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Washington's Take is Now More than Wall Street's

The opinions expressed by columnists are their own and do not necessarily represent the views of

Ask any entrepreneur you know and they’ll tell you that raising money is the hardest thing they have ever done. 

Sure there is a ton of money out in the world. That’s why prices for dot coms went way up. And despite the subsequent bust, it didn’t stop money from moving into real estate. And when real estate busted, it hasn’t stopped money from moving into metals, oil and other commodities with astonishing rapidity.

Despite a sluggish economy in the U.S. in the last decade, world GDP had roughly doubled in that time from $32 trillion in 2000 to $63 trillion in 2010 according to figures from the World Bank.

There’s no lack of money in the world. It’s just not flowing to U.S. businesses that need it.  That's why jobs are being created at such a sluggish pace.    

That’s because so much of the concern about financial regulation and transparency has failed to account for the fact that there is more money in the world today than ever before- and that investors need more places to put it, not fewer.

We need more banks, not fewer. We need more public companies, not fewer. We need more insurance companies, not fewer.

That’s why it’s time to repeal Sarbanes-Oxley, Dodd-Frank and look at all the various financial acts since the repeal of Glass-Stegall.

Let’s start with Sarbanes-Oxley.

Sarbanes-Oxley was passed in response to frauds committed at public companies WorldCom and Enron. The act concentrated on making sure companies retained corporate records, toughened penalties for accounting fraud and improved transparency for investors. However, like most knee-jerk legislation, it contained provisions that were emotional, and revenge seeking rather than in the best interests of the public at large.

One such provision made executives, especially CFOs and CEOs personally responsible for the financial reports of their companies. In essence, it stripped away the corporate veil that is supposed to protect individuals who run companies who make wrong, but well-meant decisions. Instead it said that officers and directors were personally liable for fraud committed by others, whether the officers and directors knew of the fraud or not.

From a corporate standpoint (that is: “of, relating to, or formed into a unified body of individuals”- definition by Merriam Webster), that would be akin to making a spouse criminally culpable for acts committed their partner, by virtue of the marriage contract, whether or not the spouse actually knew of the criminal acts.

The result has been that in dollar volume, the number of initial public offerings in 2011 was around $27 billion versus $31 billion in 1993, for example. In 1993, there were 509 offerings. In 2011 there were 81 offerings according to Professor Jay Ritter of the University of Florida.

What these numbers mean, is that over a period of time when world wealth was growing from $25 trillion to $64 trillion, the number of initial offerings on what are supposed to be the greatest financial markets in the world, fell by 84 percent. And 1993 was not one of the go-go 1990s years in the stock market either. Instead it was a stock market coming out of recession at 3,435 on the Dow Jones.  

What’s particularly worrying about the numbers is that they tend to confirm that smaller companies no longer have access to the type of capital that only the Street can raise to help companies grow and prosper.

According to Motley Fool, Intuit, the makers of QuickBooks and Quicken went public in 1993. According to filing from the company, they had about $132 million in revenues that year. The IPO allowed Intuit to make some strategic acquisitions with shares of stock that set it up to be the company it is today: 8,000 employees with over $3 billion in annual revenue and a market capitalization of about $17 billion as of March 2012.

Under Sarbanes-Oxley, Intuit wouldn’t have a chance in today’s market.

The average size of the offering in 1993 was around $61 million in 1993.  Today’s offerings average about $333 million.

“These regulations are damaging American capital markets by providing an incentive for small US firms and foreign firms to deregister from US stock exchanges,” says Rep. Ron Paul one of the few House members who voted against Sarbanes-Oxley. “According to a study by the prestigious Wharton Business School, the number of American companies deregistering from public stock exchanges nearly tripled during the year after Sarbanes-Oxley became law, while the New York Stock Exchange had only 10 new foreign listings in all of 2004.”

According to the Competitive Enterprise Institute just the feature that requires accountants to attest to the internal controls in a company’s annual audit costs American businesses $35 billion per year in direct compliance costs, more than all the money raised annually by IPOs since 2000, with the sole exception of 2007.

What kind of an economy are we creating when we are paying compliance costs per year in excess of the actual money inflows to newly financed businesses?

If Wall Street charged the kind of fees to companies to do the hard work of raising money that the government is demanding in compliance costs, Barney Frank’s head would explode.

You can call that practice a lot of things- government extortion and rent-seeking come to mind- but smart isn’t one of the terms I’d use.  

Overhauling financial regulation to meet the actual goal of maintaining free, open and orderly markets must be the first job of the Romney/Ryan ticket.

Because more than your mortgage is at stake.   

Your job is on the line too.   

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