Legislation allowing ordinary American investors to invest in the shares of startups and small businesses was first introduced in the U.S. Congress in 2011. Despite bipartisan support and the approval of President Obama, it is only now becoming a reality.
As an Anglo-American — born and raised in the United States, living and working in the United Kingdom and a dual citizen — I have a great deal of loyalty to both sides of the Atlantic. But as I look back on the last few years, and ahead to the commencement of American equity crowdfunding, I am amazed by how two countries with such similar commitments to enterprise, free markets and innovation have taken such different paths.
The U.K. has embraced not only equity crowdfunding, but innovative finance generally, and now has a thriving industry that is benefitting small businesses, investors and the economy alike.
The United States, on the other hand, has gotten so bogged down in the strictures of an outdated regulatory system that it is lagging far behind — and is likely to continue to do so.
A tale of two regulatory systems
Much of the difference between the British and American approaches to innovative finance can be attributed to the history of their respective regulatory systems.
When the stock market crashed in 1929, a lot of ordinary Americans lost a lot of money. The 1920s had seen swathes of retail investors enter the U.S. capital markets, often with very little information about what they were investing in. Sometimes investments were even sold door-to-door, and rarely were the risks of investing made clear.
So when share prices fell, not only were ordinary investors caught by surprise, but because many had invested far more money than they could afford to, they often found themselves losing their homes and their livelihoods.
The U.S. government responded by enacting the world’s first truly comprehensive system of financial regulation, designed in large part to protect ordinary people from investing beyond their understanding and means. It is a system designed around the way in which investments were bought and sold — and the relative lack of communication and investor sophistication — in the 1920s and 1930s.
And because lawmakers at the time did not contemplate that those things would change, they built the system as “rules-based,” meaning that investment transactions are governed by detailed sets of rules covering nearly every aspect of their conduct. With limited modifications, this rules-based system is the one that remains in force today.
The 1929 market crash affected Britain too, but in a different way. In the U.K., as in most of Europe, investing in those days was still the preserve of institutions and a small group of well-connected, wealthy individuals. Ordinary people had not had much money in the stock market, so they didn’t lose much, and there was no great impetus to change the laws to protect them. The British financial sector would remain relatively self-governing, with limited legislative intervention, for decades.
It was only in the 1990s, when a sufficiently large base of retail investors emerged in the U.K., that the government felt a comprehensive system of financial regulation was needed. The result was the Financial Services and Markets Act 2000 (FSMA), which remains the governing piece of legislation today.
By the time FSMA was enacted, the Internet was already in mass use. Perhaps more importantly, it was clear that the ways in which investments are transacted, and business in general is conducted, were evolving, and that technology was likely to create many further changes in the years to come.
So FSMA was designed to have the flexibility to adapt to changes in the market — a sort-of future-proofing. Instead of the American “rules-based” approach, FSMA adopted a significantly more “principles-based” approach: Financial services firms were expected to abide by key sets of principles around investor protection (among other things), but they were given significant discretion in exactly how they did so.
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SOURCE: Techcrunch
Jeff Lynn
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