With the Jumpstart Our Business Startups Act (the “JOBS Act”) awaiting President Obama’s signature tomorrow, the pundits are out in full force debating whether the new law will hurt investors.
As a personal finance writer whose job it is to help consumers steer clear of pitfalls, I find this appalling. But here comes the full disclosure: Careerwise I will benefit from the JOBS Act. with this law on the books, I will never be at a loss for cautionary tales about investors who got burned. so I figure that the JOBS Act has created jobs (no acronym here) for journalists.
The President hasn’t even signed the darned thing yet and already there’s been some terrific analysis. Andrew Ross Sorkin of the New York Times was spot on when he wrote that the new law, “intended to help start-ups raise capital and go public, but may also lead to many more money-losing, Groupon-like I.P.O.’s.” Since going public five months ago, Groupon has lost more than 40% of its share value, while the Nasdaq rose about 16%.
Red flags, which would have warned investors of Groupon’s questionable accounting gimmicks “might have been less evident” with the JOBS bill on the books, Sorkin writes. “the legislation, in the name of creating jobs, dismantles some of the most basic protections for the most susceptible investors apt to be drawn into get-rich-quick scams and too-good-to-be-true investment ‘opportunities.’”
For individual investors, the most troublesome part of the law is a section that allows what’s called “crowdfunding.” this refers to the fact that entrepreneurs can raise up to $1 million online from ordinary folks without telling them very much.
The Internet is already a hotbed for investment fraud. for example, in a recent case I covered here, the Securities and Exchange Commission alleges that hedge fund managers used social media sites like LinkedIn to solicit customers, representing that they could deliver pre-IPO shares of Facebook, Twitter, Zynga, Bloom Energy, Fisker, and Groupon. Turns out they didn’t have any such thing to offer.
So how did the JOBS Act–which is meant to reduce bureaucracy and make it easier for small businesses to find investors early–get by both houses of Congress? Steven M. Davidoff, a former corporate lawyer, draws upon the old analogy of the sausage factory. for example, he notes in an article for the New York Times, with a last-minute Senate amendment to the crowdfunding provision, meant to enhance fraud protection, “Congress made the provisions hard to use.”
“Crowdfunding companies will have to raise money through Internet platforms in small individual amounts, less than $2,000 for most Americans. If a company raises more than $500,000 it will have to prepare audited financials,” Davidoff writes. “this is a huge expense that will discourage most companies from resorting to crowdfunding for significant amounts of capital.”
Instead of creating a pilot program and giving the SEC the power to adapt crowdfunding rules to market conditions, legislators railroaded the law through “to give the illusion Congress was creating jobs,” Davidoff observes.
Henry Blodget, who favors the law, wrote on Business Insider that it’s not up to the SEC to save investors from their own bad decisions–just police fraud after they’ve been burned. Those SEC cases have been a great source of story ideas for me in the past. But I may just be getting warmed up.