Two recent developments in the law and practice of business include: (1) the advent of benefit corporations (and kindred organizational forms) and (2) the application of crowdfunding practices to capital-raising for start-ups. My thesis here is that these two innovations will become disruptive legal technologies. In other words, benefit corporations and capital crowdfunding will change the landscape of business organization substantially.
A disruptive technology is one that changes the foundational context of business. Think of the internet and the rise of Amazon, Google, etc. Or consider the invention of laptops and the rise of Microsoft and the fall of the old IBM. Automobiles displace horses, and telephones make the telegraph obsolete. The Harvard economist Joseph Schumpeter coined a phrase for the phenomenon: “creative destruction.”
Technologies can be further divided into two types: physical technologies (e.g., new scientific inventions or mechanical innovations) and social technologies (such as law and accounting). See Business Persons, p. 1 (citing Richard R. Nelson, Technology, Institutions, and Economic Growth (2005), pp. 153–65, 195–209). The legal innovations of benefit corporations and capital crowdfunding count as major changes in social technologies. (Perhaps the biggest legal technological invention remains the corporation itself.)
1. Benefit corporations began as a nonprofit idea, hatched in my hometown of Philadelphia (actually Berwyn, Pennsylvania, but I’ll claim it as close enough). A nonprofit organization called B Lab began to offer an independent brand to business firms (somewhat confusingly not limited to corporations) that agree to adopt a “social purpose” as well as the usual self-seeking goal of profit-making. In addition, a “Certified B Corporation” must meet a transparency requirement of regular reporting on its “social” as well as financial progress. Other similar efforts include the advent of “low-profit” limited liability companies or L3Cs, which attempt to combine nonprofit/social and profit objectives. In my theory of business, I label these kind of firms “hybrid social enterprises.” Business Persons, pp. 206-15.
A significant change occurred in the last few years with the passage of legislation that gave teeth to the benefit corporation idea. Previously, the nonprofit label for a B Corp required a firm to declare adherence to a corporate constituency statute or to adopt a similar constituency by-law or other governing provision which signaled that a firm’s sense of its business objective extended beyond shareholders or other equity-owners alone. (One of my first academic articles addressed the topic at an earlier stage. See “Beyond Shareholders: Interpreting Corporate Constituency Statutes.” I also gave a recent video interview on the topic here.) Beginning in 2010, a number of U.S. states passed formal statutes authorizing benefit corporations. One recent count finds that twenty-seven states have now passed similar statutes. California has allowed for an option of all corporations to “opt in” to a “flexible purpose corporation” statute which combines features of benefit corporations and constituency statutes. Most notably, Delaware – the center of gravity of U.S. incorporations – adopted a benefit corporation statute in the summer of 2013. According to Alicia Plerhoples, fifty-five corporations opted in to the Delaware benefit corporation form within six months. Better known companies that have chosen to operate as benefit corporations include Method Products in Delaware and Patagonia in California.
2. Crowdfunding firms. Crowdfunding along the lines of Kickstarter and Indiegogo campaigns for the creation of new products have become commonplace. And the amounts of capital raised have sometimes been eye-popping. An article in Forbes relates the recent case of a robotics company raising $1.4 million in three weeks for a new project. Nonprofit funding for the microfinance of small business ventures in developing countries seems also to be successful. Kiva is probably the best known example. (Disclosure: my family has been an investor in various Kiva projects, and I’ve been surprised and encouraged by the fact that no loans have so far defaulted!)
However, a truly disruptive change in the capital funding of enterprises – perhaps including hybrid social enterprises – may be signaled by the Jumpstart Our Business Start-ups (JOBS) Act passed in 2012. Although it is limited at the moment in terms of the range of investors that may be tapped for crowdfunding (including a $1 million capital limit and sophisticated/wealthy investors requirement), a successful initial run may result in amendments that may begin to change the face of capital fundraising for firms. Judging from some recent books at least, crowdfunding for new ventures seems to have arrived. See Kevin Lawton and Dan Marom’s The Crowdfunding Revolution (2012) and Gary Spirer’s Crowdfunding: The Next Big Thing (2013).
What if easier capital crowdfunding combined with benefit corporation structures? Is it possible to imagine the construction of new securities markets that would raise capital for benefit corporations -- outside of traditional Wall Street markets where the norm of “shareholder value maximization” rules? There are some reasons for doubt: securities regulations change slowly (with the financial status quo more than willing to lobby against disruptive changes) and hopes for “do-good” business models may run into trouble if consumer markets don’t support them strongly. But it’s at least possible to imagine a different world of business emerging with the energy and commitment of a generation of entrepreneurs who might care about more in their lives than making themselves rich. Benefit corporations fueled by capital crowdfunding might lead a revolution: or, less provocatively, may at least challenge traditional business models that for too long have assumed a narrow economic model of profit-maximizing self-interest. James Surowiecki, in his recent column in The New Yorker, captures a more modest possibility: “The rise of B corps is a reminder that the idea that corporations should be only lean, mean, profit-maximizing machines isn’t dictated by the inherent nature of capitalism, let alone by human nature. As individuals, we try to make our work not just profitable but also meaningful. It may be time for more companies to do the same.”
So a combination of hybrid social enterprises and capital crowdfunding doesn’t need to displace all of the traditional modes of doing business to change the world. If a significant number of entrepreneurs, employees, investors, and customers lock-in to these new social technologies, then they will indeed become “disruptive.”
Permalink | Business Ethics| Business Organizations| Corporate Governance| Corporate Law| Delaware| Economics| Employees| Entrepreneurs| Entrepreneurship| Environment| Fiduciary Law| Finance| Financial Institutions| Investing| JOBS Act| Legal Theory| Organizational Theory| Securities| Social Entrepreneurship| Social Responsibility| Technology| Venture Capital | Comments (0) | TrackBack (0) | Bookmark
I think I'm not alone in saying that Dan Markel's murder has thrown me. In fact, I know that from attending his memorial this past Monday at SEALS. The sudden death of one so young and vibrant is always shocking, and a violent murder all the more so. Amongst all the strangeness, one of the things that still feels strange is the way I learned about Danny's death: Facebook.
I've been hesitant to post this because it feels too personal-- transgressive of rules I can't articulate but which remain potent. But if I have taken anything from reading and listening to people's reminiscences of Danny, it's that he would have said "Just post it, Usha. Just blog. Start a conversation."
1. The discovery. I heard about Danny's death via text-- basically out-of-the-blue news that he'd been shot and killed. Nothing more. Incredulous, I went to Google. Nothing. Nothing. But on Danny's Facebook wall kept appearing post after post saying farewell, offering condolences. Thankfully someone had asked in a comment "Wait, what happened?" A comment thread elucidated the bare (and untrue) fact that it was a home intrusion.
2. The quest for information: For two days I kept returning to Danny's page, reading messages and grasping at rumors and details. I mostly lurk on Facebook, looking at photos and keeping up with people's lives. Suddenly, however, Facebook had a non-frivolous function: it was an efficient and effective way for an impromptu community based around one person to communicate news on the murder investigation and information about memorials, funds established for the boys, and funeral arrangements.
3. The grief. And here's the heart of it. Danny's Facebook page became this impromptu site for mourning and outpourings of grief. Many--indeed, most--of the messages addressed Danny personally and unself-consciously: "I will miss you. The last time I saw you...." Other messages voiced the awkwardness I felt, and went along the lines of messages of "This seems like an odd place to express my feelings, but Danny loved social media so much..." and went on to share their story. One,which particularly stopped me, was addressed to Danny's beloved sons. The writer averred that someday they would read these testimonials, which would let them know how important and beloved a man their father was.
Is this grief today? Facebook allows you to meorialize a deceased person's account. The account remains in a sort of suspended state: no friends or photos can be added, but the deceased's friends can share memories and even "send private messages to the deceased person." I have known only a few friends who have died with Facebook pages. They have remained, and on certain dates (often birthdays), their friends post tributes or just short notes of remembrance. I think Facebook's policy is that they can remain indefinitely. Which is to me equal parts comforting and disconcerting.
I look at Facebook a little differently now. For one, I can see that it is a powerful, perhaps uniquely efficient way for disparate individuals united in their caring for one person to share information in times of crisis. It is also a private community created by the deceased himself that can share their grief. That fact is important, I think. That Danny himself had chosen his friends meant that implicitly we could be trusted. The private nature of his page was especially important in a high profile murder case: I was contacted by a few members of the press. I am sure that on a public forum many would have refrained from posting at all.
Still, I was uneasy expressing myself to that community. I felt like I should say something, but I wasn't sure exactly what to say, or to whom I was speaking. Ultimately (wouldn't you know) I blogged and posted that link to Danny's page. While I knew Danny from starting law teaching at the same time, most of our recent interactions had been blogging-focused, so that seemed right. And Danny was never one to shy away from difficult or uncomfortable topics, so here's this question is a tribute to him: has Facebook changed the manner in which we grieve?
Thanks to Gordon Smith for inviting me to guest blog—and kudos to Gordon for inviting Michael Burstein, who penned several insightful guest blogs here a few weeks ago—to generate some buzz about the intersection of IP and business law. In my posts over the next two weeks, I’ll follow on Michael’s outstanding foray into the overlap—and as I’ll describe, the “gap”—between IP and business law.
As Michael explained, IP and business law often intersects in three key areas: (1) Law & Entrepreneurship; (2) Markets for Technology; and (3) Innovation and Corporate Performance. Each of these areas has been growing at tremendous rates both in terms of academic study and real-world deals.
As an IP law professor and former founder of a .com-era software company, it’s greatly refreshing to see this newfound interest in IP & business law in the legal academy and practice. Yet, both domains still often suffer from what I term the IP transaction “gap”—namely, the lack of a deep understanding on the part of academics and lawyers of both the “IP of Business” and the “Business of IP.”
In simple terms, business lawyers often fail to appreciate the important details of IP and IP lawyers often fail to understand the business of their clients. As a client, my difficulties stemmed in finding business-savvy lawyers who had a sufficient grasp of IP—particularly the business aspects of IP—to ink the kinds of nuanced licensing, assignment, and acquisition agreements that would suitably account for the structure and risks unique to IP deals. The same sorts of “gaps” between IP and business law pervade law review articles that attempt to tackle this thorny intersection.
Of course, there are notable exceptions among scholars and practitioners alike. For instance—in addition to Michael Burstein—Ashish Arora, Stuart Graham, Richard Gruner, Bronwyn Hall, Jay Kesan, Josh Lerner, and David Teece represent an abbreviated list of some of the scholars with deep knowledge in both fields. Similarly, there are well-known (and lesser-known) attorneys with the same sort of cross-disciplinary aptitude. How do scholars—and practitioners and students—acquire this kind of knowledge? I have a few suggestions.
First, law schools should offer more cross-over courses in IP and business law. For example, at the University of San Diego School of Law, David McGowan and I have focused on expanding our cross-disciplinary IP offerings, which now include IP & Business, IP Strategies, Technology Transfer, and a Technology Entrepreneurship Law Clinic. Based on a survey of IP courses performed by William Mitchell Law School, fewer than 20 law schools offer any IP transactional courses other than IP licensing. Relatedly, law schools should provide certificates or concentrations in IP Transactional Law, as well as more opportunities for joint MBA/JD programs, with a special emphasis on technology-focused business and law.
Second, legal academics writing in IP & business should more frequently read and cite literature from outside the law review canon. In my view, often the best law review articles in IP draw upon scholarly works from business, economics, management, marketing, and related journals. One excellent way to quickly learn about the latest thinking in these fields is to attend conferences in these disciplines, such as the Academy of Management or American Economic Association annual meetings.
In this vein, academics and practitioners alike should cease the frequent practice of pigeon-holing certain issues as “legal” and others as “business,” relegating the latter to the expertise of non-lawyers. At my software company, we eventually fired every lawyer who made such hidebound distinctions. In their place, we hired transactional lawyers who understood our business well—not only our goals in a specific deal, but also overall—and who thus could provide integrated business and legal advice. In order to have this deep level of knowledge, transactional lawyers—especially those who practice in the tech space—need to immerse themselves in the business of their clients. In many situations, this might mean self-educating by reading a client’s business plan and fundraising slides, as well as general business magazines, books, blogs, and journals.
Last, and perhaps most importantly, we in legal academia—in addition to training students to “think like lawyers”—should give today’s transactional law students a head-start on “thinking like businesspeople.” By doing so we can help ensure clients receive the kinds of lawyering they increasingly demand (and need).
Thanks so much to Gordon Smith and the rest of The Glom for inviting me to guest blog for a couple of weeks. As Gordon mentioned in his very kind introduction, I’m a professor at the Cardozo School of Law in New York City, where I teach Patent Law, Corporations, and Property. My writing focuses on the intersections between and among these fields. My view is that the relationships between IP and business law are numerous, complex, and rich. But in our somewhat specialized sub-disciplines, IP and corporate law scholars don’t often talk to each other. (There are exceptions, of course, and I’m thrilled to be part of a group that is working to change this – more on that below.) In my posts over the next two weeks, I’d like to try to jumpstart some new conversations. I think we have a lot to learn from each other.
In this first post, I thought I would describe a few themes that bring IP and business law together, as a way of framing the more specific problems that I’ll discuss later in the week. So to get things started, consider the following:
- Law and entrepreneurship. Gordon and others (Brian Broughman, Sean O’Connor, Usha Rodrigues, to name but a few) have done tremendous work over the last several years to explain the particular roles that law plays in shaping the environment for new ventures (and to build an interdisciplinary Law and Entrepreneurship Association of scholars interested in these issues). In today’s economy, where many such ventures are based on intellectual assets, IP laws have a tremendous impact on the shape and success of those businesses. To take just a sampling of issues: Ted Sichelman and his collaborators find, in the Berkeley Patent Survey, that entrepreneurs seek often seek patents for reasons unrelated to the classic rationale of preventing misappropriation, such as to better attract venture finance; Colleen Chien reports that the costs of patent “trolling” are disproportionately borne by startups; and federal technology transfer policies determine how innovative ideas move from the laboratory to the marketplace.
- Markets for technology. The classic economic model of innovation is simple and usually involves a lone genius inventing in a garage. But bringing an innovative product to market requires much more. It requires linking the idea with capital and development resources for commercialization. Forging those links requires players to overcome a range of bargaining challenges. I’ve argued that IP may play a smaller role in overcoming those challenges than we think (so too has Peter Lee, who focuses on tacit knowledge), and continue to explore how transactions in information take place. But at the same time, we are seeing the rise of robust secondary markets for patents and copyrights, which raise a host of concerns with which corporate scholars are already familiar. If patents are to be treated as financial assets (as, for example, Michael Risch suggests), what disclosure regime should we apply? Would a patent market function like a capital market? Would that be socially desirable?
- Innovation and corporate performance. The popular business press is obsessed with innovation. And rightly so – innovation is a critical driver of corporate performance. But the organizational drivers of innovative behavior often depend on law. Dan Burk & Brett McDonnell, and several others, for example, draw on the theory of the firm to explain how the strength and breadth of IP affects firms’ make-or-buy decisions with respect to technology. Other innovation incentives – prizes, grants, R&D tax credits – have similar impacts on firm behavior, as Lisa Ouellette and Brett Frischmann have begun to describe. Later in the week, I’ll write about work that I’m doing with Fiona Murray – a management professor at MIT Sloan – about the governance of innovation prizes, a problem that we think has much in common with the governance of innovation process in other institutional settings such as corporations.
I’m really excited to engage with the community here on these and other topics. I look forward to hearing your thoughts, and to a fun couple of weeks!
Dealbook has reprinted a series of tweets by Marc Andreessen explaining the sometimes lofty valuations of acquisitions in the tech sector. The key idea is "attach rate," which Andreessen describes as follows: "acquirer Y can attach company X's product to Y's sales engine."
We used to have another word for this idea: synergy.
Just because it's not new doesn't mean it's not real. But Andreessen rightly cautions: "Of course, for the deal to be good, I have to deliver that attach rate. But when it works, and it often does, it's magical & worth doing."
I am probably more skeptical -- "often" should probably be "sometimes" -- but I generally agree with the thrust of the tweets. Thanks to Matt Jennejohn for the pointer.
The Bitcoin exchange Mt. Gox appeared to be undergoing more convulsions Tuesday [February 25], as its website became unavailable and trading there appeared to have stopped, signaling a new stage in troubles that have dented the image of the virtual currency. . . .
Investors have been unable to withdraw funds from Mt. Gox since the beginning of this month. The exchange has said that a flaw in the bitcoin software allowed transaction records to be altered, potentially making possible fraudulent withdrawals. No allegations have been made of wrongdoing by the exchange, but the potential for theft has raised concern that the exchange wouldn't be able to meet its obligations.
The apparent collapse of Mt. Gox is just the latest shock to hit Bitcoin, the price of which is now off more than 50% from its December 2013 peak:
For those better acquainted with the dead-tree/dead-president variety of money, Bitcoin is a virtual currency not backed by any government. Rather than being printed or minted by a central bank, Bitcoins are created by a computer algorithm in a process known as "mining" and are stored online or on your computer. They are bought and sold on various exchanges, including until recently Mt. Gox (whose troubles have been reported for a few weeks now).
There are many reasons, some of them even lawful. Bitcoins can be regarded as a medium of exchange, an investment, a political statement...or a way of avoiding capital controls and other pesky laws like bans on drug trafficking and human smuggling.
But the criminal potential of Bitcoin is probably overstated. The Chinese have gotten wise to its use for avoiding capital controls. Using Bitcoin for criminal or fraudulent activity would be difficult at scale (PDF). The Walter White method is still far and away the best way to ensure your criminal proceeds retain their value and anonymity.
I don't share the utopian fervor for Bitcoin expressed in tech and libertarian circles (see, e.g., this supposedly non-utopian cri de coeur), but it may have some positive potential as a decentralized and lower-cost electronic payments system. We'll see if that ever gets off the ground.
In the meantime, the Mt. Gox collapse is pretty huge news for Bitcoinland. Unlike the NYSE (the failure of which would be hard even to imagine), Mt. Gox does not benefit from any systemic significance and thus is unlikely to receive a lot of official-sector help. The situation has some early adopters running for the Bitcoin exits, like this leading Bitcoin evangelist.
Despite (because of?) my agnosticism on the currency, I'll be writing more about Bitcoin soon. (Mainly, I wanted to stake a claim to being the first to write about Bitcoin on The Conglomerate.) If your Palo Alto cocktail party can't wait, however, this explainer (PDF) from the ever-impressive Chicago Fed should tide you over.
Permalink | Businesses of Note| Crime and Criminal Law| Current Affairs| Economics| Entrepreneurs| Entrepreneurship| Finance| Financial Institutions| Innovation| Internet| Investing| Securities| Technology | Comments (2) | TrackBack (0) | Bookmark
Like Urska, that's how I've been the past week. No school, 3 children at home, Tuesday-Thursday. Cooped up because of ice 2 of those days. It was brutal, I'm not going to lie to you.
Two technological innovations made the weather burdens a tiny bit easier to bear. First, an app: Fitstar, which aims to deliver a personalized workout based on a fitness test and nearly continuous feedback you provide as to your goals and how hard or easy you perceive each exercise to be. I am not a fitness freak by any means, but I do like to exercise at least every other day. Ideally I am outside running, but a torn meniscus had me searching for other options all fall. Even now, blessedly cleared to run again, there are some times when weather keeps you indoors. Enter Fitstar, which gives you a pretty good, and varied, workout without the need for space, weights, etc. It helped keep me sane this past week.
Second, school closings perforce means that I'm behind on my lectures. In my Lifecycle of the Corporation class in particular that's a problem, since it's a seminar with a pretty tight schedule. So Thursday after the kids went down I recorded a lecture that approximates the introduction to IPOs class. It's not perfect, since there's no student interaction, and the production value is a bit lacking, but I think it gets the job done.
An unlooked-for benefit is that I am implementing, at least for one class, the flipped classroom that has intrigued me so much in theory, but for which I've lacked the initiative to try on my own. I used the Photobooth function on my Mac and was able to upload the resultant video to TWEN with only a minor amount of inconvenience. Generally I'm a late adopter, but needs must.
Finally, let me emphasize, although the uses of technology might be sweet, I am all done with cold weather adversity. All done.
OK, so I'm more late-adopter than Luddite, but it makes for a pithier title. And late-adopter I am--I broke down and bought a smartphone only when my faithful flip-phone's charger died. And yet I'm here to tell you that the iPad has rocked my innovation-resistant little world. I offer these thoughts for those few readers out there more retrograde than I.
If you've ever stepped into my office, you'll understand the problem. Awash in paper, it oscillates between relatively orderly piles of paper on my desk and bookshelves (in the month after my more-or-less annual spring cleaning) and disorderly piles of paper littering every available surface, including the floor.
I have two main problems. 1) I'm a tactile reader--marking up, pen in hand, is how I process what I read. Reading on a computer screen, even a laptop, is no good for me. 2) I have an irrational fear that "I may need that," hampering my ability to purge the many pieces of paper an academic collects. I've tried file folders, I've tried binders. They work in moderation. But when time is short, the terrible piles accumulate.
Enter the iPad. Guided by a knowledgeable and kindly colleague, I have used a combination of Dropbox and the GoodReader app to create folders for colloquia, hiring, and various research projects. Now when I get an electronic something I need to read, I convert it to PDF, save it to Dropbox, sync with the iPad, and voila: I can mark up documents on a screen, and save the markups.
This may seem like a simple change, but it has revolutionized my working world. Here are some benefits:
- I no longer download, print, read, and mark up the same article 4 different times because I keep misplacing it.
- I print a lot less, assuaging my environmental guilt and reducing paper clutter exponentially.
- If you sync regularly your notes are preserved on Dropbox and available to you wherever you go.
- Indeed, your research is available wherever you go. No more kicking yourself as you frantically prepare in your hotel room the night before your next morning's talk because you left behind the Seminal Article that makes the point you want to refer to. Not that I ever do this. But still.
- If you're at home with a crappy printer for the semester, you can quickly download and mark up law review edits or articles that friends send to you. Before you'd have to drive by the office or make do at home.
- Travel benefit #1: All the conference papers fit easily on an iPad. No paper cuts.
- Travel benefit #2: You can't read said conference papers until you reach cruising altitude.
- Travel benefit #3: If someone emails the paper after you've left, or refers you to an article while you're at the conference, you can access it and read it while on the road.
- Travel benefit #4: Airport security? Keep it in your carry-on, baby. This ain't no laptop.
I'm sure I'm not using one-tenth of the iPad's capabilities. To take but one example, despite repeated efforts I can't seem to get my iTunes password to work, so my iPad is registered to my husband and I get all of his apps. If I want one, I have to ask him to get it. Even still, it's technology that's changed the way I work.
Ah, January. Here in Champaign, January for me means running on the indoor track here at the U of I (5 times around is a mile, can't beat that!). Yesterday, I was running and listening to This American Life on my iPod. I am never disappointed by TAL, but the epidsode I listened to yesterday beat even my high expectations. When I clicked on the app, I was a little hesitant because the title, "Mr. Daisey and the Apple Factory" didn't instantly suggest anything to me. I was quickly engrossed though by Mike Daisey, a comedian-actor, giving a 40-minute monologue on his trip to China to see where iPods and other Apple products are made.
Daisey has a two-hour one man show on the trip called "The Agony and the Ecstasy of Steve Jobs," returning to the stage in NY, but I had not heard about it until the condensed TAL podcast. In the monologue, Daisey confesses himself to be a true follower of the Apple religion and lover of all things Apple. Then, he was inspired to travel to Shenzhen, a city in China (bordering Hong Kong) where consumer electronics are manufactured for devices from the most popular companies. His first stop is a factory called Foxconn, which employs 400,000 people at that location. Daisey, risking arrest, interviews hundreds of workers and (as you can probably guess) hears as many stories of harsh working conditions, work-related illnesses and injuries, retaliation and general oppression by employers and the government. These stories are hard to hear, but I think it is only right that as an iPod/iMac owner, I have to hear them.
Now, I'm not anti-globalisation or anti-trade, and I'm from a right-to-work state. I understand that the alternative ways to make a living for some Foxconn workers may be even worse than working for Foxconn. I know that as horrible as it is to imagine 12, 13 and 14 year-olds working long hours in a factory doing repetitious work, there are worse fates for pre-teens in many developing countries. But none of that takes away from the fact that developed societies, who benefit from these ultra-cool technology devices, have all determined that these types of working conditions are intolerable and codified that determination into law. In a perfect world, China would experience the same legal transformation that occurred in Western countries during our industrialization to prohibit child labor and unsafe working conditions and provide workers legal remedies for pay disputes. That transformation seems a long way off for China, though.
Anyway, I have no development answers, but I do recommend the podcast or play. It is not preachy or ideological. It's even funny.
On Sunday, January 8th, the AALS Section on Financial Institutions and Consumer Financial Services will be holding a panel discussing featuring an impressive list of papers selected from an annual Call for Papers. The panel will take place from 9 am to 10:45 am in the Marriott Wardman Park in Maryland Suite B. It is part of a full weekend of programs by the section, including a Saturday lunch speech by Federal Reserve Governor Sarah Bloom Raskin.
In advance of that panel, let me showcase the papers one by one. (The Conglomerate is all about emphasizing the scholarly aspects of the AALS Annual Meeting.) Each of the four papers deals with a different set of foundational challenges to the regulation of financial institutions. The first paper I will preview looks at three interrelated problems:
- Which regulator should be responsible for consumer/investor protection; and
- How to allocate regulatory responsibility generally, when innovative financial services do not fit neatly within traditional regulatory silos.
In many ways, the first challenge – disintermediation -- is an echo (an extremely loud one) of an old problem. Starting over 30 years ago the cozy world of depository banking was rocked first by the rise of rival intermediaries – money market mutual funds, deeper bond markets and more sophisticated structured finance, as well as other elements of shadow banking.
Now scholars are looking at another competitive wave coming from radical disintermediation, in which the web facilitates direct connections between lenders and borrowers. This is the subject of the first paper, Regulating On-line Peer-to-Peer Lending in the Aftermath of Dodd-Frank, by Eric Chaffee (Univ. of Dayton School of Law) and Geoffrey C. Rapp (Univ. of Toledo College of Law). Eric will be presenting the paper, which is forthcoming in the Washington & Lee Law Review. Andrew Verstein (Yale Law School) will serve as discussant. Andrew has also written a fantastic paper on the same topic, The Misregulation of Person-to-Person Lending, which is forthcoming in the U.C. Davis Law Review.
Chaffee and Rapp outline the business model and current regulatory treatment of peer-to-peer lending, which includes platforms like Prosper Marketplace and Lending Club. They examine how securities laws govern the investment by lenders and banking law regulates the borrower end. The Dodd-Frank Act required the GAO to look at the regulation of p2p lending, and the GAO responded by formulating two alternatives. The first was continued regulation of investors on p2p sites by the SEC and regulation of borrowers by agencies responsible for consumer financial regulation (i.e. the CFPB). The second is assigning regulation to a unified consumer regulator.
In the end, Chaffee and Rapp argue that regulatory heterogeneity is not bad, but actually the way to go. They argue for an “organic” approach to regulating P2P lending, allowing different regulators to govern different aspects of the business. Here is their abstract:
The 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act called for a government study of the regulatory options for on-line Peer-to-Peer lending. On-line P2P sites, most notably for-profit sites Prosper.com and LendingClub.com, offer individual “investors” the chance to lend funds to individual “borrowers.” The sites promise lower interest rates for borrowers and high rates of return for investors. In addition to the media attention such sites have generated, they also raise significant regulatory concerns on both the state and federal level. The Government Accountability Office report produced in response to the Dodd-Frank Act failed to make a strong recommendation between two primary regulatory options – a multi-faceted regulatory approach in which different federal and state agencies would exercise authority over different aspects of on-line P2P lending, or a single-regulator approach, in which a single agency (most likely the new Consumer Financial Protection Bureau) would be given total regulatory control over on-line P2P lending. After discussing the origins of on-line P2P lending, its particular risks, and its place in the broader context of non-commercial lending, this paper argues in favor of a multi-agency regulatory approach for on-line P2P that mirrors the approach used to regulate traditional lending.
Verstein comes out the other way and argues against SEC regulation of P2P lending and for unified regulation of p2p lending by the CFPB. Here is his abstract:
Amid a financial crisis and credit crunch, retail investors are lending a billion dollars over the Internet, on an unsecured basis, to total strangers. Technological and financial innovation allows person-to-person (“P2P”) lending to connect lenders and borrowers in ways never before imagined. However, all is not well with P2P lending. The SEC threatens the entire industry by asserting jurisdiction with a fundamental misunderstanding of P2P lending. This Article illustrates how the SEC has transformed this industry, making P2P lending less safe and more costly than ever, threatening its very existence. The SEC’s misregulation of P2P lending provides an opportunity to theorize about regulation in a rapidly disintermediating world. The Article then proposes a preferable regulatory scheme designed to preserve and discipline P2P lending’s innovative mix of social finance, microlending, and disintermediation. This proposal consists of regulation by the new Consumer Financial Protection Bureau.
This should be a lively discussion and of interest to our securities law junkies. Disintermediation is of course a topic a challenge for securities regulation generally, as other platforms are linking equity investors and companies seeking capital. Usha has been blogging about Sharespost and friend of the Glom Joan Heminway is working away on disintermediation too, looking at “crowdfunding” from the securities regulation angle (See her working paper here, see also, among others, Pope )
Two days ago, I received my new Galaxy Nexus. Reviews of this great new phone are easy to find on the internet, so I won't attempt one here, but I will say that it is a Google user's dream phone. Goodbye, Droid. Hello, Ice Cream Sandwich!
I have been reading Steve Jobs by Walter Isaacson, and tonight I covered the chapters creation of the Macintosh. Like many others who are reading the book, I ended up on YouTube, searching for the iconic "1984" Super Bowl commercial ...
More interesting to me, however, was the video of Jobs at the Apple annual meeting two days after the Super Bowl. The memory in the Macintosh was only 128k (plus 64k of ROM) and the graphics are primitive by modern standards, but look at the frenzied reaction of the audience!
A few years ago I shared with Glom readers an exercise I use to expose law students to the concept of present value. Given the current state of affairs, I guess I should try and get a slot for this talk during Accepted Student’s Day. But whatever the true cost-benefit calculus of a legal education may be, one concept every lawyer should leave school equipped with is present value.
It’s simple for me. If you do not understand deep down in your soul how it is that a dollar today is worth more than a dollar tomorrow, you cannot intelligently take out a mortgage, plan for your retirement, settle a case or, yes, negotiate an earn out provision. The mistake law schools make is that we tend to teach present value in the context of talking about earn outs or debentures or other such esoterica. We should be talking about life's little NPVs from day one of orientation (or as I said above maybe even earlier).
So I just got an iPhone4! This is big news, particularly because I've catapulted from a clamshell, old-school phone (yes, all of you who'd send me charmingly conversational text messages only to receive in reply "OK," I was painstakingly pressing buttons repeatedly to come up with each letter of my response). Here I am, at long last, enjoying the brave new world of the the smartphone. Longtime readers, I know you are not shocked by my Luddititude.
I've been aware for some time that Apple automatically appends a "Sent from my iPhone" message to the end of emails. How do we feel about this? Is it a status symbol? A sign of slavish devotion to the Big Apple? A plea to excuse typos, along the lines of the old " dictated but not read" (which a partner I worked with joked meant, "dictated but not thought about")? A marker of apathy? Technological naivete?
Should I change it? Is this no big deal? What does it say about me? Give a late-adopter some guidance, here.