The JOBS Act: Opening Pandora's Box

Earlier this year, Congress voted overwhelmingly in favor of the brilliantly titled Jumpstart Our Business Startups Act of 2012, or JOBS Act -- a law that makes it easier for companies to commit fraud.

In a supposed effort to spur jobs growth, the act lowers the bar for IPOs, establishes a new market for so-called crowdfunding ventures, and reduces oversight of hedge funds and other private companies.

In this article series, which includes Ilan Moscovitz's testimony before the Senate Banking Committee, we examine some of the act's most troubling provisions from the individual investor's perspective, culminating in a letter of recommendations that we've submitted to the Securities and Exchange Commission. The letter describes our concerns and how we think the SEC should address them.

Dissecting the JOBS Act
The act does a lot of different things, but we wanted to focus on the three most vital areas for investors.

First, it exempts a wide swath of companies from key oversight measures for up to five years after coming public. Known as small "emerging growth companies," the definition includes any operation with less than $1 billion in annual revenue and $700 million (or less) in public float.

Just so we're all on the same page here, this definition of "small" encompasses the vast majority of companies coming public. For instance, of the 79 IPOs this year, a full 69 of them qualified for emerging growth company treatment. The 10 that didn't included only the largest industry giants, like Facebook (Nasdaq: FB  ) , Caesars Entertainment (Nasdaq: CZR  ) , Yelp (Nasdaq: YELP  ) , and Carlyle Group (Nasdaq: CG  ) .

As we discuss throughout this series, the act excuses emerging growth companies from independent accounting requirements, rolls back rules designed to prevent conflicts of interests among ostensibly independent Wall Street analysts, allows companies to confidentially submit their IPO paperwork prior to actually going public, and makes it easier for executives to mask exorbitant and usurious pay packages.

As Matt Taibbi of Rolling Stone puts it:

This is like formally eliminating steroid testing for the first five years of a baseball player's career. Yes, you can pretty much bet that you'll see a lot of home runs in the first few years. ... But you'd better be ready to stick a lot of asterisks in the record book.

Second, the act creates an entirely new market for raising capital: crowdfunding. Think of crowdfunding as a cross between social networking and the New York Stock Exchange. It's the aggregation of small amounts of capital from a large pool of investors, usually via an Internet portal such as kickstarter.com.

The benefits of this type of funding can't be denied. To date, donation and perk-based versions have already brought to life popular webcomics, online games, affordable 3-D printers, and customizable watches that connect to your smartphone via Bluetooth technology.

At the same time, however, transforming crowdfunding into a bona fide capital market is full of perils. As we state and expand upon in our letter to the SEC, "the opportunities for misuse and abuse are enormous due to the inherently speculative nature of crowdfunding businesses and weaker accounting scrutiny and corporate governance."

Finally, the act makes it easier for private companies to grow without registering and disclosing key information to the SEC. Companies can now have as many as 2,000 shareholders (previously the limit was 500).

And less innocuously, alternative investment vehicles like hedge funds can now broadly advertise their wares, echoing a move the SEC made unilaterally in 1992 and then subsequently reversed after realizing just how much fraud it unleashed.

Congress has spoken
It can't be denied that one of the U.S. economy's greatest competitive advantages is the functioning and integrity of our capital markets. As Ilan noted in his testimony before the Senate, the cost of capital for emerging growth companies here is a shocking 75% less than in China. The reason? Investors from around the world trust our markets more than theirs -- or most other countries, for that matter.

It's for both this reason and for the protection of individual investors that we've asked the SEC to protect individual investors against any unintended consequences of the JOBS Act by offering a robust response to its worst parts.

Let the SEC know how you feel about the JOBS Act by following this link. Simply tell them you're an individual investor and feel free to share your concerns or suggestions.

Click on the following link to read the next article in our series, "These JOBS Are Not for You."

 



Neither Ilan Moscovitz nor John Maxfield has a stake in any of the companies mentioned above. The Motley Fool owns shares of Facebook. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.


Read/Post Comments (24) | Recommend This Article (58)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On June 27, 2012, at 6:12 PM, PTGeezer wrote:

    It's $700 million in public float, not market cap. :-)

    The tenor of your article is spot-on. Good show.

  • Report this Comment On June 27, 2012, at 6:27 PM, jomaio wrote:

    Exempting "small" companies from significant oversight during their first rive years is ludicrous when the definition of small is less than a billion annual revenue and 700 million or less capital-ization. The exemption would be granted to all but the largest IPOs. The crowdfunding provision and the lack of a requirement of registering or disclosing of key information to the SEC provides the same type of opportunities as were provided in the bundling of risky mortgages and selling them to unsuspecting investors. We went through much of the same prior to the collapse of the economy.

  • Report this Comment On June 27, 2012, at 7:16 PM, lesailes wrote:

    The idea that promoters can produce a culture of integrity after 5 years by not encouraging it during the formative part of a companies growth is ludicrous. Company cultures do not adapted at will to the environment. The probability is that you will produce a a large number of shonky.

  • Report this Comment On June 27, 2012, at 7:34 PM, billr44 wrote:

    I don't like it when Yahoo Finance does political stories and I don't like it when the Motley Fool does it either.

    I don't care which side you are on, if you want to write about politics, be a political activist, then go to a political arena. Please.

  • Report this Comment On June 27, 2012, at 7:38 PM, JGBFool wrote:

    The name is so catchy, though. If you are against it, then your opponent will claim you hate JOBS. Democrats never did figure out this simple ploy. They would have named this exact bill something like the Incremental Commerce Limitations and Permutations bill, which is easy for opposing legislators to claim they oppose, since most voters have no idea about the content of most legislation, anyway.

  • Report this Comment On June 27, 2012, at 8:03 PM, JohnMaxfield37 wrote:

    PTGeezer -

    You're exactly right. Thanks for the catch.

    - John

  • Report this Comment On June 27, 2012, at 8:12 PM, truth4u wrote:

    Critical of shortcomings in oversight for Start -ups? That's great! Am assuming we can count on you to voice those same concerns when it comes time to reign in the Predators on Wall Street, when the issue of tighter controls comes up again. Assume this time you will throw your full support behind something much stronger than the Dodd - Franks Legislation, that, analysts say was a complete, "white-wash;" and lacked any real Teeth.

    The Comment made above, to stick with what you know - - investment advice - - and stop showing your bias'es - - and often-times ignorance, about what's going on in the Political Arena; would likely serve you well.

    When you attempt to do that; you clearly sound partial. But, hey, if Politics is your gig; give it up and go work for one of the Biased Media Outlets.

    Foolish too - - sometimes . . .

  • Report this Comment On June 27, 2012, at 9:00 PM, rocketman67 wrote:

    WOW.......I almost bit hook line and sinker in believing this story until at the end it was all about your trying to sell something!

  • Report this Comment On June 27, 2012, at 9:05 PM, JacksonInVA wrote:

    More evidence that US politicians are incompetent. To again establish effective governance, we must end political parties and the private financing of campaigns. Then we needto bring congress under the same laws through the same enforcement as the rest of us. Then we need to make GAO the fourth branch of government.

  • Report this Comment On June 27, 2012, at 11:10 PM, steveelcpo wrote:

    As a previous post alluded to, naming a bill the JOBS bill almost guarantees support since which Congressman or Senator is going to oppose JOBS? Especially if they don't know what's in it. Remember Nancy saying "we have to pass the bill to know what's in it"?

    While the article appears to outline everything that is wrong with the bill, is there anything that is good? Are some of the aspects that you attack here actually positive if seen from a slightly different perspective? For example, for years the lucky few who get into the first round of IPO's are nearly assured double digit returns in just a matter of days. Brokers have been widely accused of offering IPO's to a select few of influential customers they want to curry favor with and the poor schumck who has a $50 or $100K investment account could never hope to get into an IPO. So, one could argue that expanding the opportunity to invest in IPO's to the average guy could be seen as a positive as long as one does due diligence and has at least an idea of what they are investing in.

    And your claim about CEO's "masking exorbitant pay packages" could never possibly apply to already established companies!??

    I expect the Fool to give unbiased analysis, or at least present both sides of an issue, and don't see much of that in this article. In defense of the Fool, it is hard to find unbiased analysis anywhere and the first news media to actually do so is a place where I want to invest.

    If you really want to present both sides, how about a 9 part series on the Obama administration's policies??? Or a series on "why we're in the mess we're in"? Maybe I missed it but a series on Dodd-Frank would be interesting. Just remember to keep it unbiased.

  • Report this Comment On June 28, 2012, at 1:40 AM, utsaladyfool wrote:

    Right on!! Yet another example of anything the Government touches is screwed up!

    Utsaladyfool

  • Report this Comment On June 28, 2012, at 8:07 AM, thfp wrote:

    Another political Opinion article on a finance site that actually quotes "rolling stone". Please stop.

  • Report this Comment On June 28, 2012, at 8:19 AM, Marshalldedr wrote:

    Was this article political? That 's a stretch. If by political the article brings to light stretches and spinning by a government that is desperate and in total marketing mode by using catchy phrases, then I guess it is political. I see this information for what it is. Prudent warning for real fools and highlighting yet another foundation built upon sand artificially created by a bureaucracy that is willing to try just about anything.

  • Report this Comment On June 28, 2012, at 8:35 AM, StopPrintinMoney wrote:

    in order to promote the growth, the govt should step away. job acts are just that - political acts.

  • Report this Comment On June 28, 2012, at 9:01 AM, igsn wrote:

    As a co-founder of an "emerging growth company," IronGate Security Networks, I fully support the JOBS Act, and in particular what it means to companies like ours that are in the challenging stage of moving from "proof of concept" to "go to market." It's one thing to have a great solution for a tremendous market need, but many entrepreneurs and start-ups do not have the luxury of having a stockpile of cash to bring these solutions to life. With the JOBS Act, companies like ours can transition quickly from start-up to stand-out, which only benefits our investors, employees and ultimately our customers.

  • Report this Comment On June 28, 2012, at 9:03 AM, ziq wrote:

    @steveelcpo,

    "it is hard to find unbiased analysis anywhere and the first news media to actually do so is a place where I want to invest. "

    I would like to see more unbiased news sources as well, but I wouldn't invest in them to make money. Apparently such a thing is not profitable.

    Whatever the source, someone will always find it biased. Absolutely objective reporting or analysis is an ideal, not realizable in the real world. The best one can do is strive for it, setting aside personal prejudices as much as possible, at a level of integrity one can defend when people cry "bias".

    That being said, I did not find the article excessively partisan. The Fool has always come down in favor of both transparency and oversight. The article does not mention a particular politician or party (though it's not hard to guess which one is responsible), but merely speaks against reducing oversight, where it is not clear the benefits will outweigh the hazards. That the bill was passed in the name of creating jobs, a magic buzz phrases calculated to gain public support, should wave red flags.

  • Report this Comment On June 28, 2012, at 9:59 AM, ETFsRule wrote:

    "First, it exempts a wide swath of companies from key oversight measures for up to five years after coming public. Known as small "emerging growth companies," the definition includes any operation with less than $1 billion in annual revenue and $700 million (or less) in public float."

    I find this part of the article to be too vague. Which specific oversights would these companies be exempted from? And, which oversights would they not be exempted from?

  • Report this Comment On June 28, 2012, at 10:36 AM, JohnMaxfield37 wrote:

    ETFsRule -

    The exemptions in Title I of the Act cover a number of areas.

    They exempt EGCs from having independent auditors sign off on internal controls and prospectively rotating auditors -- I say "prospectively" because the rule is currently being ironed out by the PCAOB).

    They're exempt from Dodd Frank's "say on pay" provisions and the obligation to compare executive compensation to share price performance.

    EGCs can confidentially submit their registration paperwork to the SEC -- and that paperwork, even if it contains material errors, cannot be released either voluntarily by the SEC or involuntarily by, say, a subpoena.

    And it pulls back on the Global Research Analyst Settlement by allowing and investment bank's analysts to meet with prospective clients as a part of the underwriting courting process.

    These things are all discussed in later articles in the series.

    - John

  • Report this Comment On June 29, 2012, at 4:51 AM, TheCommodore wrote:

    I find the posts about this being a political piece and that the Motley Fool shouldn't be writing about it to both short-sighted and counterintuitive. First, just because it was written about am act passed by a political body does not make it a political article. Secondly, only a foolish (small 'f') investor would think they should not be writing about it. JOBS has the potential to affect the markets, and you ignore something like that at your own peril, but you don't ignore it at your clients' peril. For example, how is talking about the part of the act which the SEC already discovered the hard way doesn't work political? If pointing out that they are doing something that has already been shown to fail is political, then I'll tale political and informed over willful ignorance any day.

  • Report this Comment On June 29, 2012, at 11:04 AM, gblaze47 wrote:

    Sadly, since most people can't seem to understand that Government really do much for the economy except get out of the way.

  • Report this Comment On June 29, 2012, at 11:05 AM, gblaze47 wrote:

    tried to say,

    "Sadly, since most people can't seem to understand that Government can't really do much for the economy except get out of the way."

  • Report this Comment On June 29, 2012, at 1:02 PM, NYCDOG wrote:

    No, writing about about an act passed by a political body doesn't in itself constitute a political article but to discuss a certain jobs bill in a vacuum with nary a reference to the failed and misnamed "stimulus" packages strong-armed through by the White House in the previous congress IS. To further use political analysis from the rabidly partisan and intellectually bankrupt Rolling Stone (outside music) to buttress your argument is not only deeply political but absurd. How did they fail to consult Michael Moore and Sarah Jessica Parker while they were at it?

  • Report this Comment On June 29, 2012, at 1:03 PM, PrincipleOf3rds wrote:

    First, did we all forget that we don't have to partake in fraud. Only invest in what you know!

    Second, if I were a public company, VC, wall street broker, investment banker, etc....I would be shaking in my boots at the thought of decentralized crowd funded markets!!!

  • Report this Comment On June 29, 2012, at 7:36 PM, donvesco100 wrote:

    ..."we don't have to partake in fraud"? When this government makes law now, we have no choice but to participate in fraud, or be taxed for NOT participating, perhaps.

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