Felix Salmon

The problematic JOBS Act

By Felix Salmon
March 21, 2012

I have a piece in the latest issue of Wired magazine on the problem with IPOs in general, and technology IPOs in particular. In it, the JOBS Act comes across rather well:

It’s about to get easier for tech CEOs to ignore the IPO’s siren song. Legislation wending its way through Congress would change SEC rules, meaning no tech company would find itself forced to go public in the way that Facebook has. The bills, which have been supported quite vocally by a number of CEOs at pre-IPO companies in Silicon Valley, as well as VCs who want more control over the timing of their companies’ IPOs, would not count employees toward a company’s 500-investor limit. The legislation would also raise that limit to 1,000 shareholders.

I do think these changes to the 500-shareholder rule make perfect sense. Right now, companies like Facebook (and Google before it) tie themselves up in knots when it comes to giving equity to employees, handing out variations on the stock-unit theme rather than actual equity, just to get around this rule. That benefits no one, really. And ultimately they’re forced to go public anyway, with the timing imposed upon them by SEC regulations rather than being a matter of their own choice.

But this doesn’t mean that I’m a supporter of the JOBS Act more generally, which has been vehemently opposed not only by the usual subjects (Eliot Spitzer, Simon Johnson) but also by the much more centrist editorial board of the New York Times, which almost never saw a bipartisan bill it didn’t like. Even Bloomberg View has come out strongly against the act, in an editorial which, it’s worth remembering, is meant to broadly reflect the views of Mike Bloomberg personally. The SEC opposes it, as do former SEC officials like Arthur Levitt and a long list of consumer organizations.

A lot of the act is very hard to defend. The crowdfunding (a/k/a crowdmuppeting) part, for instance, seems very badly thought out: it’s certain to create a whole new class of startups which raise substantial sums on some Kickstarter-like platform, without having anything like the controls and staffing necessary to do the investor-relations job they’re letting themselves in for. On top of that, of course, there’s enormous scope for outright fraud here, given the lack of real penalties for issuers who lie.

Higher up the food chain, companies going public in an IPO could not only put out incomplete information in glossy sales pitches for themselves; they could also outsource that job to investment-bank analysts hoping their bank will win lucrative mandates down the road. There’s no good reason at all for this: it’s basically a way for unpopular incumbent lawmakers who voted for Dodd-Frank to try to weasel their way back into the big banks’ good graces and thereby open a campaign-finance spigot they desperately need.

I don’t fully understand the political dynamics here. A bill which was essentially drafted by a small group of bankers and financiers has managed to get itself widespread bipartisan support, even as it rolls back decades of investor protections. That wouldn’t have been possible a couple of years ago, and I’m unclear what has changed. But one thing is coming through loud and clear: anybody looking to Congress to be helpful in the fight to have effective regulation of financial institutions, is going to be very disappointed. Much more likely is that Congress will be actively unhelpful, and will do whatever the financial industry wants in terms of hobbling regulators and deregulating as much activity as it possibly can. Dodd-Frank, it seems, was a brief aberration. Now, we’re back to business as usual, and a captured Congress.

9 comments so far | RSS Comments RSS

What makes the United States strong in its ability to attract capital to new companies is not low compliance costs but investor confidence that their interests are protected. By taking away disclosure and turning investors into dark pool money, the process is weakened, if not immediately then after the first blow-up where investors find out they’ve been bilked.

Posted by Sechel | Report as abusive

The only jobs this bill will create are in the lucrative world of bucket shops, scam artists, and fax repairmen to deal with the copious stream of marketing BS from CEO’s of small companies with degrees from directional universities.

What, exactly, does this bill address? The “need” for financial fraudsters to locate their tax-dodging businesses in the US rather than London?

Financial frauds are weapons of job destruction. If Obama actually promotes jobs, this bill must not pass.

Posted by Unsympathetic | Report as abusive

It’s distressing how easy it is to get bipartisan support for terrible legislation. SOPA was a recent previous example.

Posted by RussAbbott | Report as abusive

I wonder whether the IRA model could be used to allow unaccredited individuals a limited ability to invest in unregistered investments without allowing them to expose themselves to tens of thousands of dollars in losses too terribly easily. Perhaps a $1000 contribution per year, subject to a much weaker test than accreditation, such as perhaps a balance or contribution rate to retirement funds.

Posted by dWj | Report as abusive

It’s a great piece — the IPO market for tech isn’t performing its function properly anymore, but then again the innovation pipeline is having problems, too. That said, I think you’re being too positive on companies like Facebook getting rich on the backs of free labor while avoiding the IPO and hiding equity in Second Market. And who are these horrible VCs who kick their companies out of the nest post-exit? What if your successful team comes back with another pitch? It’s good business to be long-term caring. VC proposition isn’t just the province of the Sand Hill Big Boys.

Posted by mattdebord | Report as abusive

Wait…the SEC forces companies to go public??

Posted by Eericsonjr | Report as abusive

“A bill which was essentially drafted by a small group of bankers and financiers has managed to get itself widespread bipartisan support, even as it rolls back decades of investor protections. That wouldn’t have been possible a couple of years ago”

Really? What makes you say that? The only difference is that a couple of years ago, it was possible to get some less-bank-friendly legislation through, forcing the banks to make lobbying efforts to make sure it was sufficiently diluted before passing.

Posted by Moopheus | Report as abusive

“On top of that, of course, there’s enormous scope for outright fraud here, given the lack of real penalties for issuers who lie.” Where in the heck did you get that idea?? Issuers who lie are perpetrating fraud and violating multiple state and federal statutes. It’s a crime, and people go to jail for it. Check out this brag sheet from the DOJ for some recent cases: http://www.justice.gov/usao/briefing_roo m/fin/mca_fin.html. There are also special protections in the bill, but sadly, news reporters apparently are not reading the bill or even asking a securities attorney to read it for them to tell them what it really says.

Posted by securitiesatty | Report as abusive

Bill Black has come out strongly against this bill too, although he doesn’t clarify details of why.

As an entrepreneur, I am in favor of the innovations. It is just too hard to get in to even have a hearing with VCs these days. VCs are lemmings and always pursuing the latest “hot sector”.

Posted by BrPH | Report as abusive

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