Joseph Schocken plays role in new JOBS Act
Joseph Schocken of Broadmark Capital believes opening up IPO opportunities is great way to help companies grow, get the economy going.
Special to The Seattle Times
Between the election and inauguration of Barack Obama, when the economy was in such a severe free fall that it was killing 700,000 jobs a month, Joseph Schocken prepared a white paper for the president-elect.
Obama was not lacking kibitzers, even ones with Nobel Prizes in economics. But Schocken was a big Democratic donor, as well as president of Broadmark Capital, a Seattle boutique merchant bank that focuses on emerging companies. And he had something to say.
"The single most important method to revitalize the current economy is to re-create the economic growth seen under the Clinton administration through short-term legislation meant to 'unclog' the initial public offering (IPO) market."
Three years on, President Obama paid attention and met with Schocken. The white paper inspired some elements of the JOBS Act, signed into law last Thursday at a Rose Garden ceremony that Schocken attended.
The law, passed with bipartisan support, will make it easier for venture-based companies to raise money in the public markets. Among other provisions, it loosens regulations for these emerging-growth companies.
Those seeking to raise $50 million or less wouldn't be subject to the same disclosure requirements of bigger IPOs. "Crowd funding" would allow them to sell stakes to small investors.
"It will have a dramatic impact on the economy," Schocken told me last week. "It is a very significant piece of legislation. You have to appreciate how significant the IPO problem is. If you want to fix the economy, bring back the IPOs. Look back to the Clinton era. The last time you had a large number of venture-backed IPOs, you had full employment and a balanced budget."
Schocken argues that venture-backed companies are the backbone of a high-wage knowledge economy, as well as being important for exports. They are a critical competitive edge for America in the global economy. These companies represent 21 percent of gross domestic product with plenty of room for growth, and on average do 92 percent of their hiring after the IPO.
But IPOs are down at least 75 percent over the past decade, despite the occasional superstar deal, such as the upcoming Facebook or last year's Groupon. In the second quarter of 2008, even before the panic, the United States saw no IPOs, the first time that happened in 30 years.
To be sure, the capital markets have changed since the 1990s. After the 2001 recession, capital flooded the U.S. housing market, abetted by easy Fed money and poor regulation, creating a disastrous bubble. Venture capitalists, on the whole, are less patient and more risk-averse.
Schocken admits how investment has flowed to China and other BRICS countries, into gold, and into Wall Street gambling with derivatives. That only makes him more determined to revive the IPO market.
"We need to do these kinds of adjustments to get investment back into growing small companies in the U.S.," he said. "It will get the financial industry more focused."
I'll admit to concern over crowd funding, which seems like an invitation to empty-grannies-bank-account fraud reminiscent of the penny stock era.
Crowd funding would allow startup companies to solicit small investments from average investors over the Internet. The Securities and Exchange Commission is studying the issue.
"This is just an opportunity for fraud in the extreme," Stephen Graham of Fenwick & West's Life Sciences Practice told Reuters. "You can just imagine the unsophisticated investor that is just bombarded on the Internet." Graham is on an SEC advisory committee on small and emerging companies.
And less disclosure seems an invitation to trouble. It's not as if the most venerable banks, accounting firms and credit-ratings agencies have covered themselves in glory in recent years. And we're going to roll back some of the reforms from the Enron-WorldCom-HealthSouth scandals?
Said Schocken, "The benefits of this bill will far outweigh any problems that result. I had nothing to do with crowd funding or other ornaments that got hung on this tree."
As far as the dot-com bust at the end of the 1990s, he is an evangelist for perspective, especially compared with the Great Recession, which brought the world financial system to the brink.
"Reflect back to the '90s. Was there any systemic damage? Was any major bank hurt? No. Some speculators got hurt. The system worked exactly how it's supposed to work. The era created some great companies ... And we made some adjustments because there were some abuses."
It's a valid point. The 1990s saw some highly successful IPOs, including Amazon.com, F5 Networks, eBay, Expedia, Yahoo and Cisco. The era saw the longest economic expansion in American history, and one largely based on real things, not just speculation.
On the other hand, the era produced some famous busts, such as Pets.com, Webvan, eToys, GeoCities and Garden.com. We were told this was a new economy, where it didn't matter if a company had earnings or a stuffy traditional business plan — and millions of investors fell for it.
On the other hand, China was not such a force, playing by its own rules. The economy was not so unproductively and dangerously financialized, partly the result of President Clinton signing the repeal of Glass-Steagall. And while divided government then seemed like a good thing, today's paralyzed, money-fixed government is a danger to the future.
In this one case, common ground has been found, if even because the Congress needs to run on having accomplished at least one thing.
If the JOBS Act really focuses more capital to productive, job-creating enterprises a la the 1990s it will be a major achievement. Even more so if it helped grow companies to address challenges in renewable energy, infrastructure and health.
"The venture guys today are not less smart than they were then," Schocken said.
I wish we could say the same for many of the politicians.
You may reach Jon Talton at email@example.com. On Twitter @jontalton.
About Jon Talton
Jon Talton comments on economic trends and turning points, putting them into context with people, place and the environment in the Pacific Northwest