funds.
National and international markets have key characteristics. Regulation is standardized to ensure transparency and accountability. Companies report openly and regularly on progress, sometimes a difficult task when performance declines.
Speculation is not without its challenges. However, regular changes in price provide an open governance mechanism for firms. Price change also allows for investors to have more liquidity within their investment, which increases total investment volume in capital markets.
In the privately held and local economy, there is a trend to establish open capital markets across venture capital, private equity, and real estate development. The trend is the result of digital tools that allow for inexpensive information sharing. Companies do not need a physical market to distribute information about their offering and ongoing performance. Likewise, investors can verify information about a private investment offering across geographic boundaries.
The trend toward open capital markets includes local initiatives and national legislation and policy. It includes innovation that offers a permanent digital record when transferring ownership. Policymakers and practitioners alike see an important need to harmonize public capital markets with how private capital is exchanged. The potential result is more investment into private capital markets, as well as more accountability, transparency, and visibility to how private firms operate.
At the heart of how open capital markets operate is the reemergence of local economies as a force for economic growth. Local economies today have a robust set of economic development practitioners, creative new initiatives, and successful founders and small business owners. Empowering these individuals may quite possibly unleash the next century of American economic growth and ensure America’s leadership as a global hub of innovation and creativity. More importantly, open capital markets can unleash the reward and responsibility of liberty for more Americans who have more opportunity to invest locally and advance new businesses and initiatives.
Regulations And Incentives That Facilitate Open Capital Markets
Federal Government seems consumed with partisan discord. Republicans and Democrats are entrenched in opposition to one another. Around key issues, bipartisan compromise seems impossible.
Financial policy, however, offers rare bipartisan action and can cross party affiliation or voter demographics. The first quarter of the 21st century offers numerous examples of economic and financial policy that recognize the importance of local economic development that establishes open capital markets for local economies.
Policies range from Economic Development Administration (EDA) grants to support innovation and entrepreneurship to tax incentives that encourage wealthy investors to invest in distressed communities to, yet another example of 21st Century policy innovation, lowering barriers to firms and investors who raise capital.
Below is an outline of key policy initiatives. Initiatives are not perfect, but often passed or implemented in a bi-partisan nature. Each policy can unlock capital investment, but like all activity in capital markets, must be implemented in an equitable, responsible way and with appropriate oversight.
Tax Cuts and Jobs Act (TCJA) and Opportunity Zones.
A recent push toward local capital markets occurred as bi-partisan legislation in the 2017 Tax Cuts and Jobs Act (TCJA). Opportunity Zones offer a tax incentive for investors in distressed communities. The tax incentive introduces patient capital and a local focus to tax policy. Qualified Opportunity Zones were identified by Governors, an example of decentralized policymaking.
Opportunity Zones draw the most partisan scrutiny as the legislation is ultimately a tax cut. Opportunity Zones do provide anecdotal evidence of reinvestment. In Detroit, several projects will utilize the incentive supporting residential and commercial development [1]. Multi-million-dollar development projects can expand the tax base significantly, especially in distressed communities.
Many regions are also creating economic development positions that support capital formation. The Rockefeller Foundation, for example, will support Chief Opportunity Zone Officers in select municipalities with total awards of over 5 million USD [2]. The Chief Opportunity Zone Officer acts to prepare projects and organize capital stacks for qualifying projects.
The Opportunity Zone Officer fills an important need for local capital markets by offering dedicated support to catalyze deal flow. Distressed markets often have a ‘chicken-or-egg’ problem as it relates to deal flow. As the market declines, less private sector resources go toward packaging or preparing deals for investment. Public markets have a much more robust industry of investment bankers and analysts that connect investors with deal flow.
Opportunity Zones have been quite successful in many regions in raising awareness of the need for a structured process to support capital reinvestment. Support includes nurturing and promoting deal flow as well as building relationships with potential investors at home and abroad. My hometown of Erie, Pennsylvania completed a successful Homecoming event to attract significant investment back to the region.
The Jumpstart Our Business Startups (JOBS) Act and Equity Crowdfunding.
Another initiative called the Jumpstart Our Business Startups Act (Jobs) reevaluates securities law to lower barriers for startups and investors in the Internet era. Securities Law remained largely unchained since being established in 1933 and 1934 with the passing of the Securities Act and Securities Exchange Acts. The legislation established the framework to regulate secondary markets and created the Securities and Exchange Commission (SEC) to protect investors.
In today’s world, some protections require revaluation. For example, prior to the JOBS Act, rules prevented companies from soliciting investment online. Investors can review enough information and disclosures to verify the quality of the investment.
The core of JOBS legislation lowers the barrier to investment in specific deals. Until the JOBS Act, only accredited investors could make equity investments into startup firms. The SEC’s definition for an accredited investor is an annual income of 300,000 USD for an individual for two years in a row, 200,000 USD for each family member in a household, or the ownership of 1 Million USD or more in assets [3].
These regulations made sense decades ago. For example, in the age of industrial manufacturing, starting a business required significant capital expenditure or a relationship with a higher tier manufacturer who might serve as an early client. Equipment was expensive and the return from that equipment aligned more directly with its capacity and material costs. Today’s digital technology, on the other hand, is replicated exponentially and distributed limitlessly to customers across the globe. A business can go viral and offer a 10x or 100x return to investors. That return is unlikely for manufacturers.
Also, prior to the Internet, investors had few resources to verify the legitimacy of an investment let alone conduct complicated due diligence. Many simply did not have experience in evaluating new investments and they could not obtain access to verified investment disclosures. Travel was more limited so visiting an investment opportunity might be out of the question.
Consider a hypothetical investment in real estate. A bad actor could lie about a property or sell a fake property deed. At least individuals with a high net worth and investor accreditation would understand complicated investment deals and would not go personally bankrupt should an investment go South [4].
The JOBS Act allows non-accredited investors to make equity investment through registered equity crowdfunding portals, who operate as broker-dealers. Firms raising money through equity crowdfunding utilize the Regulation CF exemption, which is different from other exemptions utilized by issuers. The first equity crowdfunding
