The answer is “yes” according to this MarketWatch article. Here’s a taste.

Forty-three percent of investors with a net worth of $5 million or more, not including a primary residence, say they prefer a guaranteed rate of return for the majority of their investments, according to a new report from Chicago-based Spectrem Group, a consulting firm. That percentage of investors compares with just 29% in 2003 and 38% in 2005 who said the same thing, according to the report “The Move Toward Investment Moderation.”

Federal Trade Commissioner Pamela Jones Harbour has sent the U.S. Supreme Court justices an “open letter” regarding the pending Leegin case. [HT: Danny Sokol.]

Leegin, as regular TOTM readers know, will test the continued vitality of Dr. Miles, the 1911 decision making it per se illegal for manufacturers and retailers to agree on minimum retail prices for the manufacturers’ products. I have previously argued (here and here) that such “vertical resale price maintenance,” or “VRPM”, should not be automatically illegal and that Dr. Miles should be overruled. Based on his upcoming eCCP presentation, I believe Josh agrees. He may, however, be reluctant to go head-to-head with a commissioner since he’s now a scholar-in-residence at the FTC.

I have no such qualms.

Putting aside any procedural impropriety here (Is it kosher for a commissioner to send an open letter to the Supreme Court regarding a pending appeal? I have no idea, but it seems fishy to me….), Commisioner Harbour’s letter is substantively off base. (more…)

This recent article in the NYT (log in required) caught my eye. It discusses the growing market for temporary financial services to companies. Since SOX this market has grown by 68% to $8.9 billion, and is expected to grow another 10% this year. The companies looking for temporary help include nonprofits, public corporations, and start-ups.

While the post-SOX boom suggests that public companies are the largest user of these services, the article also notes that start-ups have been renting CFOs for the past fifteen years. This practice makes a lot of sense from the entrepreneur’s perspective. Start-ups are short of cash and may be unable to keep a permanent finance person on staff. But when it comes time to solicit angel or venture capital funding, bringing in an expert can help entrepreneurs with financial projections in a business plan and during negotiations over valuation, all at an hourly rate. This hire-as-needed model works well for lawyers – why not for finance types? The article was quite rosy on the idea, but I wonder if there are any downsides? Perhaps liability concerns for the temp (the article mentions the possible need for a D&O policy)?

Thursday night I will be speaking at a dinner and discussion sponsored by the eSapience Center for Competition Policy (eCCP) on the pending Leegin decision and the application of per se rules to minimum RPM. Here is the eCCP announcement:

Presentations will be made by Prof. Robert Pitofsky, and Prof. Joshua Wright. Prof. Pitofsky is the Sheehy Professor of Antitrust & Trade Regulation Law at Georgetown University Law Center, and Of Counsel with Arnold & Porter LLP. Prof. Wright is is an Assistant Professor of Law at George Mason University School of Law, and has been recently appointed to the newly created position of Scholar in Residence in the Federal Trade Commission’s Bureau of Competition.

I will be presenting the view that per se rules should not be applied to minimum RPM opposite Professor Pitofsky who has long been the most prominent champion of the per se approach. It should be fun!

*I should note that Thom, Geoff, and I are Advisory Board members at eCCP.

Some blogging that may be of interest to TOTM readers:

• Andrew Gelman (for it) v. Tyler Cowen (against it) on the American Economic Association’s decision to add 4 new quarterly journals.
• Michael Giberson (Knowledge Problem) and David Fischer (Antitrust Review) on the Sirius-XM Merger, a story Keith has been covering here at TOTM.
• VC’s Todd Zywicki on the Supreme Court’s decision in Marrama v. Citizen Bank of Massachusetts (”the Court reached the right result, but turned what should have been an easy case into a much more difficult and close case than it should have been, and in so doing, wrote an unnecessarily confused opinion”).
• Larry Ribstein’s investiture ceremony address on markets, capitalism, Starbucks, hamsters, movies, and more (it is a very entertaining talk, check it out).  Congrats to Professor Ribstein, the new Mildred Van Voorhis Jones Chair.
• Starbucks’ Chairman Howard Schulz warns of “The Commoditization of the Starbucks Experience.”
• Robin Hanson on the backlash against evidence-based medicine.

Choice of entity is a standard topic in courses on small or start-up businesses. The usual materials cover the basic tax, liability, and governance issues relevant to the choice. These materials are fine for pointing students toward the LLC or S corporation forms for the typical small business, or “lifestyle” firm, as both forms enjoy limited liability and flow-through taxation. (Although my one quibble here is that insufficient attention is devoted to the ultimate choice between LLCs and S corps, where items such as the LLC self-employment tax can be relevant.) The general advice doesn’t hold, however, for start-ups seeking or potentially seeking venture capital.

In this paper, Vic Fleischer explains why start-ups are a different animal, and why they actually prefer C corps despite double taxation and the inability of shareholders to use significant corporate losses during the early years (think R&D expenses). The most interesting reason, to me, requires looking to the ultimate investors in venture capital funds. The VC funds are limited partnerships, so any gains/losses that flow through the start-up to the VC fund also flow through the VC fund to the fund’s limited partners. The majority of limited partners are tax-exempt entities such as pension funds, endowments, and foundations. These investors don’t care about flow-through losses, because they have no tax liability to offset. Also, they try to avoid flow-through gains, which are unrelated business taxable income (UBTI) that, because these entities are tax-exempt, can trigger an audit. Therefore, these investors prefer start-ups to be C corps, venture capitalists will aim to please these favored investors, and start-ups will aim to please the venture capitalists.

On another note, I think Vic’s article is instructive on the craft of writing. It’s tempting to find irrational reasons for start-ups to form C corps (we’ll never have losses!), and as Joseph Bankman documented in The Structure of Silicon Valley Start-Ups, 41 UCLA L Rev 1737 (1994), a “gambler’s mentality” probably does have something to do with it. But when sophisticated players like venture capitalists are involved, I tend to favor rational over irrational explanations for behavior. In fact, I’m taking this approach in a new paper to explain the puzzling behavior of angel investors (no draft yet, although blogged about at Conglomerate).

Since Josh’s academic life continues to be so riveting, I’m going to blog about it once again:

This time the big news is that Josh has accepted a visiting offer from the University of Texas School of Law during the 2008-2009 academic year (following the conclusion of his undoubtedly-brilliant and mercifully-brief (brilliant, in part, because it’s brief!) stint as the FTC’s first Scholar in Residence).

Congratulations again, Josh!

Jonathan Baker (American) has a very interesting paper on a very hot topic in antitrust nowadays: the role of antitrust regulation in innovation.  The title is ”Beyond Schumpeter vs. Arrow: How Antitrust Fosters Innovation.” Here is the abstract:

The relationship between competition and innovation is the subject of a familiar controversy in economics, between the Schumpeterian view that monopolies favor innovation and the opposite view, often associated with Kenneth Arrow, that competition favors innovation. Taking their cue from this debate, some commentators reserve judgment as to whether antitrust enforcement is good for innovation. Such misgivings are unnecessary. The modern economic learning about the connection between competition and innovation helps clarify the types of firm conduct and industry settings where antitrust interventions are most likely to foster innovation. Measured against this standard, contemporary competition policy holds up well. Today’s antitrust institutions support innovation by targeting types of industries and practices where antitrust enforcement would enhance research and development incentives the most. It is time to move beyond the “on-the-one-hand Schumpeter, on-the-other-hand Arrow” debate and embrace antitrust as essential for fostering innovation.

Baker argues that antitrust is good for innovation despite what are sometimes competing effects because antitrust intervention can target “settings and categories of behavior where enforcement can promote innovation.” In other words, antitrust enforcement can focus its efforts in industries where the “good effects” dominate, i.e. antitrust promotes product market competition and innovation without a substantial reduction in post-innovation product market competition that would undermine the ex ante incentive to innovate. This is a reasonable approximation of the argument I think, but those interested in antitrust and innovation should go read the paper.

I’ve been working through the “competition and innovation” literature myself recently for a project I’ve been working on covering similar ground by exploring the economic basis (both in theory and empirically) for antitrust intervention in markets where innovation is important.  I suspect that Professor Baker and I might disagree about the details concerning how our economic knowledge maps into antitrust policy here, but this is an excellent and thoughtful addition to an important literature.  I will look forward to blogging more about my project when I have more to say about it.

Justice Thomas’ opinion is available here.  The punchline: “The general theoretical similarities of monopoly and monopsony combined with the theoretical and practical similarities of predatory pricing and predatory bidding convince us that our two-pronged Brooke Group test should apply to predatory-bidding claims.”  Professor Sokol has a few additional comments at AntitrustProfBlog.

I teach at a relatively small school, which has its great advantages. One of those is that faculty get to teach a range of courses in their respective fields – in my case business law. But this can also present challenges. Sometimes non-“core” courses, such as my law and entrepreneurship course (which focuses on venture capital but also covers other issues relevant to start-ups), are taught on a rotating basis. Because upper-level students have only one chance to take the course, I don’t require prerequisites, although I strongly suggest business associations and the basic tax course as co-requisites. Inevitably, students come in with wide variations in their knowledge of corporate and tax law, not to mention the economics/IO literature. To mitigate the differences, I grade on the basis of an in-class presentation and short paper on a particular topic (on the theory that everyone can get up to speed on one topic). But my lectures do have to be accessible to all without boring the students with advanced training (or me!).

I’m interested to hear how other profs handle this problem.  I think the approach may depend on whether the course is of the seminar variety, with no exam, or a standard exam course.  So next year when I add securities regulation to the mix, for example, I will probably require business associations as a prerequisite unless students have some sort of advanced training that’s an adequate substitute.

Soledad O’Brien said a (sort of) bad word on American Morning this morning. I was watching when she said it. I didn’t notice the word, but it’s plain as day in the transcript below (omissions noted by ellipses): (more…)

Today’s report that Sirius and XM plan to merge vindicates the antitrust analysis offered here last June.

Regulators should analyze the merger from a broad “audio market” perspective that includes terrestrial radio. Considering the extensive non-satellite content available to listeners, and considering as well the efficiencies associated with the Sirius/XM combination, it is reasonable to conclude that consumers will benefit from the deal and that regulators should therefore allow it (after careful review, to be sure).

The question I’m left with is: how long will it take for GM/Ford to follow?

Thanks to everyone at TOTM for having me.  I’m a big fan of this blog, and look forward to visiting here for a short time.

I was intrigued by a recent article in the Wall Street Journal on venture debt, or the practice of lending to start-ups as opposed to the standard practice of investing for equity.  According to the article, debt made up 7% (or nearly $2 billion) of the money invested in venture-backed companies last year, up from 2% the year before.  The article also shows that venture debt was nearly $4 billion at the height of the venture capital market in 2000.

Venture debt is interesting — and puzzling.  Investments in start-ups are risky, plagued by extreme levels of uncertainty, information asymmetries, and agency costs.  A VC fund invests in a number of start-ups in the hopes that its portfolio will contain the next Google or eBay, to offset the inevitable duds.  VC-fund investors expect a better-than-market rate of return, and most profits come from the IPOs of a small number of highly successful start-ups (like Google and eBay).  The VC model works because of the potential for a huge upside.  Can venture debt work, when by definition it does not offer this huge upside?

Perhaps.  While the start-up is solvent, venture debt commands a high interest rate (double digits, according to the WSJ article).  The article also mentions that lenders get warrants, convertible into equity, which allows them to share (to some extent) in a huge upside.  Also, if the start-up liquidates, debt has first priority over the preferred stock of VCs.  Therefore, venture debt makes sense by offering some upside, although of a different makeup, and by limiting the downside.  But venture debt also presents problems.  First, the typical high-tech start-up must spend available cash on R&D and other growth activities, not interest payments.  Venture debt is unlikely to be the “patient capital” that start-ups need for long-term success.  Second, and perhaps more importantly, venture debt is likely to complicate a start-up’s chances with VCs.  VCs fund relatively few companies.  If a start-up comes with venture debt, I can’t imagine it’s very attractive to the VCs, whose money would go to pay off the debt during solvency, and who would now be second in liquidation preference during insolvency.  Unless the amount of venture debt is sufficient to eliminate the need for venture capital – and by current levels it is nowhere close – do start-ups carrying venture debt really have a chance for long-term success?  Venture debt may make sense for some companies, but in general it seems like a bad idea.

Darian Ibrahim will be guest blogging here for the next couple of weeks. Darian is an Associate Professor of Law at the University of Arizona Rogers College of Law where he teaches Business Organizations, Law & Entrepreneurship, Securities Regulation, and Contracts. He presented his latest paper, Fiduciary Duties, Individual or Collective Liability for Directors, and the Functioning of Corporate Boards, at the AALS Disney Panel. Welcome Darian!