<nettime> L. Gordon Crovitz: How Washington Defriended Investors (Wall Street Journal)

["Patrice Riemens" <patrice@xs4all.nl>]

original to:   http://on.wsj.com/f4Vqrl

How Washington Defriended Investors
L. Gordon Crovitz
January 11, 2011

Facebook raised $500 million last week, but the only people who could
invest were the wealthiest private clients of Goldman Sachs. Instead of
offering shares to the public, Facebook chose a private version of a
public offering.

The case of an unsocial Facebook should be a wake-up call about how
regulations have undermined public markets. Facebook's customer base could
not be more mass. The site is used by some 600 million people around the
world. It got almost 9% of all Web visits in the U.S. last year, more than
Google. According to comScore, a majority of all Canadians have a Facebook
account.

As the leading social-media site, Facebook depends on people sharing
information about themselves. Yet the very people whose posts directly
created Facebook's value are banned from investing in the company.

In this context it is useful to recall that for the past century the
public stock markets set a vibrant, pre-Internet example of social media
combined with crowd sourcing: People gathered information on companies and
through their trading moved share prices. This combined wisdom rewarded
good companies and punished others.

"Nobody in Wall Street knows everything," explained William Peter Hamilton
in his 1922 classic, "The Stock Market Barometer," which focused on the
investment theories of Charles Dow and his Dow Jones Indexes. Hamilton,
then editor of The Wall Street Journal, described how information flowed
through the still-young U.S. stock markets, which had funded utilities and
industrial companies: "The market represents everything everybody knows,
hopes, believes, anticipates, with all the knowledge sifted down to . . .
the bloodless verdict of the market place."

Private markets close off this exchange of information, making it likelier
that prices are wrong, letting bubbles brew. Private capital is funding
highly valued startups beyond Facebook, including gaming site Zynga and
social-coupon company Groupon. Having these companies grow to huge sizes
without disclosing their performance beyond a small group of private
investors means we are losing the benefits of public-market disclosure.

Facebook founder and privacy skeptic Mark Zuckerberg is blamed for
hypocrisy, since putting off a public offering means he can retain
confidentiality about the details of his company. But the fault lies with
Washington, not with Goldman Sachs, Facebook or Silicon Valley.

Regulations arising from the bust that followed the dot-com boom of the
late 1990s caused the collapse of the IPO market. Congress and regulators
made it harder for companies to go public. If they do go public,
Sarbanes-Oxley forces managers to spend time on audits and accounting that
is better spent developing new products and services.

Under the banner of "fair disclosure," public-company executives are also
barred from giving analysts deep briefings on their businesses. The intent
was to level the playing field against analysts at banks, but the result
is fewer expert analysts covering companies, reducing information
available to markets even from publicly traded companies.

"The increased costs of being public have helped exclude ordinary people
from the ability to own the stars of the future," Illinois law Prof. Larry
Ribstein wrote on his blog last week. "Rules designed to make the markets
safe for ordinary investors have ended by excluding them. Maybe it's time
to start considering whether we got what we wanted." Indeed, by the time
these companies go public, it will not be for the historic reason of
raising capital to build their business, but to give private investors a
way to realize their profits.

"These companies are going to be more or less fully developed by the time
they eventually come to the public markets, with most of the upside having
been captured by private investors," Albert Wenger of Union Square
Ventures argues on businessinsider.com. "That's especially annoying when
it seems that with the Internet we should be seeing IPO 2.0?direct to
small investors without the historic flip opportunity for well-connected
investors."

Instead of reforming securities laws, the Securities and Exchange
Commission threatens to shoot the messengers. Regulators are reviewing new
online exchanges such as SecondMarket and SharesPost that give
shareholders in private companies, such as employees, a way to cash out.
These markets are the logical result of delaying IPOs.

Until recently, U.S. capital markets were the world's most open, public
and well-informed. A free flow of information can't eliminate booms and
busts, but as we saw a decade ago, companies in fast-growing industries
such as the Web can be the quickest to implode?so the more public
information about them the better.

The goal of securities regulation should simply be to ensure that accurate
information gets to the market as quickly as possible. By this measure,
the regulations of the past decade have undermined public stock markets
and their vibrant flow of information about companies. Now that Washington
has defriended investors, the would-be investing public should defriend
the politicians who took away their markets.


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