I’ve interviewed lots of candidates for Congress in recent weeks, and being from Alabama they all have two things in common. They advocate a reduced role of the federal government in deference to state government, and they advocate a reduction in regulatory control of businesses.
The concepts are joined so often in stump speeches that it’s easy to forget that there is no logical connection between the two.
A reader recently called my attention to an example in which the desire for less regulation and the desire for less federal authority are at war with each other.
Angel financing refers to a small group of investors who combine their funds to finance an entrepreneurial venture. They are free from regulatory control by the Securities and Exchange Commission if the total investment is under $5 million, there are fewer than 35 unaccredited investors, and accredited investors are included in the mix. An “accredited investor” is a person with a net worth of at least $1 million or an organization with at least $5 million. The idea is that accredited investors are sophisticated enough that they do not need SEC to scrutinize the fairness of the deal, and unaccredited investors can rely on the expertise of the accredited investors.
In an apparent nod to the free market, the SEC exempts such ventures from almost all regulatory control.
Under Sen. Christopher Dodd’s proposed financial regulatory reform bill, angel financing ventures would have to file their proposal with the SEC. If the SEC does not review it, the states can regulate it.
And regulate it they would. In January, Denise Voigt Crawford, Commissioner of the Texas Securities Board, complained that the existing private offering exemption preempts state action but fails to “protect” investors with federal oversight.
Preemption of state regulation of private placements, therefore, created a regulatory black hole — today no one regulates these offerings.
Crawford notes that the financial industry resents increased efforts by states to regulate such deals involving sophisticated investors:
Not surprisingly, the financial industry has not welcomed this new activism by state securities regulators and would be happy to constrain or preempt us.
All this is a reminder that a smaller federal government does not necessarily result in fewer regulations. Instead, ventures may be faced with 50 different states trying to expand their regulatory control. At least in this example, the federal agency has reduced regulatory control. It could do so unilaterally because the states are preempted from exercising control. Under Dodd’s bill, the states could fill the “black hole” of regulatory freedom with their own regulations.