JOBS ACT: The Next Bubble

Charles Ponzi

In yet another example of the Democratic and Republican parties working together to screw the American people, the United States House of Representatives last week passed a set of bills formally referred to as the JOBS Act, but colloquially known to insiders as an enormous early holiday gift to entrepreneurs and Wall Street. The Senate passed the bill with minor modifications yesterday. Therefore, it heads back to the House and certainly shortly thereafter will find its way to the President, who has voiced his support for the measure.

Essentially, Democrats and Republicans alike tout the JOBS Act as addressing many of the problems that investors and start-ups have for years said plague the venture market–that they cannot easily raise capital from hundreds and thousands of small investors, and that financial disclosure requirements make it difficult for them to take the companies public. The Chamber of Commerce and several other business groups strongly support the measure, which should be an initial clue that the measure will intimately result in crap for the public, and more wealth for the powerful. In essence, small companies wish to be able to raise capital through a method called “crowdfunding.” It allows hundreds or thousands of investors to invest small amounts in a “promising startup” rather than pigeon holing the startup to only pitch their ideas to “angels” and large investors. Of course, this method is preached everywhere as opening the equity markets to the small investor, when essentially it only serves to separate them from their money when the startup goes belly-up.

The JOBS Act would also loosen regulatory requirements for smaller companies seeking to go public by creating a new classification called “emerging growth companies.” If a company has annual revenues of less than $1 billion—the lion’s share of all businesses—the financial statements required for an application to go public would be reduced and the companies would be exempt from having to hire an external auditor. It also provides for so-called “mini” public offerings for which companies raising $50 million or less. These companies would be permitted to avoid some of the financial disclosure requirements.

In other words, the investor and the SEC would have to rely upon the company’s word and its own accountants and statements as to the financial solvency of the company. No regulation would exist that would serve to verify any of the claims set forth in the reports. A company could essentially cook its books without any oversight. Ultimately, when the company folds or its fraud is exposed when its IPO draws near, the small investors would have little or no recourse as all of the company’s assets would likely have been exhausted, if it ever had any assets.

Only a tiny fraction of startup businesses in the United States are still in business 10 years after launch. Allowing these companies access to grandma’s equity is not going to change that. What it will do however, is make grandma poorer as part of this proposed ponzi scheme. In an effort to woo you away from your savings, emerging growth companies would also be able to solicit investments with incomplete information permitted by provisions exempting emerging companies from many of the regulations enacted to limit boiler-room activities. These provisions allow the company to use fancy heretofore-banned presentations and sales techniques in order to convince small investors to support their endeavor. A company could hire teams of pitchmen stationed in an office or at home whose only job is to contact potential investors and extract their capital.

Jeffrey Stibel, CEO of Dun and Bradstreet Credibility Corp recently said: “Under this bill, you can now go to my grandmother and say, ‘I want you to invest in a company,’ but the whole thing can be effectively a scam and you’ve just created the air of legitimacy to skirt the law.” Previously, you had to go to a qualified investor, who has enough sophistication to sniff out fraud.”

To be clear, the reason U.S. stocks today, and historically, trade higher in terms of profit to equity ratios than foreign securities is quite simple: our regulations provided confidence to worldwide investors that unsavory or illegal practices would be minimized. Our stringent reporting requirements also provided a level of clarity to would be investors of the financial solvency of any publically traded corporation.

This legislation, which has bi-partisan support, seeks to undo a century of securities reporting requirements in an effort to compete with foreign corporations. The legislation does so under the guise of job creation and small business “incentives.” The legislation is nothing more than a regulatory race to the bottom that will result in thousands of bankrupted investors and a more volatile and less trustworthy stock market.

Update March 27, 2012: Well, it passed through the House, without changes, so it is on to the President. Let the games begin.

Update March29, 2012: Ian Masters conducted an interview with Jeff Mahoney, the General Council of the investor watch dog group the Council of Institutional Investors. He assesses the damage that this de-regulation of Wall Street in the name of job creation will do to unsophisticated investors.  

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