Debt-Free Path to Innovation: A New Exemption Class Over Corporate Regulation Might Be a Better Approach to Innovation Policy

Abstract

Corporate regulation was never designed or intended to promote new business growth, but rather to control existing and particularly large, mature businesses. For the most part, it does this successfully. However, current regulation fails to make a fundamental distinction between two very different types of firm failure. Among mature companies there is not implicit expectation of failure. When failure does occur it is usually a sign of mismanagement. For start-up firms, particularly in the technology sector, a high failure rate is not only normal, it is often desirable. Applying the current bankruptcy and insolvency framework to innovation firm start-ups - where failure is treated as an exception - makes no sense. Start-ups by their very nature have the expectation that they will most likely fail. To discover something truly new requires trial and error, a process that necessarily involves a succession of failures before success. How do we create a regulatory framework that has at its heart the mindset of `no fault failure'? The solution is to create a new regulatory class of company, a Not-for-Debt company (NfD), that reduces the regulatory burden of learning through failure by significantly reducing creditor risk.

Keywords: Innovation, Policy, Regulation, Companies, Credit Risk

JEL Classification: H3, O3, G38