital, does not constitute legal or financial advice.
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