UPDATE: Unfortunately the JOBS Act passed the Senate, albiet with important amendments to the Crowdfunding section that added in important disclosures, and then the amended version passed the House. It awaits Obama’s signature. I am updating this post to reflect the problems that still remain with this bill, but to also explain the problems that were fixed by the Senate amendment.
At a time when it’s is clear that Americans deeply want want more accountability, more justice, and more financial regulation, Congress is quickly and sneakily paving the way for less accountability, less financial records, and more potentials for investors to be completely exploited.
They are doing so with a new bill that flew through the House with bipartisan support and is set to his the Senate this Tuesday. It sounds great: the J.O.B.S Act (Jumpstart Our Business Startups). Except it’s not great, it’s absolutely egregious. It’s probably the worst roll-back of investor protections in decades. It risks putting us back into the wild west environment that led to the 1929 crash.
Worse still, they’re couching it in this JOBS language when really it’s about financial deregulation. And at a time when anti-bank, anti-fraud sentiment is so high, and people are talking about conflicts of interest (see: Greg Smith’s recent op-ed on why he left Goldman Sachs), here we have Congress passing a bill through the house with flying colors that will create the potential for more fraud, more conflicts of interest, and more scams.
So what is so bad about the JOBS Act?
- The bill is touted for helping startups, but if you actually read it, it defines a new class of company called an “Emerging Growth Company,” which is defined as a company with up to $1 billion in gross revenues per year. It proceeds to undo reporting and audit requirements for these new class of companies, which I’ll detail next.
- For five years after an IPO, Emerging Growth Companies (EGCs) and not required to submit to Sarbanes Oxley internal control certifications–which were controls put in place post-Enron to put the CEO on the hook for accounting fraud. With the JOBS Act, these EGCs are not required to run audits to prove you’re not cooking the books for 5 years following the IPO.
- The approach to IPOs makes U.S. markets less transparent than Hong Kong. It will lower the required disclosure of core financial information to two years for these Emerging Growth Companies. Three years of financial statements have been required of all U.S. public companies for over 70 years.
- An Emerging Growth Company does not have to be a new company. A private equity firm could take a public company private, and as long as they had less than $1 billion in revenues, they’d qualify for treatment as an EGC. The Private Equity firm can now flip the company (i.e. sell it to another investor or facilitate a merger) with only two years of financial disclosures.
- It rolls back the wall between the investment bank and the research analysts. It used to be that if you were an investment bank underwriting a company’s IPO, you couldn’t create research touting the stock–that’d be a conflict of interest. With the JOBS Act, Emerging Growth Companies are exempt from this rule. Goldman Sachs can take a company public, and provide research to the market on why you should buy the stock, too.
- Currently, Regulation D prevents solicitation or advertising for what’s called a “private placement.” Hedge Funds, for example, cannot advertise. Now, that rule is gone. Solicitation is ok, as long as the only people who buy in to your hedge fund or private placement are “accredited investors” (i.e. have a net worth of $1 million or more). Accredited investors isn’t a new thing. What’s new is that the JOBS Act will now allow Hedge Funds and private placements to advertise. So, we could see things like investment banks posting billboards by senior citizen homes and cold calling seniors to try and get them to pump “private” investments.
- There is no SEC registration is required for websites engaged in crowdfunding. In fact, companies can raise up to $1 million while providing no financial information at all to potential investors. This is nothing more than a recipe for fraudulent activity. UPDATE: The Senate thoughtfully amended the Crowdfunding provisions, and now a number of important disclosures and SEC registrations are present
- And to top it off, investors can bet up to $10,000 (or 10% of their annual income, whichever is less) on a given company. There is no aggregate cap on investments, so an investor could in theory repeat this bet 100 times over across 100 different companies. UPDATE: This was also addressed in the Senate Amendment, and now individuals cannot invest more than $1 million in aggregate.
- There is also no prevention of, nor disclosure required for, a company hiring people to promote the stock. UPDATE: The Senate also fixed this with the amendment, requiring that if someone provides “promotional communication” and is paid to do it, they must “clearly discloses the receipt, past or prospective, of such compensation”
Sound bad to you? It should. This is being hyper-aggressively pushed as a bi-partisan jobs effort, but this is really a boon to Wall Street, Venture Capitalists eager for an easy exit on their investments, and an invitation to re-inflate the dot com bubble and bring back the Boiler Rooms.
If you care about investor protections, preventing fraud, you should contact your Senator as soon as possible and urge them to throw out the JOBS Act. There is an amendment, the INVEST Act, that builds investor protections into the bill, but the best thing to do would be to throw this bill out all together.
You can send a form letter here or here, but I urge you first thing on Monday to also call your Senator’s Office. You can simply call the Capitol Switchboard and ask to be connected to your Senator’s Office: (202) 224-3121.
I think they are trying to fast-track this before the public can decipher what it’s truly about. I heard they may vote in the Senate on Tuesday. I find it truly alarming. It seems the Obama administration and Congress want a quick win that is bipartisan and has “jobs” in the title, but they are doing so with this sneaky piece of deregulation that will increase conflicts of interest, increase potential for fraud, and help all the wrong people.
Please note that this, and all content on my blog, represents only my personal view, not the view of any of the working groups I participate in at Occupy Wall Street.