Heard Off the Street: JOBS Act ambiguity won't boost workforce
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Democratic President Barack Obama's signature on the Jumpstart Our Business Startups -- or JOBS -- Act opens the spigots of finance, creating untold numbers of jobs and rampant prosperity. The bipartisan legislation frees the nation's businesses of cumbersome and costly disclosure requirements that are curbing their entrepreneurial genius, enabling them to more conveniently tap investors for the millions needed to fund the next Apple or Google.
If you're naive enough to believe that, you're probably naive enough to fall for one of the plethora of investment scams securities regulators warn the law will make possible -- all in the name of creating jobs.
"Election-year politics have blinded Congress and the White House to the unintended consequences of their actions, which, however well-intentioned, could open the floodgates to investment fraud," according to Jack E. Herstein, a Nebraska securities regulator and president of the North American Securities Administrators Association.
The group of state regulators called the law "an investor protection disaster waiting to happen." The Council of Institutional Investors and the Consumer Federation of America also have grave concerns about the measure.
The JOBS Act makes it easier for companies to sell securities and frees more of them from complying with Securities and Exchange Commission reporting and disclosure rules. Or, as the U.S. Chamber of Commerce put it, the act "is the first step to allow America's businesses and entrepreneurs to step up their game in a global economy."
Among other things, it exempts emerging growth companies with annual revenue of less than $1 billion from select financial disclosure and governance requirements for up to five years. (By way of comparison, Federated Investors had revenue of $895 million last year.)
Because of the new law, the kind of public debate Groupon had with the SEC in advance of its initial public offering last year over its accounting practices -- practices that were once again questioned after the online coupon provider restated its fourth quarter results on March 30 -- will now be conducted behind the scenes.
Emerging growth companies will file confidential IPO materials with the SEC and those filings will not be subject Freedom of Information Act requests, according to a bulletin that Hinshaw & Culbertson, a Chicago law firm, sent to clients last week. Once all the differences are ironed out, the IPO wannabe will release the registration statement that investors review before investing.
The law also enables crowd funding, where investments are pitched to a large number of small investors via the Internet. Companies will be able to raise up to $1 million annually. Limits will be placed on how much investors can purchase based on their annual income or net worth. Crowd funding offerings that meet those requirements won't be reviewed by state securities regulators.
That worries Pittsburgh attorney Steven D. Irwin, a Pennsylvania Securities commissioner. He called the crowd funding provisions "particularly troublesome."
"We're going to be limited to taking action after the damage is already done," Mr. Irwin said.
He believes looser disclosure requirements will undermine the confidence in securities markets that investors want before entrusting their money to entrepreneurs.
Penn State accounting professor J. Edward Ketz said the act weakens securities laws enacted to protect investors who were devastated by a wave of accounting scandals involving Enron and other companies. The reforms included requiring CEOs to certify there aren't any lies in their financial statements.
"We want to dismantle the government apparatus for checking these things? It's almost like a license to steal for five years," Mr. Ketz said. "I find it incredible that Democrats and Republicans are claiming this is going to produce a lot of jobs."
So does Lawrence J. Goldstein, president of Santa Monica Partners Asset Management, a Larchmont, N.Y., investment manager. Because the law frees more companies of SEC disclosure requirements, they "are going to have a lot less work for lawyers and accountants," he said. Although there are legitimate business reasons for "going dark" by not having to report to the SEC, investors should proceed with caution when that happens, he said.
"Right away, in big letters, that means 'buyers beware,' " Mr. Goldstein.
He said the JOBS Act should be called "the Expose Investors to Additional Risks Law."
To be sure, the SEC cannot protect investors from every scam. Some people are just hell-bent on losing money, and no regulator is going to detour their excursion to the casino. And many investors ignore the mind-numbing prose that companies routinely concoct and cast into the public domain.
Moreover, there are legitimate concerts about how difficult it is for startups to raise funds.
But many of those difficulties stem from investors getting burned in the past and from the aversion to risk that lingers nearly four years after the credit bubble collapsed. To think that less disclosure is going to reduce that aversion and produce a jobs bonanza strains the imagination.
First Published April 8, 2012 12:00 am