The Impact of Internet Regulation on Early Stage Investment

Bottom Line: Global investors say legal ambiguity and regulatory barriers have negative impacts on the digital investment that is driving the global economy. Regulators need to make sure that they consider the regulatory impact on investment, new business formation, innovation, jobs and growth.

As new technologies for distributed digital content on the internet have emerged and the volume of available content has exploded, regulatory questions have arisen as to how digital content intermediaries (DCIs) should be obligated to maintain, process and police the data that they make available. Regulators have considered a variety of different rules that would obligate DCIs to take affirmative steps to ensure the legality of the content they distribute.

Such regulation could disrupt the critical role that angel investors and venture capitalists play in the innovation process by providing capital to new companies that otherwise would find it difficult to secure funding. It is this early-stage capital that fuels the innovation engine. 

Investors around the world find the legal environment has the most negative impact on their investing activities. A significant majority are concerned about investing in digital content intermediaries that are today confronted by ambiguity and uncertain outcomes, potentially large damages, and the risks of secondary liability if new anti-piracy regulations are introduced.

While lawmakers genuinely want to help in the fight against copyright infringement, this can have unintended consequences for investment -- a danger particularly important for content creators given that DCIs are now driving a significant and growing proportion of revenue for the creative industries.

According to a survey of global investors: 

• 89% of investors find the legal environment has a more negative impact on their investing than either a weak economy or an increased competitive environment.
• 88% say that regulatory ambiguity makes them uncomfortable investing in DCIs that offer user generated music and video.
• 85% agree or strongly agree that uncertain and potentially large damages put them off investing.
• 78% are deterred from investing in DCIs by the risk of secondary liability in IP infringement cases.

These findings demonstrate that there is a risk that potential regulations might greatly curtail or cut off capital from the early stage companies that are driving global innovation, GDP growth and new job formation.

Read the full report here.