Protectionism in the Way of Innovation, Creativity and Jobs Creation

The first amendment reads "Congress shall make no law respecting an establishment of religion, or prohibiting the free exercise thereof; or abridging the freedom of speech, or of the press; or the right of the people peaceably to assemble, and to petition the Government for a redress of grievances." Although the First Amendment only explicitly applies to the Congress, the Supreme Court has interpreted it as applying to the executive and judicial branches[1], which should include the Securities and Exchange Comission (SEC).

Yet, Section 4(2) of the Securities Act of 1933 reads: "you may not use any form of public solicitation or general advertising in connection with the offering" (offering being a private investment offer to investors). Thanks to this rule, every year thousands of entrepreneurs and brilliant inventors find themselves in the impossible position of looking for angel capital for their ventures without being able to announce their investment opportunity to the public using media like TV, newspapers, radio or a direct phone campaign. Many of these businesses end up closing down because of inability to locate investors without breaking the "no solicitation rule". Others, oblivious of the existence of the SEC "no public solicitation" rule, end up placing an ad on the internet or other public media soliciting investors and some of them actually start getting investments. Sadly, most ventures that master the capital raising technique only end up getting a Cease and Desist Order from a State Securities Board and endless legal problems resulting again in shutting down their business.

It seem to me that regardless of our constitutional right to distribute information freely, when it comes to raising capital to take our business off the ground and to possibly create new jobs for the American economy, we are told that we cannot speak out! We might have just invented a remedy that cures cancer that could have a huge impact on millions of Americans and people around the world and yet we cannot legally post an ad in the New York Times telling investors and the world that we need a few million dollars of a capital infusion to bring our new invention to the market. Absurd you would say! And yet, this is the reality we live in. And while you could argue that a really great invention will always find some sort of support from government grants or big corporations, will it really? Since its formation in 2004, BreadStreet.com, Inc. has been in the business of surveying and pre-screening investor leads for small businesses. In just five years we have seen amazing products and technologies that could make all of our lives better if they could actually make it to the market. We've ran across advanced hydrogen technologies that could be installed on any vehicle and, thus, solve the oil dependence problem and improve our environment, diabetes solution that in reality should be made available at any hospital, imaging technologies that could make diagnostics of deceases so much faster and more accurate and inventions offering simple improvements like a low cost vehicle protection against hail that could prevent constant damages in hail prone regions. Not to mention the numerous independent domestic oil producers, mining and manufacturing operations, organic dairy farms and brilliant film directors. Yet, at the time these projects made it to our desks, they had already exhausted all traditional sources one could think of: banks, grants, venture capital groups, corporations in their line of business and many local support groups too. The problem these companies were facing was the fact that they could not legally advertise their investment opportunities on a large enough scale to help them raise the millions they needed. Many of these and even more worthwhile projects are still out there struggling to raise enough capital to take it to the next step and in some cases even getting Cease and Desist Orders in the process from State Securities Boards for having confused a regulator on a lead list for an investor. Ultimately some of these businesses are either forced to shut down or die trying! In the meantime, Americans are loosing jobs, the economy is struggling and we as citizens still do not even know about all the great technologies and inventions that could greatly improve our lives, make life simpler or just more enjoyable. Even if we do find about them, we would probably still not be able to take advantage as the product or service never got the funding to materialize on the first place. So what went so wrong with these companies' freedom of speech and with our right to chose what to support or not support?

Well, what happened is that protectionism took over our freedoms. We got so afraid of everything that we allowed our government to listen to our phone calls, obtain our bank records, put us in jail if we resemble a terrorist, decide for us what we should and should not find out about, and tell us to shut up when we come up with a business idea.

To give credit to our regulators, I should say that they probably meant good. Prior to the Securities Act of 1933 that enacted the "no public solicitation or general advertising" rule (Section 4(2) of the Securities Act), there were actually some serious problems. Investment scams were commonplace and bogus companies were able to embezzle millions of dollars from naïve investors and many of these investors were actually ordinary people earning daily wages who could not afford the losses. This was well covered in the "Boiler Room" movie for example, which is a great illustration of how getting investment dollars is more of a matter of great sales skills than anything else. This problem was again re-emphasized to us just recently with the Madoff scandal that left investors 50 billion dollars short. Apparently selling investment scams comes easier to some people as supposed to selling a legitimate product or service.

And yet, is protectionism the solution? Apparently Bernie Madoff had no problem complying with the SEC "no public solicitation" rule while scamming well seasoned investors. At the same time, real businesses that could be a great asset to our economy right now get "killed at inception" because their founders were not so lucky to have a few millionaire friends or associates around and were not allowed to let the public know they could use some investors?

So why is it that private companies can not advertise to the public? I believe most of us will agree that allowing participation in high risk investments to people that do not have the education and training to evaluate the risks and merits of such investments could be detrimental to our society. And yet, the SEC already requires private companies to thoroughly screen all investors that they accept for accreditation and financial sophistication (ability to evaluate the risks and merits of an investment). So if there are already mechanisms in place to ensure that the general public can not get involved in private deals, why violate our constitutional right to freedom of speech? Or our right to elect what information to receive and not receive and to possibly become more educated as a society?

I hope this article will make all of us aware of the horrifying consequences of protectionism. It does stop innovation and creativity and does kill businesses at their inception! We all must fight back for our right to live in a free country where we decide what to say, what to learn about, and what to invest in!

Sources:

1.Wikipedia, http://en.wikipedia.org/wiki/First_Amendment

2.SEC, http://sec.gov/info/smallbus/qasbsec.htm#eod6

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