March 3, 2013
A Sneaky Way to Deregulate
By STEVEN RATTNER
SLAPPING a catchy acronym like the JOBS Act on a piece of legislation makes it more difficult for politicians to oppose it — and indeed that’s what happened with the Jumpstart Our Business Startups Act.
Unveiled a year ago by House Republican leaders, the proposal was rushed into law with large majorities just two months later; its provisions are gradually taking effect.
Its enticing acronym notwithstanding, the JOBS Act has little to do with employment; it’s a hodgepodge of provisions that together constitute the greatest loosening of securities regulation in modern history.
Most troublesome is the legalization of “crowd funding,” the ability of start-up companies to raise capital from small investors on the Internet. While such lightly regulated capital raising has existed for years, until now, “investors” could receive only trinkets and other items of small value, similar to the way public television raises funds. As soon as regulations required to implement the new rules are completed, people who invest money in start-ups through sites similar to Kickstarter will be able to receive a financial interest in the soliciting company, much like buying shares on the stock exchange. But the enterprises soliciting these funds will hardly be big corporations like Wal-Mart or Exxon; they will be small start-ups with no track records.
Picking winners among the many young companies seeking money is a tough business, even for the most sophisticated investors. Indeed, most professionally run venture funds lose money. For individuals, it’s pure folly. Buy a lottery ticket instead. Your chance of winning is likely to be higher.
Supporters say the amounts that can be lost will be limited. But an American earning $40,000 can still risk $2,000 per year.
Other major provisions of the JOBS Act are less terrifying but still problematic.
For the first time, private equity and hedge funds will be able to advertise — and thereby separate inexpert individuals from their savings. Putting money in these alternatives is yet another type of investing that Americans shouldn’t try at home. Until now, only a small percentage of Americans who qualified to invest this way (the law requires they have an income of $200,000 per year for an individual or a net worth of $1 million) did so. The possibility that advertising will lure more people to participate does no one any favors. Besides, these days, the most successful private equity and hedge funds can already raise all the capital they can efficiently manage without advertising.
So I’ll wager that most of this new advertising will come from firms that sophisticated institutional investors wouldn’t consider investing in. No wonder that the Securities and Exchange Commission, whose former chairwoman Mary Schapiro opposed the legislation, has been taking its time writing the regulations to implement these provisions.
At the least, the S.E.C. should insist on standardized disclosure for these funds, particularly of performance and fees, similar to what is required of mutual funds.
Already in effect is the section of the act that makes it easier for small companies (defined as less than $1 billion in annual revenues) to go public. For example, these companies no longer have to file as much financial information as their larger brethren. By some estimates, that could have benefited as many as 90 percent of recent I.P.O.’s, including such prominent names as LinkedIn, Zynga and Pandora Media.
More recently, companies as diverse as the Manchester United soccer team (founded in 1878) and dodgy Chinese businesses have taken advantage of the provisions.
To be sure, the Sarbanes-Oxley securities regulation law, passed in the wake of the dot-com meltdown and the Enron fraud, has overly burdened public companies and deterred initial public offerings.
But the JOBS Act’s update for “emerging growth companies” goes too far, particularly in relaxing the prohibition on research analysts to recommend stocks while their firms are underwriting them.
Although 25 Democratic senators and one independent, Bernie Sanders, opposed the legislation, it had broad support from business groups and from some research organizations like the Kauffman Foundation. The Obama administration signed on, convinced that the need to encourage start-up capital was great and that the legislation’s shortcomings could be fixed during the implementation phase.
The largest number of jobs likely to be created by the JOBS Act will be for lawyers needed to clean up the mess that it will create.