Today, our investments are generally more liquid than ever before. Retail investors with 401(k) accounts or even their own accounts on Robinhood or other brokerage platforms can purchase investments from across the world, in every industry. And we can rapidly sell off investments that we no longer like and move our money somewhere else.
This is generally seen as good. Liquidity is valuable; it gives us options, allows for “market discipline” for the companies we invest in, and gives us a degree of safety if things start going south. Moreover, liquid investments are generally worth more, all else equal, than similar investments that cannot easily be sold. For these reasons, liquid investments often attract more dollars, offering the prospect of riches to more entrepreneurs.
And even if liquidity were not good, it seems to be hard to stop. Measures to restrict or punish frequent trading often backfire, whether it be in 17th-century Amsterdam (which briefly tried to ban the resale of stock shares) or early-20th-century Germany (which taxed sales of stock on the public exchanges in an ill-fated bid to discourage speculation). Today, the most popular such proposal, the so-called Tobin Tax, would likely encourage investors to move their money into large brokerages that can create an internal market among their clients, pulling trading volume off of the public exchanges and centralizing financial power (as it did in early-1900s Germany).
But relying on liquid stocks does come with drawbacks. First of all, it allows us to trade emotionally. Most traders underperform the market indices, as is well known at this point. And especially during a market crisis, it is far too easy to take counsel of your fears and sell out at the absolute worst time. Second, trading has become so easy that assets that used to be uncorrelated are now behaving more and more like each other, especially during crises when big institutions are desperate to sell everything.
More insidiously, the ease of investing in public stocks has channeled much of our society’s capital to a very few large companies, exacerbating inequality. Only a few thousand U.S. companies are publicly traded, and they employ less than a third of all workers. At the same time, small businesses are desperate for capital as banks reduce their business lending. Some new companies have taken advantage of new ways of raising money—astonishingly, it has been about 7 years since the SEC finally obeyed Congress and issued Regulation Crowdfunding. But most investors still don’t know much about crowdfunding, so overall volumes are relatively low.
Plus, crowdfunding seems to favor companies that are “sexy” and can generate a lot of interest on the internet. What about the humble corner store, the restaurant, the small manufacturing shop, the family farm? Often, they are forced to rely on costly merchant capital or even tapping personal credit cards, at financing costs that can top 20% or even 40% or more.
But this seems absurd. Most investors would kill for sustained rates of return of even 15%, and a lot of people are looking for ways to support their local communities. Why isn’t it easier to provide capital to businesses in your own backyard?
The truth is, it can be done; but you have to know all the laws to follow, and most people don’t know how, or even that it’s an option. From where I sit, given the various exemptions in the securities laws, it should be easy for every neighborhood to have its own venture-capital fund or several; the biggest obstacles, apparently, are lack of awareness, perceived lack of expertise, fear of the risks, and the high legal fees that most securities lawyers charge.
Slow Money is one of my passions. People should be able to come together and support their local economies. One of the best parts about becoming a lawyer is that I’m finally in a position to help people do that. If you are trying to create ways to invest 50% of your money within 50 miles of your home (a tenet of the Slow Money movement) and you need ideas, please reach out and let’s talk.
Oren Litwin LLC 