In an opinion piece run by the New York Times DealBook, an argument is made that the JOBS Act recently passed by Congress might jeopardize the safety net for investors. The legislation is on the way to President Obama’s desk to be signed later this week.
Andrew Ross Sorkin argues the Act is a “well-intentioned bill” that is designed to support small businesses by making it easier for them to find investors by lowering some of the bureaucratic barriers to raising capital. The bill also supports “crowdfunding” which is a means for raising capital (capped at $1 million) on the web with minimal financial disclosure.
Should the recent Groupon IPO debacle serve as a cautionary tale? Initial investors in that play have apparently lost about 41% of their investment. The company has faced “nagging questions about accounting irregularities and continued losses.” Last week, they were forced to restate their quarterly earnings because of problematic accounting practices.
Meanwhile the company’s co-founder, Eric Lefkofsky, had publicly declared that “Groupon is going to be wildly profitable.” Funny, but this is a violation of SEC rules in connection with initial public offerings. The securities watchdog made the company amend its filings, which effectively cut Groupon’s revenue by 50%. More importantly, the changes “raised questions” about the company’s internal controls.
One more fun thing tucked into the Jobs Act is that it allows new companies to have private meetings with the SEC about planned disclosures. And these meetings do not need to be made public until 21 days before an IPO is pitched to the market.
All of this is counter-intuitive–it goes against the need for transparency in the investment markets. It’s also a recipe for fraud, which as we now know is the key ingredient that triggered the financial tsunami of 2008.
Despite these problems, the bill had broad based bi-partisan support, and the measure does not eliminate requirements for new businesses to abide by generally accepted accounting principles (GAAP) that were established by FASB eons ago.
Sorkin may be correct in waving the yellow flag at the Jobs Act, but what’s missing from his argument are the politics behind the legislation. Given the state of the economy, and the unemployment rate locked in at 8.3%, we can count on Congress to go populist in a presidential election year.
And you can bet the president will take credit for the bill. He said that the initiative “will help our small businesses and startups access capital they need to grow and create jobs.”
And now, back to our original program: investment banks can go back to issuing reports on the companies they take public while web sites can pitch new companies directly to investors. This also raises the specter of “boiler rooms” popping back up, like in a scene from The Sopranos.
In the meantime, money center banks continue to drag their feet in the credit markets and the slowly recovering economy is still not growing businesses or jobs. In the end, lawmakers had to do something to ensure they don’t lose their musical chair seats come November.
Kyle Colona is a New York based freelance writer and a Feature Writer for the Compliance Exchange. He has an extensive background in legal and regulatory affairs in the financial services sector and his work has appeared in a variety of print and on-line publications.