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So, this is obviously a great comment, but two responses:

* The SOX requirements that capped the first Internet bubble clearly retarded tech company IPOs, so that only companies with (say) more than 60MM/yr cash-flow-positive revs could consider IPO'ing. The net effect of that for startups is negative: it virtually eliminates one previously available path to liquidity. But the net effect of that to society has been to transfer a lot of risks that were previously borne by the public markets to private equity and VC. Is that a bad thing?

In other words: yes, way fewer IPOs. But also much higher quality IPOs. Even Groupon is superior in many ways to companies that managed to IPO towards the end of the first bubble. Also: companies without a clear path to acquisition are forced to adopt business models that distribute profits to owners (else why run the company). The end result of that might be pretty positive.

* The Crowdfunding provision in the act clearly doesn't "legalize fraud". That's a hyperbolic claim. But is it hyperbolic to say that it simplifies and eases fraud? Especially if the Crowdfunding disclosure and capital restriction rules place Crowdfunding in a "worst of both worlds" situation in which shady (or just incompetent) companies find it productive to raise from crowds, but valuable companies get fed to insiders at VC funds.




You raise some excellent points, the kind that stimulate further thinking.

I still remember the bubble years vividly. A couple of indicators of the mania: patent firms were requiring that startups give them a 5% equity piece just to take on their work (this was in addition to paying full fees, i.e., it was akin to a toll charge just to get in); at least one prominent IPO law firm was taking 25% equity pieces for fee deferrals out to IPO (which followed in a compressed time frame of as little as 18 months). Both indicators show that there was a mad rush at the time to get quick sucker money from public purchasers and it had reached such an insane stage that even lawyers, of all people, had become as critical to the value proposition as the entrepreneurs and investors. That is because the value proposition had shifted. At its worst in that era, it was no longer the goal to build a great company. The goal was to package a company profile, fill it with the most extreme hype imaginable, and market it to the public markets via IPO so that both founders and investors could do a quick cash out while leaving the public purchasers holding garbage in the end. Of course, there were also solid offerings but no one can deny - and I certainly don't - that there was a high volume of trash as well.

That said, I believe that SOX was such a piece of heavy-handed regulation that it went too far in choking off the IPO markets. Yes, this means that private equity deals with the dubious stuff, which never sees the light of day in public markets. But, in recent years, it also has meant that a good number of very solid offerings have not seen the light of day either. In practical terms, what this has meant is that founders get short-changed in being left mostly with just the M&A option - this means that (in general) acquisition pricing is suppressed, quick turns of ventures become the rule, and all sorts of conditions are imposed by the acquirers in the deals that further lessen value for founders. The net result is a lessening of founder leverage at the M&A stage because there is no viable alternative for exit. Of course, some companies might choose to go for the long haul, make great profits, and distribute these to owners (as you suggest, and, yes, that is a good thing) but these are by far the exception and not the rule in the startup world.

As to crowdfunding, I have my own reservations and actually agree with your point, even strongly so. I am encouraged, however, by the idea of experimenting with new fundraising techniques that are made possible only by modern technology and I think it is well worth the experiment. If companies use the new provisions to try to load up with a lot of small shareholders from which they seek to get quickie money based on dubious offerings, the experiment will clearly fail in my eyes. I am excited about this but cautious as well.


Investors and founders have had to become more creative and seek other ways to exit ($$). Only a handful of companies have made it through the SOX morass. So, it does seem logical that they are better. But, to suggest SOX might have actually been positive? Like the TSA is positive because more people are learning to fly? (I don't know if this is true).


What parts of SOX do you think are negative?


Multinational I work for with over 100 billion yoyos of revenue and 150,000 employees stepped off the NYSE because SOX was too expensive to be bothered with.


Did they take the company entirely private? Because if they didn't, SOX still applies to them; it isn't an NYSE thing.

Anyways: that's not responsive to my question. What parts of the law are negative? What parts would you do away with?


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