My Crypto Lawyer Sec Speeches Cryptocurrency Green Lighting Capital Formation: Remarks at the SEC International Institute on Capital Formation

Welcome to the SEC’s International Institute on Capital Formation. My views are my own as a Commissioner and not necessarily those of the SEC or my fellow Commissioners.

I am delighted that during this week you are having the opportunity to hear from many of my colleagues about various aspects of capital formation. Capital formation is one of my favorite topics; if done well, it can alter the course of a nation. The prosperity of future generations requires the current investment of capital in worthwhile endeavors. Good regulation can foster healthy capital formation. A shared, sensible approach to regulating capital formation globally can help to bring the world together for the mutual benefit of people all over the world.

The best resource the world has—even in this artificial intelligence era—is the human mind. Some of your nations are overflowing with that resource as reflected in the low median age of your populations.[1] Through a combination of material (food, shelter, and clothing), emotional, and educational support, we must empower our young people to develop their minds so they can tackle humanity’s many challenges. We also need to fuel their problem-solving capabilities and creativity by facilitating their access to the financial resources they need to experiment and ultimately to commercialize their ideas.

Some nations entrust to the government the important task of finding and funding ingenuity. After all, if getting capital into the right hands to empower bright minds is so important for human prosperity, shouldn’t the government manage the process? Certainly not! Governmental efforts to allocate capital tend to inhibit, rather than encourage, human flourishing. First, governments are too slow and ponderous to be able to shift capital flows in response to changing technology and societal needs. Second, when the government controls the funding spigot, political and bureaucratic connections tend to overshadow merit in driving capital. Third and relatedly, companies and entrepreneurs start to pay more attention to what government—which will determine their funding fate—wants than to what their actual and potential customers might want. Government ends up driving decisions about what problems to work on and which solutions to pursue. Fourth, government decision-makers—generally isolated from innovators and insulated from the consequences of bad decisions—tend not to be good at predicting what problems will need to be solved and how they should be solved. For all these reasons, capital allocated directly by government or indirectly by government nudges often does not go to the highest and best use. Misallocated capital prevents the economy from growing as rapidly as it otherwise would and prevents societal problems from being solved as quickly as they should be.

The task of allocating capital is simply too important for government or any other single entity to manage. Here is where private capital markets of the sort the SEC regulates come in. By bringing together a huge, dispersed, heterogeneous, self-motivated set of capital providers and an ever-changing set of companies in need of capital, private capital markets facilitate testing by many independent minds of different proposals for using capital. Does the system work perfectly? No, but the more participants and the wider the diversity of perspectives offering and competing for capital in the private markets, the more effective the markets will be at finding and funding solutions to human problems. The multiplicity of voices and viewpoints in the private markets means that capital allocation decisions are constantly being tested. The ability of anyone—regardless of her familial, political, or social connections—to come to those markets and make a pitch for funding is another strength of a market-driven economy. Good regulation encourages broad participation by funders and by companies seeking funding. So rather than making decisions about how capital should be allocated, governments should create an environment conducive to optimal private decision-making.

My hope is that this Institute will prompt robust thought and discussion about how to regulate well. What types of rules give investors the confidence to put their money into enterprises run by talented strangers? What types of rules ensure that a person who has a good plan for putting capital to work can find that capital even if she does not have wealthy or politically connected friends? How can a regulator administer and enforce rules in a manner that is not arbitrary or overbearing but ensures that rules are taken seriously?

The goal is a ruleset that works for both investors with capital and entrepreneurs and growing companies in need of capital. In the infancy of the Securities Act of 1933, which governs the issuance of securities, an official of the predecessor entity to the SEC explained:

The Securities Act is not predicated upon the theory that the interests of investors are in conflict with the interests of the issuers. On the contrary, it embodies a recognition of the fact that the investor and the corporation are mutually dependent. Neither can continue to prosper at the expense of the other.[2]

Well-functioning capital markets enable entrepreneurs to focus on finding solutions to society’s problems and enable investors to share in the successful entrepreneur’s returns.

I was originally scheduled to address this conference on November 20^th of last year, but we had a government shutdown—another reason that markets, which stay open, are better capital allocators than governments. November 20^th was meaningful because on the same date in 1923 one of my favorite entrepreneurs, Garrett Morgan, who lived and worked in Cleveland, Ohio, patented a new traffic light.[3] The invention was Morgan’s solution to preventing collisions like one that he had witnessed. In contrast to the old lights that switched from stop to go with no transition period, Morgan’s “T-shaped pole unit . . . featured three positions: Stop, Go, and an all-directional stop position.”[4] Morgan installed the first of those traffic lights a few miles from where I attended high school.[5] Another of his inventions—the Morgan National Safety Hood—protected people battling fires from breathing noxious fumes.[6] He was able to use the hood himself in a harrowing rescue effort during a tunnel fire under Lake Erie in 1916.[7] Morgan—even in the face of obstacles including prejudice from the very people whom he sought to help—was a serial inventor: someone who, in the words of his granddaughter, “couldn’t help himself when he saw a problem. He had a humanitarian spirit that needed to help.”[8]

A century later, another Cleveland entrepreneur, Gary Wnek, is carrying on the Morgan tradition of serial innovation. He has developed a material to absorb shocks when people fall and, like Morgan, a fire-protective technology—Wnek’s invention is a flame-retardant coating for metals and plastics.[9] As Wnek puts it, “It’s a life skill to think about a need . . . [and] to evaluate how well it is being met and propose a solution.”[10]

Identifying needs and solutions is the innovator’s spontaneous response to life’s challenges. Consider Jim Moylan, who developed the now ubiquitous dashboard arrow pointing to the side of the car with the gas tank after an uncomfortable wrong guess on a borrowed car at a gas station during a rain storm.[11] Marie Van Brittan Brown, troubled by increasing crime rates in her neighborhood, patented with her husband an early and sophisticated forerunner of the modern home security system in the 1960s.[12] Author Lorraine Marchand identified Brown’s “innovation mindset”: “She observed a significant need—in her case, that basic need of personal safety for herself and her family—and was motivated to find a solution.”[13] More recently, Dr. Elizabeth Clayborne, developed a device to stop nosebleeds after seeing so many patients coming into the emergency room suffering from them and, in her words, she “couldn’t stop thinking about it.”[14] To raise money to bring her patented device to market, she used a whole range of funding mechanisms: a business accelerator, angel investors, friends, family, venture capital funds, and crowdfunding.[15] Andrew Smith Hallidie, who died on this date in 1900, iterated on the metal wire his father had developed to improve mining operations, build suspension bridges, and replace overtaxed horses in San Francisco with the cable cars that still climb the city’s hills.[16] In addition to facing many engineering challenges of building a cable car, Hallidie struggled to find financial backers; in the words of one author, “A less determined man would have given up in despair.”[17]

Innovators like Morgan, Wnek, Moylan, Brown, Clayborne, and Hallidie should inspire capital markets regulators to facilitate effective capital formation. Private citizens observing problems around them and setting about to solve them without any grand government plan improve our societies and our economies. Human ingenuity matters, but so does the money, and the way we regulate the capital markets affects whether funding is available. If we do our jobs well, private markets will support these innovators as they identify problems, solve them, and bring their solutions to market. Regulating to facilitate the flow of capital to people who cannot stop themselves from helping others is a noble pursuit. It requires great care and considerable restraint: our job is not to do the matchmaking, but to create a regulatory environment conducive to money and ideas meeting. I look forward to working with all of you in this room in that delicate and important effort. Let us collaborate to ensure that our capital markets serve as a mechanism for empowering our citizens to develop their talents and to use them to serve humanity.