When it plays out, it looks nasty

I feel like using my hypothesis of collectively intelligent social structures in other fields than just energy and urbanisation, which I have been largely doing so far. This time, I want to make a case for individual freedom as both a factor and a manifestation of collective intelligence. There is a population of humans. Each human has m possible states of being. As soon as two humans interact, one m states of being in the first human interacts with the other m states of being in the other human. It is like an existential geometrical square: those two humans together have m*m = m2 collective states of being. Generally, n humans, with m possible states of being in each of them, can produce mn different states of being together. When n gets substantial, like 38 million people in my home country, Poland, you can hardly expect all of us 38 million Poles having the repertoire of freedom in our behavioural patterns. Some of us will have 3m actually happening states of being, some other will soar into 6m alternative ways of being in the world, whilst still some other others will modestly stick to 0,3m. In that large population, the standard m ways of existing will be an expected state, thus an arithmetical average or an expected interval around it.   

Collectively intelligent structures learn by experimenting with many alternative states of themselves. Up to a point, the more such alternative states, the more and better we can learn. There is probably a point where ‘the more’ becomes ‘too much to process’, and then, we face a fork on the road: either we simply ignore some alternative versions of ourselves and we truly learn just from those which we can cover inside our cognitive span, or we try to experiment with everything we can possibly be, and chaos develops. I understand freedom, at the collective level, as the flexibility in shifting between those different states of being. Organized, collective freedom is the ability to explore the sweet spot of transition between order and chaos, and the ability to experiment with as many alternative versions of ourselves as we possibly can. Those collectively defined alternative realities always follow the basic logic of mn. At the end of the day, there are as many versions of us being together as there are us, for one, namely the ‘n’ exponent, and as many as there are possible states of being in the average individual among n, and this is the ‘m’ base.

Degrees of freedom in the average member of society are the foundation of collectively intelligent learning. I guess this is a mathematical argument for individual freedom in legal and political systems. As I think about my whole hypothesis of collectively intelligent social structures, I inevitably ask the question which any social scientist needs to ask: what is the practical usefulness of all that stuff? Social sciences are applied sciences, at the end of the day. However abstract I go in my intellectual peregrinations, my findings and methods need to serve in real life, for designing policies, business strategies, business plans etc. The empirical method I have developed around that whole thing of collective intelligence opens on two practical applications. Firstly, it allows non-arbitrary testing of various empirical observables as actual social outcomes. In policies and business strategies, and, by the way, in the whole realm of social sciences, there is that curse of arbitrary orientations. ‘People strive to maximize profit’. ‘No, they want to optimize dynamic equilibriums in their social games’. ‘Well, maybe, but we can and should educate people towards social justice and environmentally rational behaviour’ etc. etc. All that chatter abounds in literature which deems itself ‘scientific’, and yet it is 100% metaphysics, with no scientific grounds at all. I think my method allows working around that metaphysical part and testing human populations for the actual outcomes they collectively, objectively pursue. Here comes an interesting question: are our goals collective or individual? The more I think about it, the more I am convinced they are collective. When I ask myself about my own goals, at least those which I phrase out explicitly in my mind, they are all sort of categorical rather than idiosyncratically my own. I pursue the types of goals which many other people pursue in their existence. I just hop on those specific wagons, with my own backpack.  

Secondly, my method allows exploring the issue of Black Swans, i.e. outlier events, which suddenly become key drivers of social change. The method I have developed allows simulating something like a social chain reaction. An unexpected triggering event happens, and it is unexpected because from our point of view it is random. That triggers a collection of events which we could otherwise fathom, but they have been in the refrigerator of history so far. Now, they are triggered into existence, and, at the same time, the overall cohesion of the social structure weakens, at least temporarily. New things start happening, and old things happen sort of more loosely and chaotically than they used to. I have discovered that depending on the exact orientation assigned a priori to the social structure I study, those social chain reactions can we essentially predictable, completely unpredictable, or, in still another case, we can calm them down exaggeratedly quickly, without really learning from them.

All in all, the method of using a simple neural network as social simulator, which I developed in connection with my hypothesis of collectively intelligent social structures, allows what I perceive as very empiricist a study of social change, much freer of metaphysics than many other methods. Of course, a bit of metaphysics is unavoidable. What we use to call ‘quantitative variables’ in social sciences are always the mathematics of something we think that happens, and we think in terms of our language and culture.

Ooops, pardon my manners, I have gone into philosophy again. Philosophy is nice, but when I stay in this realm longer than what is strictly necessary for feeling like an intellectual, I start feeling as too much of an intellectual and my apish side calls for more ground under my feet. I use this blog for providing a current account of my intellectual journey, and of the actual projects which I am working on. I hope that the paragraphs above are (provisionally) sufficient as regards the intellectual journey, and I can pass to debriefing on my projects.

One of the projects I start working on is a platform for debt-based crowdfunding. This is some sort of comeback to the interest I had in financial schemes for the implementation of small installations in renewable energies. For the less initiated readers, I am quickly going through the basics. You probably know that if your cousin asks you to invest in his or her business, you can do it, on the basis of a private contract of partnership, and, in most countries, you don’t even go to jail afterwards. This is the market of private equity. You can also lend money to your cousin, you can agree as for the exact terms of the loan, and this is financing through private debt. The opposite of private is public, and therefore we have public capital markets on the opposite end of the spectrum. Stock markets are the most visible ones, and sort of next to them are the markets of publicly traded debt, where you can buy and sell bonds of all kinds: corporate, municipal, and sovereign. 

Between the strictly private and the regulated public, a transitional zone, of many shades and colours, is to be found.  Crowdfunding, sometimes called ‘societal funding’ or ‘communitarian funding’ dwells in this zone, precisely. The basic difference between crowdfunding and private finance strictly spoken is the largely aleatory, social-media-type creation of relations between investors and entrepreneurs. Crowdfunding happens essentially via digital platforms, where entrepreneurs auction their ventures and try to attract whoever is interested in them. Those digital platforms in themselves are marketing engines, essentially. On the other hand, the basic difference between public financial markets and crowdfunding is that the latter does not really allow tradability in financial positions. When I invest my money through crowdfunding, it is much more of a long-term commitment than investment via stock market. Less liquidity in my financial assets means more exposure to long-term risks, and yet less exposure to short-term volatility in market value.

In my own big picture of social reality, I put the emergence of crowdfunding in the same phenomenological bag as I put cryptocurrencies, progressively increasing supply of money in relation to real output in the economy (thus decreasing velocity of money), and increasingly cash-furnished corporate balance sheets. As a civilisation, we are building up a growing base of financial liquidity, and that means we are facing a quickening pace of depreciation in technological assets, and thus we are in the middle of accelerated technological change. Now, a little word is due about the way I understand accelerated technological change. I have encountered quite well-articulated views that technological change is currently disappointingly slow as compared to what we need. Well, maybe, but in strictly spoken business terms, when a piece of technology which I purchased last year ages morally twice as fast as those which I purchased 5 years ago, because new generations of the same equipment pop up faster and faster, this is accelerated technological change, and, as a businessperson, I need to figure out a strategy to cope with that change.

Here, my own point of view of that phenomenon called ‘financialization’ differs significantly from a lot of other researchers. The mainstream doctrine says that increased financialization is a bad thing, it destabilizes the economic system, and it contributes to social inequalities. I think that financialization is the by-product of something else. It is an otherwise rational coping mechanism to smooth and amortize quick social change which, without financialization, could take very nasty forms, like global wars, massive disappearance of human settlements and much greater damage to natural environment than what we use to bitch and moan about today. Just imagine that somewhere in Europe, 5 million people in a post-industrial spot cannot afford to pay for electricity anymore and they start burning wood and coal in stoves instead. This is what could happen in the presence of quick technological change and in the absence of that horrible financialization.     

Crowdfunding is essentially attached to new ideas and new business structures. It is seed capital or early development capital. When I invest my money through crowdfunding, I am opening a long-term position in something essentially young, burgeoning and full of uncertainty. One hundred years ago, mustering capital for such a venture would take an entrepreneur years of patient contacts with potential investors. Now, it can take months or even weeks, and this is the tangible gain of time through the use of digital platforms.   

That introduction kept in mind, I get closer to the main thread of that project in crowdfunding, namely to the new regulations thereof, likely to enter into force in Poland this autumn, based on recent regulations of the European Union as a whole. I am passing in review the REGULATION (EU) 2020/1503 OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL of 7 October 2020 on European crowdfunding service providers for business, and amending Regulation (EU) 2017/1129 and Directive (EU) 2019/1937, to find at https://eur-lex.europa.eu/legal-content/PL/TXT/?uri=CELEX:32020R1503 . As I usually do, I start from the end, more specifically from Annex II, titled SOPHISTICATED INVESTORS FOR THE PURPOSE OF THIS REGULATION.

A sophisticated investor is an investor who possesses the awareness of the risks associated with investing in capital markets and adequate resources to undertake those risks without exposing itself to excessive financial consequences. Sophisticated investors may be categorised as such if they meet identification criteria, which, in turn, differ according to the legal personality of the entity. Legal persons (like a bunch of folks in a business partnership), are assumed to be sophisticated in their investments if they meet at least one of the following criteria: (a) own funds of at least EUR 100 000 (b) net turnover of at least EUR 2 000 000 (c) balance sheet of at least EUR 1 000 000.

On the other hand, natural persons can call themselves sophisticated investors when the meet at least two of the following criteria:

>> (a) personal gross income of at least EUR 60 000 per fiscal year, or a financial instrument portfolio, defined as including cash deposits and financial assets, that exceeds EUR 100 000;

>> (b) the investor works or has worked in the financial sector for at least one year in a professional position which requires knowledge of the transactions or services envisaged, or the investor has held an executive position for at least 12 months in a legal person considered as sophisticated investor;

>> (c) the investor has carried out transactions of a significant size on the capital markets at an average frequency of 10 per quarter, over the previous four quarters.

The whole distinction between ordinary investors and the sophisticated ones is in the degree of legal protection they are provided with. That distinction essentially taps into an older one, contained in the DIRECTIVE 2014/65/EU OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL of 15 May 2014 on markets in financial instruments and amending Directive 2002/92/EC and Directive 2011/61/EU (https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=celex%3A32014L0065 ). As it happens sometimes, protection turns out to be a limitation actually. Non-sophisticated investors are generally limited in the amounts of money they can invest, and the repertoire of financial instruments which they can invest in. If one wants not to be treated like a child, they have to make a special, written request to be treated as sophisticated investor, and whatever operator of financial platform is that request addressed to can accept or reject said request.    

The Polish prospective regulations on crowdfunding approach things from a different angle. By the way, they are just prospective regulations, and the only official version of that will which I could get my hands on is in Polish. For those who speak the beautiful language of my home country – distinctive, among others, by a record-level density of consonants in one word – I placed the current bill of this regulation in the archives of my blog, just here: https://discoversocialsciences.com/wp-content/uploads/2021/05/Projekt-crowdfunding-.docx . Polish regulators focus mostly on the concept of ‘key investment information sheet’, which I will allow myself to call KIIS in what follows, is present in the European regulations as well. The KIIS should warn prospective investors that the investing environment they have entered into entails risks that are covered neither by deposit guarantee schemes, nor by investor compensation schemes. The KIIS should reflect the specific features of lending-based and investment-based crowdfunding. To that end, specific and relevant indicators should be required. The KIIS should also take into account, where available, the specific features and risks associated with project owners, and should focus on material information about the project owners, the investors’ rights and fees, and the type of transferable securities, admitted instruments for crowdfunding purposes and loans offered. The KIIS should be drawn up by the project owners, because the project owners are in the best position to provide the information required to be included therein. However, since it is the crowdfunding service providers that are responsible for providing the KIIS to prospective investors, it is the crowd­funding service providers that should ensure that the KIIS is clear, correct and complete.

The specificity of the Polish regulations as regards the KIIS is largely in the addressees of that information. In the general European regulations, the KIIS is addressed to prospective and actual investors. In Polish regulations, it is strongly stressed that crowdfunding operators should communicate all their KIIS’s to the Financial Supervision Commission (PL: Komisja Nadzoru Finansowego, https://www.knf.gov.pl/en/ ), not later than 7 days before making the same KIIS available to prospective investors. On the other hand, the owner of the project subject to crowdfunding can publish the KIIS on their own platform only after the provider of crowdfunding does in on their own one. We have a sequence of KIISes. The first KIIS goes from the crowdfunding provider to the Financial Supervision Commission, which has at least 7 days to consider (what exactly?). The next KIIS goes from the crowdfunding provider to prospective investors, who also receive the last KIIS from the owner of the crowdfunded project in question.

In a general manner, those Polish regulations give a lot of discretionary prerogatives to the Financial Supervision Commission as regards crowdfunding providers. They can halt a crowdfunding project immediately, and for an essentially indefinite period of time, on the grounds of a simple suspicion. I don’t like it. Someone in charge with the Financial Supervision Commission is the first to know about a crowdfunded project, they can request any information about that project, they can halt the project whenever they want. That smells bad. That smells insider trading. That smells uncontrolled pressure on the owners of crowdfunded projects. Imagine: you start such a project, and then you have a phone call, I mean THE phone call. Someone tells you they know about your crowdfunding campaign, and they would willingly take 60% of your business for 50% of its book value. You refuse, and the next thing you know is your crowdfunding campaign being suspended for an unknown period of time. I know the scheme, I saw it play out, and when it plays out, it looks nasty, believe me. That means people close to the government taking over entire swaths of small business, and the kind of small business, which is particularly exposed to adverse actions, the emerging one.  

Leave a Reply