Platt Perspective on Business and Technology

Considering a cost-benefits analysis of economic regulatory rules – 11

Posted in in the News, macroeconomics, outsourcing and globalization by Timothy Platt on June 8, 2012

This is eleventh installment in a series on the cost-benefits analysis of economic regulatory rules (see Macroeconomics and Business, postings 64and scattered following for Parts 1-10.)

I posted on crowd funding as a new and still unregulated investment channel in Part 10 of this series, doing so as a follow-through response to reader feedback. And I noted at the end of that installment that I would “begin my eleventh series posting by rounding out my discussion of crowd funding, by citing how broker and middle-man sites are being developed that at least in principle, do at least some due diligence research and validation for their investor clients, and for their new business clients too.”

One such broker site that comes immediately to mind for me is Kickstarter.com and I have to begin this part of my crowd funding discussion by in effect challenging one of the basic assumptions I noted in Part 10. Specifically, I stated that:

• Crowd funding would in most cases be pursued by newly forming enterprises that need relatively small amounts of infused capital for early and even earliest-stage development and growth. (Emphasis added in boldface for the key wording for purposes of this discussion.)

Individual investors might make small investments in any given crowd funded venture, but one of the goals of any brokerage site such as Kickstarter would be to develop positive viral marketing buzz about the businesses that they work with and promote – as that is where they would bring in revenue from their efforts. These sites might take an up-front new account set-up or similar fee from their client business ventures. But in most cases it could be expected that they would also take at least a small percentage of any and every investment made to one of their client businesses that come in through their web site and from their marketing efforts. And I have to add that when a crowd funding brokerage site raises significant funding levels for startups and early stage businesses that have garnered a lot of positive buzz in the online conversation and online community, that has to benefit the brokerage firm too by putting them on the map for other potential fundraising businesses and for potential investors too. That could only serve to help them build themselves as businesses too.

Individual investors may take small investment stakes through their crowd funding activities, but individual business ventures are already in some cases bringing in many millions of dollars of investment capital through single rounds of crowd funding – and even aggregate funding levels that would match what would be obtained from venture capital sources – but without any of those smaller investors doing their own due diligence in the way that a venture capitalist or even an angel investor would. So real money is in play here, for crowd funded ventures and not just a few discretionary-income dollars. And that makes regulatory protection-mandated openness and transparency essential moving forward.

New investment instruments and channels and new business models for managing them are continually arising and new forms and variations on older approaches are arising just as fast and certainly as online connectivity has opened up and globalized the marketplace. Regulatory control and oversight needs to evolve in response and with matching agility if it is to offer the type of level playing field that is called for. And with that, I turn to reconsider regulatory control and its costs and benefits per se and I begin by explicitly noting two conflicting visions as to what that word “regulatory” means. I add that these two visions are currently being played out in United States national politics, and certainly going into the upcoming 2012 presidential elections – though variations on this differing of vision can be found in a great many other countries and in international trade alliances as well.

• One perspective would view regulatory control and oversight as primarily serving to preferentially limit marketplace access and opportunity to compete. This is the laissez faire or “government hands-off” approach, according to which the default assumption is that regulatory control should be considered a hindrance and harmful unless specifically and by instance proven otherwise. The basic underlying assumption here is that markets are always self-correcting to limit the impact of improper business practices and that long-term, good practices will always prevail. And Adam Smith’s invisible hand of the market is usually invoked in one way or other to justify this perspective.
• The competing vision and perspective notes that even if this were to hold true in the long term, a great deal of harm can be caused and for a great many individuals, families and businesses in the short term, and on any ongoing basis – from predatory marketplace behavior. I have been positing this approach throughout this series in terms of effective regulatory control leveling the playing field for marketplace participants by more equitable distribution of risks and benefits, with that coming in large part from the imposition of greater transparency and accountability. But the basic approach of this version of regulatory control reality is to limit the potential gain from predatory marketplace behavior per se. And that is where the still unfolding development of crowd funding enters this story. Any effective positive vision of and approach to regulatory control, has to be adaptable and flexible in the face of continuous ongoing change. Otherwise it can only be reactive and behind the curve, and running the risk of actually causing harm from failure to address actual current practices.

That is why I focus on risk/benefits distribution and on transparency and accountability per se and not on the specifics of regulatory control as it would address any particular current state of the art of business practices – good and bad, that will be superseded for immediate relevance as the marketplace and opportunity in it change and evolve.

I am going to add at least one more installment to this series, looking at the impact of marketplace regulatory control and its successes and failures as they reach beyond the marketplace per se. I will focus at least as a starting point in that on the issues of wealth and opportunity distribution within and across societies, and on societal stability. Meanwhile, you can find this and related postings at Macroeconomics and Business and also at Outsourcing and Globalization. See also Ubiquitous Computing and Communications – everywhere all the time.

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