UPDATE: The Senate, on a 73-26 vote, passed the bill, with a minor amendment (some slight restrictions on crowd-funding), which means it’s heading back to the House.
If you read our interview with Bill Black yesterday (see immediately below), you may have some idea why the JOBS Act is bad for jobs, and bad for American business. What has been billed so far as merely a mechanism for blossoming start-ups to raise more capital more quickly, the Jumpstart Our Business Startups Act is actually a way for CEOs to make it more difficult for investors, regulators, and outside auditors to see the inner-workings of their companies.
And it won’t just apply to tiny start-ups either. Kathleen Smith, chairwoman of Renaissance Capital, told a Senate Banking Committee that “over 90 percent of the companies going public” would fall under this bill, having revenues under $1 billion annually. Lynn Turner, at that same hearing, testified that “98 percent of all IPOs since 1970″ would have qualified as what the JOBS act now identifies as “emerging growth companies.”
So what does the bill (really, “six discrete bills, all tied up with a bow”) do? First, is raises the number of shareholders a company can possess before it is forced to go public, from a 500-shareholder limit to 1,000. The bill allows companies to “crowd-fund,” essentially raising money from large pools of small investors, and creates a new category of firms called “emerging growth companies” which are exempted from many of the regulatory hurdles and fee structures implemented by the Securities and Exchange Commission. Most startlingly, the JOBS Act permits companies to raise up to $50 million in shares sales before they have to register with the SEC, ten times the previous level of the last two decades.
Former IMF chief economist Simon Johnson argued a few days ago that:
…you will be ripped off more. Knowing this, any smart investor will want to be better compensated for investing in a particular firm – this raises, not lowers, the cost of capital. The effect on job creation is likely to be negative, not positive.
Johnson also picks apart the seemingly benign “crowd-funding” allowance:
Perhaps the worst parts of the bill are those provisions that would allow “crowd-financing” exempt from the usual Securities and Exchange Commission disclosure requirements. A new venture could raise up to $1-2 million through internet solicitations, as long as no investor puts in more than $10,000. The level of disclosure would be minimal and there would be no real penalties for outright lying. There would also be no effective oversight of such stock promotion – returning us precisely to the situation that prevailed in the 1920s.
If the Act makes it through the Senate today, there’s a fair chance that Obama will lend his signature. If so, regulatory regimes will take another substantial hit: Large corporate creations will have even more opportunity to commit fraud with nearly-total legal immunity, and the seeds will be sown for another massive financial bubble. This is indeed, as Bill Black stated, a “catastrophe.”