Let Them Eat Trinkets

Steven Rattner, investment banker and former member of the Obama Administration,  is terrified that under a proposed law companies will be able to raise money without investment bankers.

Most troublesome is the legalization of “crowd funding,” the ability of start-up companies to raise capital from small investors on the Internet. While such lightly regulated capital raising has existed for years, until now, “investors” could receive only trinkets and other items of small value, similar to the way public television raises funds. As soon as regulations required to implement the new rules are completed, people who invest money in start-ups through sites similar to Kickstarter will be able to receive a financial interest in the soliciting company, much like buying shares on the stock exchange. But the enterprises soliciting these funds will hardly be big corporations like Wal-Mart or Exxon; they will be small start-ups with no track records.

This is absolutely, classically representative of the technocratic arrogance of the Obama Administration and the investment bankers that inhabit it.  I have three quick thoughts:

  1. Rattner's concern for individual investors comes rather late.  After all, he was the primary architect of the extra-legal screwing of GM and Chrysler secured creditors in favor of the UAW and other Obama supporters.
  2. God forbid investors get actual, you know, ownership in a company for their capital rather than just trinkets.  This is so bizarrely patronizing that I had to read it twice just to make sure I wasn't missing something.  But no, he is explicitly preferring that you and I get trinkets rather than ownership  (ownership, apparently, to be reserved for millionaire insiders like himself).
  3. We have truly entered the corporate state when leftish opinion makers argue that large corporations like Exxon and Wal-Mart get preferential access to capital and that smaller startups that might compete with them be shut out of the market.

I predict that over that Internet entrepreneurs running such crowd-sourcing sites would develop reputation management and review tools for investors (similar to those at Amazon and eBay).  Over time, it may be that these become far more trustworthy than current credit agency reports or investment bank recommendations.  After all, which do you trust more -- a 5-star Amazon review with 35 responses or a Goldman Sachs "buy" recommendation on an IPO like Facebook or Groupon?  Besides, it would take a very long time, like eternity, for fraud losses in a crowd-sourcing site to equal 1/100 of the investor losses to heavily regulated Bernie Madoff.

  • http://profiles.google.com/maruadventurer john mcginnis

    You have some points in your OP. However I think you miscalculate the value of something like a Kickstarter and `trinkets` At least on the tech side of things the contributors are getting value for their money. Fact they are typically getting a value beyond normal circumstances as the items being offered are not currently available from any supplier but them. But I have already explored some of this territority here -- http://bejohngalt.com/2013/03/its-too-late/

    As to fraud, I think we will see a service start up eventually that will be able to offer buyers a beta factor combining the past history of the players and the type/feasabilty of the product being offered. I would also point out that the more successful (ie over subscribed) Kickstarters generally all have working prototypes of what they plan to offer.

  • LarryGross

    I'm not getting it. People are free to invest on a wide variety of things already. Right? It's the selling of stocks and bonds that is regulated now - and didn't those regulations come about originally when the stock market crashed and millions of people lost everything including their bank deposits?

  • marque2

    Prosper already does something similar with personal loans. I don't see why you couldn't get a rating. And shoot I don't see any issue with folks wanting to speculate a grand or so a year on a wacky start up. Might turn out that regular folks are better than VC's because regular folk know what they want. Elites have this arrogant perspective that they know what everyone else wants and then proceed to finance. Of course the elites usually don't understand the little people well (hence some of these weird government support programs for the poor that let them sit around) and I suspect this makes the innovations flops more often then need be. Would the average Joe give $1000 to Tesla, or Segway?

  • marque2

    Ooh good to see you read BOTWT as well!

  • Shane

    This is the best quote EVER:

    "After all, which do you trust more -- a 5-star Amazon review with 35 responses or a Goldman Sachs "buy" recommendation on an IPO like Facebook or Groupon? "

    EVER!!

    Thank you Coyote :)

  • MNHawk

    I take it this particular plutocratic piece of garbage isn't digging on the new Spock's Beard CD, which I am as I was one of the those who participated in the crowd funding of this CD, and thereby got it early. :-)

    Crowd funding is everywhere.

  • NormD

    Currently asking people who are not "friends and family" to invest in your company is a felony.

    You should hear Arthur Levitt (former head of the SEC) go on and on about what a disaster letting people invest in startups will be.

    This might be one of the most unappreciated consequential changes to have occurred in years.

    If you think about it, banks/hedge funds/? are simply intermediaries between people who have money and people who need money. They extract huge rents for funneling money between these two entities.

    I look forward to a day when I can see/approve the connection between my money and the end user who is using my money to produce useful stuff/services.

    The entire class of people bankers and regulators will fight this to their dying breath because it will put them out of business.

  • MingoV

    Steve Rattner (what an appropriate surname) lies about businesses acquiring start-up funds only via banks and investment firms. Venture capitalists sometimes provided funds directly. Other start-ups obtained funds from individuals or businesses that would be repaid with interest or percentage of sales or part ownership.

  • http://devilish-details.blogspot.com/ mesaeconoguy

    You don’t get most things, dumbass. Regulation prohibits you from investing in many ventures, unless you are a sophisticated investor, institutional investor, or qualified institutional buyer.

    And none of the regulations work, as we just proved in 2008, 2002, 1997, 1987, etc.

    No matter how many regulations you construct, investors will always lose some money (sometimes a lot), and the more you construct, the more you prevent smaller investors from successful outcomes.

    All investment carries risk; it is the risk/reward tradeoff that is the core of our capitalist system, or more correctly, before morons like Rattner showed up at the party with wet government blankets.

    That is precisely what leftists like Rattner and Barry are trying to circumvent and destroy – risk-based capital formation and investment.

    Unfortunately for them, economics (and life) doesn’t work that way. TANSTAAFL

  • http://devilish-details.blogspot.com/ mesaeconoguy

    Rattface is another nauseating financially challenged leftist imbecile.

    Great observations, coyote.

  • Rob

    Does "friends" on Facebook count!