The Jumpstart Our Business Act (H.R. 3606) was recently passed by the House of Representatives and sent to the Senate. Without meaning to put words into anyone's mouth, the JOBS Act appears to be based on three highly uncertain premises:
- "Emerging growth companies" (basically, companies with revenues under $1 billion) are the principal driver of jobs growth – Floyd Norris reports that recent data from the Bureau of Labor Statistics challenges that notion.
- Scaling back on disclosure and other capital markets regulations will reduce the cost of capital for these companies – SEC Commissioner Luis Aguilar has published his own comments and cites research that suggests this to be a highly dubious and dangerous notion. If anything, evidence suggests that some of the provisions in the H.R. 3606 could raise the cost of capital.
- If emerging companies could raise capital less expensively, there would be more investment, and new jobs would follow – That, of course, depends on the validity of the first two premises.
Here's a quick taste of what investors would be in store for, should H.R. 3606 be passed in its present form by the Senate:
Although an IPO prospectus would still have to be filed with the SEC, "research reports" (read advertising) would not.
There would be no assurance that all investors would have equal access to those "research reports", and no SEC review would assure that the information is not misleading. Think Groupon's misleading "non-GAAP performance measures," which it eventually was compelled to repudiate. If the JOBS Act had been in effect, these could have been published (or selectively distributed) as non-filed "research reports" beyond the purview of the SEC.
These so-called emerging growth companies (for all practical purposes, nearly all of the companies that would file a registration statement) would be allowed to skimp on their IPO disclosures, be given five subsequent years to ramp up to full disclosures, and be exempted for five years from the requirement to obtain an audit of internal controls over financial reporting (S-OX 404(b)).
Recent history of SEC accommodations to small business has shown that relaxed prospectus disclosure requirements (i.e., registration statement) will not be helpful to legitimate capital raising. Prior to February 2008, the applicable rules for smaller reporting companies (then referred to as small business issuers) were set forth in Regulation S-B, which along with the related small business registration statements and periodic forms was rescinded. One reason they were rescinded was that instances of companies electing abbreviated IPO disclosures (by filing old Form SB-2) were extremely rare. The perception in the market was that "SB-2 companies" could be hiding something important, so the advisors and underwriters essentially insisted on filing a Form S-1, the long-form registration document. Once a small business issuer had gone public, however, and exposure to liability was only under the less-threatening Exchange Act, nearly all of the companies eligible to do so would use any opportunity they could to "scale" their disclosures – fewer years of financial statements, less-detailed risk disclosures, abbreviated disclosures of executive compensation, etc.
In short, based on past history of SEC initiatives to scale disclosures to a reasonable level, one would expect that companies having nothing to hide will eschew the accommodations and provide full disclosure in the IPO prospectus, and those that do have something to hide, won't – or won't go public anyway.
Companies could raise up to $2 million through "crowd funding" via the internet without an SEC filing. If the offering is for less than $1 million, an issuer wouldn't even have to provide financial statements to potential investors. Fire up them boiler rooms!
Underwriters would no longer be required to separate investment bankers and research analysts who work in the same firm.
Think of the days of secret deals between investment bankers who promised favorable "research reports" in return for a piece of the deal. Think Jack Grubman and Worldcom.
Emerging growth companies would be exempt from complying with any new or revised accounting standards.
This makes transparency and comparability a joke.
Read More and Gag
If you want to learn more about this terrible and potentially disastrous piece of legislation, I suggest the following additional readings:
- SEC Chairperson Mary Schapiro's letter to the Senate Banking Committee is fairly tepid (Aguilar's is much better), but it's a pretty good road map on the regulatory issues. Notably, she states that rulemaking required to implement the new legislation would take 18 months – as opposed to the 6 months the SEC would be directed to do the work in.
The following editorials and commentaries are just a few of the many stating/implying that investor protection is being trashed in favor of Wall Street special interests:
If a bill has a snazzy name, it means the anti-all-government-regulations Republicans want to claim credit for it. But, the JOBS Act is sailing through Congress in a bipartisan effort at election-year fundraising from the financial services industry plutocrats: Wall Street is in New York, and that's where the Democrat, financial-industry-water-carrier Senator Charles Schumer lives.
It's an ugly piece of securities legislation that only a fraudster – or an investment banker – could love. I'll be the first to admit that the securities laws may not be perfect, but surely this is not one of the first places to look if one wants to create an environment that is more hospitable to real jobs growth.