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Comment by nickpinkston | Hacker News Reader

If the CFTC does this, I hope they limit it to investments / valuations of $1B or more, as seed-stage companies shouldn't have to pay for an audit, etc.

This is what happened with Sarbanes Oxley where they overregulated the IPO process and caused the companies to stay private (and uninspected) for longer as well as removing the post-IPO growth upside from retail investors [1].

This is not to mention the recent SPAC craze being a way to get around this as well, which ended up with the median SPAC losing 70% of its value, while the S&P lost roughly 1/4 of that over the same period. [2]

There's a sweet spot for this kind of regulation, and overly "get tough" never works more than sensible restrictions where the risk is highest.

[1] https://en.wikipedia.org/wiki/Sarbanes%E2%80%93Oxley_Act#Cri...

[2] https://www.fa-mag.com/news/spac-euphoria-turns-into-painful...

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SOX is, IMHO, one of the most reasonable regulations people came up with in the last decades. There seems to be quite some push back against some of the SOX rules, especially when it comes to internal controls, and especially coming from the start-up community.

I think that it's mostly reasonable too, but there's a balance in regulation pushing the bad behavior to less regulated places and stifling what you're trying to encourage.

One example of this in the Bay Area was the Ghost Ship Fire [1] where they were forced to live off the grid because of over regulation, and then dying in a fire that some of that regulation was trying to prevent.

It's a classic problem. Laws have enforcement costs and knock-on effects.

https://en.wikipedia.org/wiki/Ghost_Ship_warehouse_fire

I agree we need to think hard about tradeoffs of regulation and adjust when the pendulum swings too far in one direction. But I think you can come up with a better example of downsides of overregulation than the Ghost Ship Fire.

To say that people were "forced" to live there due to overregulation is quite a stretch I think. I've known a few creative people in the bay area who lived in similar situations and they all were making an active choice to live in communal housing illegally converted from industrial use. They found it creatively energizing.

Yea, a lot of my friends live in the same housing and for the same reasons, but I find many of them move out once they make enough money for typical housing.

A better Bay Area example if housing regulations stopping all growth and leading to all sorts of problems, but that's well covered.

It's really weird the way people argue how disastrous regulations are when their are clear examples of them being fine.

- California bans non-competes and it is essentially the fastest growing economy in the western world. But if you read WSJ banning non-competes is a disaster.

- SOX is supposedly a disaster, but when SPACSs bypass that process they are almost universally terrible. Also, the stock market and the VC business have both done great under SOX.

I think we don't realize how good the existing US regulatory framework is. If we try to improve it we should have a strong status quo bias.

> - California bans non-competes and it is essentially the fastest growing economy in the western world.

Source? From cursory Googling, it doesn't even seem to crack the top 10 US states, let alone Western world economies...

https://www.usnews.com/news/best-states/rankings/economy/gro...

Maybe not in percent but in added billions $ of gdp or gdp per capita. A large shell getting larger instead of a tiny one doubling.

Just a shot in the dark though.

On your own link it's 6th in terms of GDP growth. The other 2 are growth of young population and net migration where California is much more behind.

Your link doesn't exactly mean what you think --- they're giving a combination of economic growth and population growth. When looking at just the GDP growth, your link suggests that they are the 6th fastest growing US state economy. As a sibling commentator noted, this is growth is on top already being the largest state economy. (Texas had the 2nd largest GDP percentage increase from 2020 to 2021. Texas grew 2% faster than California, for an economy only 2/3 the size. Raw data [which the usnews article cited] here https://www.bea.gov/itable/regional-gdp-and-personal-income )

Not too long ago there was news that CA is about to pass Germany to become the 4th largest economy in the world. (CA press release here: https://www.gov.ca.gov/2022/10/24/icymi-california-poised-to... original article by Bloomberg)

You make a really good point, I should have cited a source. Let's compare California with the top state on that list.

https://www.statista.com/statistics/187834/gdp-of-the-us-fed...

https://www.statista.com/statistics/187861/gdp-of-the-us-fed...

What's kind of a joke about that is that between 2020-2021 California added an Idaho.

Also, to undermine my point, Texas seems to have grown at almost exactly the same rate (80% increase in 20 years): https://www.statista.com/statistics/188132/gdp-of-the-us-fed...

Compare this to an excellent first world economy, Germany. I think all Europe and Japan is worse. South Korea is probably much better.

https://data.worldbank.org/indicator/NY.GDP.MKTP.CD?end=2021...

So I think you could say California only grew at the pace of the fastest states in the US in the last twenty years (all with non-competes, which was my point) but the overall amount of growth was by far the most. The point is having no non-competes didn't seem to destroy it.

And here's the propaganda version -- I think being skeptical of this stuff is a good idea. https://www.gov.ca.gov/2022/10/24/icymi-california-poised-to...

I was being too flip and you were right to point this out.

lol what just happened here?

Parent: This specific regulation causes unwarranted problems.

You: Wrong, because there exist regulations that are good and wrongfully impugned. <top reply>

Me: ???

Anecdotally, companies in bad shape use SOX as an excuse for a lot of their bad behavior.

I worked at an ad tech which decided engineers should not have access to revenue data. Nor should they have access to click data or other relevant data on how customers were doing.

Needless to say, if you are a transactional business who makes money when people perform an action - this is critical information to know. The company eventually lost focused and failed to IPO.

While all of this was done in the name of SOX. I don’t believe SOX required any of it.

> SOX is, IMHO, one of the most reasonable regulations people came up with in the last decades.

SOX is a reasonable regulation, but there should have been a useful lower limit below which it doesn't apply.

When I was treasurer of a non-profit, I made us carry SOX insurance (along with some other insurances which were by far our biggest annual expenditures). All this was silly given that we had about $2K of dues every year and less than $10K in savings. Consequently, we couldn't possibly have paid for the legal fees required if we got called on SOX compliance.

A limit somewhere around $1M in revenue/assets would probably be useful for SOX compliance dropout.

I don't think they have a case if they are arguing they didn't audit. VCs don't audit all the time. You will note they said "conflict of interest."

A conflict of interest would be if they invested $x and then got early access to y tokens. The announcement of their investment suddenly makes y tokens more valuable. You could even imagine the tokens could be sold for more than the investment. In that case, what incentive does the VC have to audit? Also, that should be illegal if it isn't.

Don't worry about the cost of audits. I do think if you took tokens from a VC investment and sold them you may have done something illegal.

> as seed-stage companies shouldn't have to pay for an audit

According to the new CEO, FTX had no board and lacked basic due diligence.

That doesn't seem too onerous for seed-stage companies once they have taken external funding to have in place.

Most seed funds (sub-$2M checks) have to make a large number of investments (like 15 per partner every 2-3 years) to make the fund economics work. Sitting on as many boards would be impossible / ineffective.

The situation is different when you hit SeriesA, where partners generally do up to 3x investments per year. This results in a more manageable board load.

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