For nearly a century local investing has been essentially illegal, and Wall Street has monopolized
all the investment options for the average investor. Thanks to the JOBS Act that President
Barack Obama recently signed into law, local investing in job-creating small businesses is now
legal.
Unfortunately, there has been a tremendous amount of misinformation spread about this Act,
much of it by liberals I usually admire. They should be the people most eagerly embracing this
bill for what it does -- giving people a chance to revive Main Street economies across America.
Jim Hightower, for example, condemns the bill for "deregulating Wall Street." In fact, the
bill spells the end of Wall Street as we know it. It allows the 99% of us who are not wealthy
("unaccredited investors") to put our money in the local businesses we love by removing what
were once impossibly difficult and expensive legal hurdles. Those barriers were so targeted
against small business and small investors that they resulted in almost none of our long-term
savings -- now totaling $30 trillion -- being invested into the local half of our economy. The
JOBS Act ends this misallocation of capital for good.
To me it's ironic, and disappointing, that folks like Hightower, Robert Kuttner, and Eliot Spitzer
were committed to the status quo and to maintaining Wall Street's monopoly on capital. How
could such great thinkers get this issue so wrong? Here are my top five reasons:
First, the critics misunderstand who promoted this bill. Kuttner, for example, blames Obama for
being "always eager to curry favor with Wall Street donors..." Wall Street lobbyists played, at
most a peripheral role, it was small business owners and "makers" like Woody Neiss and Paul
Spinrad who led the charge. Innovative thinkers in the White House, like Doug Rand at the
Office of Science and Technology Policy, played a pivotal role in shaping the president's views
about entrepreneurship. Non-Wall Street insiders like IndieGogo, a crowdfunding web site, and
the nonprofit Sustainable Economies Law Center, pushed hard as well.
Second, the critics, who are justifiably skeptical of wholesale deregulation, don't like to
concede that any form of regulation has been a failure. But any honest assessment of the history
of securities law would observe that we essentially regulated local finance out of existence
while permitting Bernie Madoffs to operate freely. For decades, the SEC has held annual
meetings where small business owners have urged reforms -- modest deregulations that could
open up capital to small companies, such as allowing small-dollar, local investments to be
exempted from securities filings. The SEC never implemented any of those suggestions -- even a
recommendation that $100 investments be exempted.
Third, the critics have tremendously exagerrated the dangers of fraud. The casual reader of the
liberal critiques might conclude that the sale of fraudulent securities is now legal, and that "boiler
room" operations will be set up to bilk grandma of her life savings. Yet state and federal laws
against securities fraud remain in effect. In fact, the JOBS Act adds a number of new provisions
for preventing fraud, by requiring that crowdfunding offerings only be made through registered
intermediaries.
Why, moreover, should anyone be banned from spending, investing, or donating a couple of
hundred dollars any damn way they please? Every American, irrespective of income, is allowed
to lose their life's fortune on lotteries and casinos. Why not allow more reasonable risk tasking
on building community economies? If grandma is not wealthy, the JOBS act limits her risk in
any one business to the lesser of $2,000 or 5% her assets.
Fourth, the critics do not appreciate that there are other approaches to preventing fraud. E-
bay has all but eliminated fraud through consumer and business evaluations of one another.
So have other crowdfunding sites in the United Kingdom. In other words, the SEC's premise --
that the only way to prevent fraud is by banning unaccredited investors from making their own
judgments -- is flat out wrong.
Perhaps the critics' most appalling misunderstanding is the fraudulence of the status quo. Every
day the SEC allows investment advisers on AM radio to hawk the stock market, promising 10-20% annual returns, when in fact the returns -- once inflation and compounding are taken out
-- are closer to 3%. These misrepresentations have convinced Americans that putting 100% of
their savings into Fortune 500 companies is safer and provides a better return than investing
in local business. In reality, the stock market is becoming an increasingly dangerous and
unregulated casino where trades are done by computers that cause flash crashes when they
malfunction. The JOBS Act will allow local businesses to begin to compete for a fair market
share of investment dollars and provide returns that are equal to, if not slightly greater than, the
true returns provided by Wall Street.
I agree, the bill is imperfect. I'm not thrilled with the deregulations of larger companies. And
the bill legalizes all kinds of crowdfunding, local and nonlocal. But we can make it better.
We should start educating the public about the importance of favoring local investment over
abstract ones hundreds or thousands of miles away. Knowing the business in which one invests
-- knowing the products, the entrepreneur, the workforce, etc. -- is the best way to prevent fraud.
It's worth adding that after the bill was signed, 25 of the people who were most
instrumental in passing the bill -- none from Wall Street, by the way -- got together to discuss
ways we could create internal checks and balances on the marketplace, to improve quality
control and help identify hucksters. I hope similar groups form in every community to create an
honor roll of local businesses they know and trust -- perhaps businesses that embrace open-book
accounting -- and that they then encourage residents to prioritize their crowdfunding.
Like it or not, Wall Street's stranglehold on investment is over. We now have a new legal
landscape that we can play a pivotal role in shaping. Everyone who cares about the vitality of
Main Street needs to step up, not out.
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Michael Shuman is the author of Local Dollars, Local Sense: How to Shift Your Money from
Wall Street to Main Street and Achieve Real Prosperity (Chelsea Green Publishing, 2012) . He is research director at Cutting Edge Capital, and a fellow of the Post Carbon Institute. He attended the Rose Garden bill signing
ceremony.