A few weeks ago, President Obama signed into law the Jumpstart Our Businesses Act aka JOBS Act. The legislation makes it the easiest that it has been in decades to raise capital. The JOBS Act is actually a collection of Acts:
The Capital Expansion Act allows banks to avoid registering with the Securities Exchange Commission (SEC) until they have assets of $10 BILLION and more than 2,000 investors.
The Reopening American Capital Markets to Emerging Growth Companies Act allows for any company with less than one billion in sales to go public with less regulatory oversight for five years.
The Small Company Capital Formation Act allows a company to raise $50 million before registering with the SEC.
The Access to Capital for Job Creators Act removes a SEC ban on the use of advertisements to attract investors.
The Entrepreneur Access to Credit Act allows anyone with cash to invest in their companies. In the past, you needed to be an investor with a large net worth or high income to participate.
Helping businesses to raise capital is good, right?
No one disagrees that current regulations made it virtually impossible for small start-ups to access the public markets for capital. Changes were badly needed. I sincerely doubt though that most people would consider banks with up to $10 billion in assets and businesses with up to $1 billion in revenues as start-ups in need of regulatory relief.
The problem with the JOBS Act is that it strips away many of the investor protections created over decades due to fraud and other misleading practices. Going forward, companies would not have to make sure that their accounting is done correctly. Internal checks against fraud would not start for many firms for the first five years of a public company’s life. Audits of financials or internal controls would not be necessary for many companies. A company could raise capital with a PowerPoint presentation with no protections on investors for misrepresentations, disclosures related to the past business failures of their executives, compensation of those executives and other information critical to an informed investment decision. Even worse, investment banks and their analysts could write misleading investor reports that they do not believe in order to win investment banking business with no threat of SEC enforcement action.
Another problem is that the Act removes an SEC restriction against “entrepreneurs” raising equity from “unsophisticated” investors. Up to $1,000,000 can be raised without ever filing financials. The Act also allows the use of advertisements in efforts to raise capital – a practice the SEC stopped in 1982 under the Reagan administration.
In California, only six members of Congress opposed this legislation – Representatives Baca, Bass, Becerra, Lee, Napolitano and Waxman. Representative Jack Reed of Rhode Island said that the JOBS Act, “is fundamentally flawed when it comes to protecting consumers and the middle class.”
The Act provides clear benefits to honest start-ups and small business trying to raise capital. This process is now infinitely easier. The Act will certainly create more jobs. The real worry of the Act is that it is expected to be the equivalent of the full employment act for fraudsters and scammers. Using 2010 as a reference point, there were 3,500 enforcement actions requiring the restitution of $14 billion to investors. With the passage of the JOBS Act, most believe that bad behavior will only increase – but now regulators will have a harder time fighting such activity given the deregulation of so much of the fundraising process.
Most telling relates to who supported and who opposed the Act. Pretend for a moment that you have to entrust your life savings to those in favor of the Act or against it. Your choice is: a) the Securities and Exchange Commission, the AARP, North American Securities Administrators Association, the Editors of Bloomberg, the business news services company, OR; b) Wall Street bankers, Boca Raton securities firms, The House of Representatives, The Senate and President Obama so long as he got $100,000,000,000 for another project.
