Less than two years after tightening some financial regulations in the Dodd-Frank Act, Congress appears ready to loosen others in the name of job creation.
The Jumpstart Our Business Startups bill – known as JOBS, of course – would reduce the red tape involved in making an initial public stock offering, and make it legal for businesses to solicit investors over social media, a process known as crowdfunding.
The bill also would roll back some longstanding investor protections. The Securities and Exchange Commission, AARP, the AFL-CIO and the Consumer Federation of America have all expressed concerns that the bill will lead to a surge in investment fraud.
The North American Securities Administrators Association, a group of state regulators, “an investor protection disaster waiting to happen.” The group's president, Nebraska official Jack Herstein, said in a statement that the JOBS bill creates “new jobs for promoters of Internet investment scams.”
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Tossing such warnings aside, Senate passed JOBS Thursday on a 73-26 vote, following an even more lopsided approval in the House. (The bills differ slightly, so another House vote is necessary. President Barack Obama has said he'll sign the legislation.)
The hope is that, freed of red tape, entrepreneurs will find it much easier to raise money and hire people. It's tough to be against a jobs bill in an election year.
What happens, though, if the critics are right and there's an increase in fraud? If investors lose faith in the capital markets, companies will find it harder, not easier, to raise money.
“Investors won’t return to the IPO market if they don’t believe they can trust it,” SEC Commissioner Luis Aguilar on the agency's website. He also calls the legislation “a boon to boiler room operators, Ponzi schemers, bucket shops, and garden variety fraudsters.”
The bill would create a new class of “emerging growth companies” that wouldn't have to follow certain rules. They'd get a five-year reprieve, for example, from the need to have an audit of their internal controls.
The most eagerly anticipated part of the bill involves crowdfunding, a concept that sites like Kickstarter have used to raise money for art projects and other nonprofit causes.
Advocates say crowdfunding could be a big new source of capital for new businesses.
“The majority of Americans have been excluded from the opportunity to participate in the startup community,” says Clifford Holekamp, a lecturer in entrepreneurship at Washington University's Olin School of Business. “It really democratizes the process of equity investing. This is a cultural shift that's really exciting.”
Those novice mini-angel investors will be operating, however, with only a thin layer of protection. The Senate version of JOBS requires crowdfunding platforms to register with the SEC, but no regulator would vet the offerings themselves.
They'd be exempt from states' registration requirements, and that's what bothers Robin Carnahan, the Missouri Secretary of State.
“I'm a fan of crowdfunding,” she said. “It's important to give small businesses access to new funding opportunities, but we need to do it in a measured and responsible way.”
Her office will watch crowdfunding deals for signs of fraud, she says, but unfortunately, it's hard to get your money back from a scam artist. A wiser course would have been to combine this new form of investing with the upfront protection that people have come to expect in America's financial markets.
