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."