Below are a couple of WSJ articles that indicate the way things look from the top down in our crapitalist society these days. First up are the financial elites. Public securities markets are the principle means by which individuals can participate in the success of large capitalist enterprises as something more than a labor cost. You may not be able to create a company like Apple, but you can buy its shares and receive a share of its success. The effect of devising policy that discourages public filings in favor of private placements means the door closes on the little guy and only the insiders get the sweet deals, which they then spin off to fleece the public after the easy profits have been squeezed dry. This is how capitalism concentrates wealth and don’t think our politicians are not pigs at the trough when it comes to insider deals.
The second article is offered in the “fair and balanced” spirit to show how our labor leaders play their political game by devouring their own members. Yessiree, the labor elites feed off their workers’ hard-earned incomes, while the financial elites feed off those workers’ savings. The wolves are eventually going to run out of sheep…
How different this Animal Farm would be if the shepherds decided to represent the interests of all to participate in the bounty of free enterprise.
Who Needs Wall Street?
Public debt and equity issues fell to $1.07 trillion between 2009 and 2010, while private issues rose to $1.16 trillion.
A tectonic shift is under way in how companies raise money—and it will have a profound impact on U.S. investors and markets. According to the Securities and Exchange Commission’s most recent estimates, businesses have been raising more funds through private transactions than through debt and equity offerings registered under the securities laws and offered to the general public.
Overall public debt and equity issuances fell by 11% between 2009 and 2010, to $1.07 trillion, while private issues rose by 31%, to $1.16 trillion. This shift, which has been driven by the rising costs of public-market participation and regulation, will likely accelerate when the SEC implements reforms in the Jumpstart Our Business Startups Act, which the president signed into law last April.
The crowd funding provisions in the JOBS Act are intended to democratize investment opportunities using the Internet and have attracted the most public attention. But another part of the law may have the most impact.
Here is the background. U.S. securities laws have a private-market exemption, called Regulation D, that allows companies to sell securities to accredited investors with high net worth (essentially more than $1 million excluding a home). The exception means the companies don’t have to go through the SEC’s costly and time-consuming registration and reporting requirements for public offerings. The securities can also be resold to financial institutions that hold a required minimum value of securities investments.
But the securities laws have also banned general solicitations for these private-market offerings—and Title II of the JOBS Act lifts this ban. This means that a company, investment fund or seller now can publicize its offerings via the Internet or traditional advertising media, as long as the ultimate investors are accredited or qualified institutional buyers.
One of the most significant advantages that public markets have held over private markets is the ability to generate substantial market liquidity by advertising to a wider public. Once the SEC implements the legislation, that advantage will gradually fade away.
Until the JOBS Act, Regulation D effectively allowed companies and funds to raise capital only from investors with whom they already have a pre-existing relationship. So money typically flowed into a deal through broker-dealers or arbitrary social networks. This process shuts out a wide swath of prospective investors and, thanks to the lack of a robust trading market, results in lower prices for the securities.
By rolling back the ban on general solicitation, fund offerings and resales of unregistered securities can now flow through vast Internet-based broker-dealers and other finance networks, potentially giving a steroid shot to private capital markets.
According to the Angel Capital Association, there are 8.6 million accredited investors nationwide, of which only 3.1% currently invest in business startups through private markets. The large pool of untapped investors and capital may result simply from a shortage of information regarding investment opportunities or concerns over private market liquidity.
Thanks to the JOBS Act, private capital markets will enjoy increased transparency and therefore greater efficiency. They will also likely experience substantial new capital inflows due to the widespread advertising of offerings. If high-quality companies and funds have access to broad and deep pools of capital in private markets, then the question becomes why many of them would bother with the regulatory compliance and shareholder-management costs of public markets.
We anticipate a paradigm shift in how companies raise money, as they increasingly shun the highly regulated, costly and volatile public markets in favor of now deeper and more efficient private markets. This could be a boon for capital formation.
But it could also mean fewer investment opportunities for the general public. The most promising companies may delay or never file IPOs and instead seek capital on private exchanges not accessible to those who don’t qualify as accredited investors—which is 97% of the U.S. population. Meanwhile, novice accredited investors may be bombarded with solicitations for private placement opportunities, without some of the regulatory oversight provided in public markets.
For lawmakers and regulators, however, perhaps the lessons from the success of private markets can help with a reform of public securities regulations, many of which were written nearly a century ago and, at least in part, are the reason for the continuing privatization movement.
Michigan Union Tell-All
A memo shows how unions hope to keep coercing worker dues.
When Michigan became the 24th right-to-work state late last year, everyone knew unions would try to overturn or otherwise neuter the law. Less expected was that they would do so at the expense of their own members.
That’s the message from a December 27-28 memo to local union presidents and board members from Michigan Education Association President Steven Cook, which recommends tactics that unions can use to dilute the impact of the right-to-work law. One bright idea is to renegotiate contracts now to lock teachers into paying union dues after the right-to-work law goes into effect in March. Another is to sue their own members who try to leave.
“Members who indicate they wish to resign membership in March, or whenever, will be told they can only do so in August,” Mr. Cook writes in the three-page memo obtained by the West Michigan Policy Forum. “We will use any legal means at our disposal to collect the dues owed under signed membership forms from any members who withhold dues prior to terminating their membership in August for the following fiscal year.” Got that, comrade?
Also watch for contract negotiations in which union reps sign up members for smaller pay raises and benefits in exchange for a long-term contract. “We’ve looked carefully at this and believe the impact of RTW [right to work] can be blunted through bargaining strategies,” Mr. Cook writes.
The union filed its inevitable lawsuit against the law last week. But in his memo, Mr. Cook admits this is a long shot, as is a challenge based on technicalities like the law’s carve-out for police and fire fighters. “Because of wording contained in the Act,” Mr. Cook writes, “challenging the carve out might not strike down the Act but could merely put police and fire into the same RTW pit the rest of us are in.”
Unions may have learned from last year’s meltdown in Wisconsin over Governor Scott Walker’s reforms. While Big Labor waged an unrelenting campaign to overturn the law in court and to recall Mr. Walker and Wisconsin legislators, there has been little serious discussion of a similar effort against Governor Rick Snyder in Michigan. “If the goal is to undo RTW, this is the least appealing of the options,” Mr. Cook writes of potential recalls.
The pattern in new right-to-work states is that union membership plunges when it is voluntary. That’s what happened in Wisconsin and Indiana, and it will probably happen in Michigan too.
Yet the most revealing news in the Cook memo is how little the union discusses assisting workers so more will voluntarily join unions. Instead the focus is how to continue coercing workers to keep paying dues. No wonder that the percentage of government workers who belong to unions fell last year. The Cook memo is damning proof that the main goal of union leaders is to enhance the power of union leaders, not of workers.