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business newsWhat SOPA-Like Regulations Would Mean to Financial Innovation
By
Ruti Polachek
Jan 23, 2012 12:30 pm
Government over-regulation of the Internet would alter the course of online investing and shut down developments we haven't yet dreamed of.
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The obvious threats include Internet blackouts, not just Wikipedia and a handful of sites, and not just for one day. If some random post were considered a copyright infringement, the bill would have the entire site vanish, have it removed from search results, have its domain name seized.
Imagine if the government deleted some names from your phone's contact list. You would have no idea how to contact your friends. Similarly, domain names are the little addresses you go to or click on when heading somewhere online. It's the site's name, e.g., Minyanville.com. The name refers to some numbers (a.k.a., IP address), much like the contacts in your phone. If you disconnect these numbers from the domain name, the site disappears. Now go find the number combination for YouTube. Anyone? I didn't think so.
But that is not all. Just over a year ago, Paypal, Visa, and Mastercard suspended their service to Wikileaks, which was facing pressure from the US government. SOPA would have enforced that kind of treatment on many sites, based upon their users' contributions. Makes you want to start an e-commerce site already. Of course online advertisers would be forced to suspend services to these sites, too, so don't think there will be another source of income.
On the bright side, complex regulations do encourage creativity in providing solutions for the problems they create. I remember as a banker working on the acquisition of Actimize by Nice (NICE), which provides regulatory-compliant solutions for financial institutions.
You may be thinking, well, maybe some companies could emerge to provide SOPA-compliant solutions. After all, financial payment providers will monitor content posted on sites they cater to, and should be prepared to suspend their services to some sites immediately. Internet advertising hubs such as Google (GOOG) and Yahoo (YHOO), domain name registrars, and search engines would be forced to do the same. This could be a huge opportunity for companies providing monitoring and censoring tools.
Wait. Seriously? Is that what we want entrepreneurs to be focusing on? Censorship of other sites?
No startup would consider starting a Yelp Capital Markets edition, where you could review and report public equity and debt offerings, link to them, or even offer direct access to the securities. There are many regulatory barriers for this to be possible, but SOPA just adds some additional problems. Anyone posting there could not only cause the site to be removed, but also terminate financial transactions for everyone. Imagine the horror.
Mark Zuckerberg consulted with Quora users on what startups Facebook should acquire. But no one would open a centralized mergers and acquisitions website driven by votes online because the potential threat of SOPA-equivalent legislation coming back is too high.
In the future, innovative new companies (or existing ones, such as StockTwits) might expand from stock ideas to actual online investment groups based on crowdsourced recommendations. But if SOPA comes back, entire companies and investors would be doomed. Some innovation might just never happen if regulation has its way. The same goes for angel, equity, debt, funds, and any kind of future innovative online investing. Why risk losing millions merely because average Joe just posted an excerpt from the latest blockbuster?
Companies would be reluctant to build the Amazon for capital markets, where they could enable users to participate in official securities offerings (including IPOs) or auctions alongside their reviews and enable direct access to debt offerings by corporations. Existing regulatory risks already deter the birth of such an exchange. But SOPA adds some cherries to the cake. After all, the government might shut the market down merely because someone made the wrong comment on a security. The financial hit could be in the billions or even higher. No one would ever dream of undertaking such a risk.
Companies like SecondMarket and SharesPost already provide similar services for shares of private companies. Such bidding one day will be available for any kind of asset, publicly. The only question is how long it will take us to get there.
Some of these financial services already exist; others may seem far-fetched. Current regulations make innovation in this field hard as it is. SOPA-like legislation pushes it even further away.
That is not to say that some of the regulations are not important. Some of them definitely are (anti-money laundering is just one example). But we would have seen far more innovation in finance if it did not require north of $50 million in funding, to be spent mainly on legal fees.
Many of the legislators are driven by ignorance, not ill will. But they mostly hear what lobbyists tell them. Lobbyists hired by traditional media companies.
But ignorance is not bliss, at least not when you are calling the shots in DC. I don't think Congress intentionally decided to bully innovation. But these obstacles suppress upcoming financial and technological innovation. And I hear it's a good idea "to promote prosperity, creativity, entrepreneurship, and innovation" (SOPA's opening statement).
No positions in stocks mentioned.
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