Monday, September 23, 2013 - Almost Reality

Almost Reality

by Sinclair Noe

DOW – 49 = 15,401
SPX – 8 = 1701
NAS – 9 = 3765
10 YR YLD - .03 = 2.70%
OIL – 1.37 = 103.38
GOLD – 3.30 = 1323.30
SILV - .16 = 21.74

If we remain on our current trajectory, in about one week the government will shut down. It doesn't shut down everything and not all at once, but it is a pretty big deal. Here's how it might affect you:

Many federal workers will be furloughed, and they might even receive pay retroactively. Not all fed workers stay home; air traffic controllers, meat inspectors, and a few others will remain on the job. The post office will continue to deliver mail. National parks will be closed. The military will still report to duty but they will be paid in IOUs ( I still haven't heard if they can cash the IOUs to buy bread but I'm sure somebody is figuring that out). Social Security checks will be mailed more or less as usual. No gun permits will be issued. The IRS will continue to collect taxes. No government loans to small businesses. Trash collection in Washington DC will stop; that's a federal job and not considered essential (give it a couple of weeks and that might change). The Republicans want to defund Obamacare in exchange for funding the government. But the health care act at the center of this storm would continue its implementation process during a shutdown. That's because its funds aren't dependent on the congressional budget process. And finally, both the Senators and the House of Representatives will continue to get a paycheck. Go figure. All the politicians say a shutdown is a bad idea, so I guess that means there's a good chance it will happen.

Of course last week, the market moving news was “no taper” from the Federal Reserve. The Fed is still concerned about a variety of things, including frothy markets, and so since the “no taper” announcement, or actually a non-announcement, the Fed has been talking down the markets. Last Friday, St. Louis Fed President James Bullard said taper could happen in October.

Today, Dallas Fed President Richard Fisher warned that by standing pat the Fed had hurt its credibility and said he had urged colleagues to support a $10 billion reduction in the Fed's bond-buying program at last week's meeting.

At a separate event, William Dudley, president of the Federal Reserve Bank of New York, said in a speech the timeline that Fed Chairman Ben Bernanke articulated in June for scaling back the central bank's stimulus measures is "still very much intact," as long as the economy keeps improving. Dudley says the Fed still needs to push hard against threats to the economic recovery, and fiscal uncertainties in particular "loom very large right now." 

Over the weekend there was an election in Germany. Angela Merkel won – big. Merkel's Christian Democratic Union and its sister party, the Christian Social Union, won 41.5% of the vote, with analysts calling the win a personal victory for the 59-year-old. Merkel is on track to overtake Margaret Thatcher as Europe's longest-serving female leader. The historical dimensions of the election were clear, with Merkel set to become just the third postwar chancellor to secure three election wins, after Konrad Adenauer and Helmut Kohl. She has also bucked the European trend by becoming the only leader in the eurozone, from left or right, to be re-elected since the snowballing of the eurozone crisis in 2010. Out of 17 countries, 12 governments have fallen, indicating how protected Germans feel from the crisis under Merkel's leadership.

Germany is not an island, it has benefited from membership of the euro, presenting it with an in effect undervalued currency, and the fortuitous explosion in demand for its high-quality manufactured goods by China; but Germany also has some real concerns, such as income inequalities, awful demographic projections, faltering investment levels, crumbling infrastructure, and inadequacies in higher education and in research and development. Post-election Germany will have a similar approach to pre-election Germany: legalistic, cautious and resistant to grand plans and gestures, no matter how much its European neighbors are looking to it to act.

Today marks an historic day for entrepreneurship and early stage finance, as Title II of the JOBS Act goes into effect. For the first time in nearly 80 years, private startups and small businesses can raise investment funding publicly, through general solicitation including: radio, TV, print, and internet, including sites like Facebook or Twitter to help spread the word, and taking in investment online via equity crowdfunding sites who power the investment process in a more open and collaborative way.

Before today, publicly advertising the fact that you were raising investment (general solicitation) was against the law for early stage private companies. Fundraising from the general public was the exclusive domain of larger companies who can afford to spend the millions it takes to become listed on stock exchanges like the NASDAQ.

But now, as a result of Title II, early stage investing has become more public, kicking off one of the largest new capital markets in our time. Back in 1933, when the Securities Act was passed, it created a ban on general solicitation (advertising investments to the general public for private companies). At the time, radio was the dominant communication medium, and there was little access to open information, education, or disclosures to help protect investors.

While these laws passed in 1933 helped reduce fraud at the time, they also had unintended consequences that hurt honest everyday small business owners and entrepreneurs, restricting them in their efforts to attract potential investors and critical seed and growth capital.

The world has changed since 1933, and early stage investing has been long overdue to catch up. Today, as these laws finally roll out, we now have clarity and a path for open and public fundraising for startups and small businesses. In short, companies who file Form D with the SEC prior to doing so can generally solicit to the public. Within 15 days from soliciting they must disclose additional information about the solicitation.

To simplify the details down for you, here are the basics:

For Startups & Small Businesses:

You can now generally solicit and advertise publicly; only accredited investors can actually invest in generally solicited companies; file Form D with the SEC before you begin soliciting, letting them know you will; disclose details about your general solicitation to the SEC within 15 days from first solicitation; strict verifications done by companies are required to confirm that each investor is accredited; the penalty for not adequately meeting and following general solicitation requirements with the SEC is being banned from fundraising for a full year.

For Investors:

Only accredited investors can invest in companies who generally solicit; qualifying as accredited means having $1 million in net worth, or making over $200,000 a year for the past 3 years; investors will need to prove accredited investors status, which can be done through written confirmation by a CPA, attorney, investment advisor, or Broker-Dealer, or income-related IRS forms.

 For companies fundraising, the growth of these capital markets and the movement towards online systems and investment crowdfunding is going to bring much greater potential access to capital and opportunity. Most early stage entrepreneurs don’t have an existing network of wealthy potential investors, and fundraising is hard.

Now that the general solicitation ban is lifted, within a matter of days startups and small businesses can leverage the internet and other marketing tools for their fundraising, to reach potentially thousands of potential investors. Prior to this, reaching a targeted audience of 20 or more active investors often took 4 to 6 months.

According to current regulations, businesses may not raise money with non-accredited investors. Title III of the JOBS Act will create rules and a path for non-accredited investors to begin investing in companies, but the SEC has yet to finalize any rulings. The timing of Title III is expected to include a proposal and a commenting period coming this Fall, and for finalized rulings and a vote in early 2014.

It's a brave new world, and as always, caveat emptor. Some people think the JOBS Act will lead to fraudulent activity by startups, but we don't need the JOBS Act for that. Today we learn the Justice Department is preparing to sue JPMorgan on civil violations of securities laws in offering mortgage bonds from 2005 to 2007 that were backed by subprime and other risky residential mortgages. The bank disclosed in August that federal prosecutors in California were conducting criminal and civil investigations into the bank's mortgage securities.

Five years after the financial crisis, sparked, at least in part by banks and mortgage lenders who claimed that toxic loans were in fact AAA-worthy -- wiped out trillions of dollars of wealth and led to demands for accountability. There had been widespread fraud, after all, and somebody had to pay. And so federal prosecutors teamed up with three other federal agencies to launch and execute a major criminal investigation. And finally they have a high profile indictment.

Teresa and Joe Giudice, (I'm not sure about the pronunciation. Judy-Chay?) stars of Bravo's "Real Housewives of New Jersey." Their crime? Lying to banks on mortgage applications. U.S. Attorney Paul J. Fishman said, "Everyone has an obligation to tell the truth when dealing with the courts, paying their taxes and applying for loans or mortgages. That’s reality." Get it? The prosecutor told a funny; that's reality, because they are on a reality TV show. While the federal prosecutors were cracking jokes and patting themselves on the back for taking down the Giudices, the leaders of the Wall Street firms actually responsible for doing catastrophic damage to the financial system remained free to enjoy the money they made while overseeing the near-collapse of the global economy. That's reality.