President Obama just affixed his signature to the JOBS Act in a public signing ceremony you may have caught on CNN. The Jumpstart Our Business Startups Act, which passed both houses with bipartisan support, sounds like a win for everyone: It clears away red tape and makes it easier for small businesses to raise money from investors – and for everyday investors to get in on the ground floor of promising startups through the magic of “crowdfunding.” But critics of the bill suggest it also makes it a lot easier for investors to get fleeced.
On tech news hub ZDNet, Eileen Brown declares the act “good news for micro-investors and entrepreneurs.”
If only the act had been around when Facebook was trying to raise capital. Would you have invested?
You might also one day, be an investor in the social tool that will topple Facebook. Imagine how that would feel.
Trouble is, not every startup is the “next Facebook.” Andrew Ross Sorkin of the New York Times argues that
the legislation, in the name of creating jobs, dismantles some of the most basic protections for the most susceptible investors apt to be drawn into get-rich-quick scams and too-good-to-be-true investment “opportunities.”
So what parts of the JOBS Act are the most troubling to its critics? Bloomberg columnist Susan Antilla draws attention to
two features that don’t bode well for small investors: It lets a lot of companies reveal less about themselves when they sell stock, and, for the first time, it lets companies flog their shares on the Internet.
The bill’s “crowdfunding” provisions will allow companies to raise up to a million bucks from investors online without having to disclose the details of their financial life. That’s a boon for the companies, but without this information investors will have a difficult time telling if the companies they’re investing in are solid businesses, pipe dreams, or even outright scams.
Bloomberg’s Antilla, for her part, predicts that the bill will become a gigantic enabler of fraud, and dismissses crowdfunding fans as “mostly … well-meaning boosters of entrepreneurialism who simply don’t have much understanding of how a swindler’s mind works.”
Brookings Institution Senior Fellow Robert C. Pozen offers a more nuanced critique. “Crowdfunding,” he writes, “could open up a host of exciting new possibilities for small businesses.” But it also brings risks. Happily, he writes, while
the House bill broadly exempted crowdfunding from the securities laws, a bipartisan amendment in the Senate provided some regulatory protections to investors. The amendment mandated that companies disclose basic financial information before seeking crowdfunding, and required third-party intermediaries (i.e., websites selling crowdfunding shares) to register with the SEC. The amendment also reduced the amount of money that an individual could invest in a crowdfunded venture-preventing investors from assuming too much risk.
This bill, Pozen reminds us, is an experiment, and he urges Congress to hold regular hearings to assess how this experiment is going. We’ve certainly seen many examples in the past of financial deregulation going seriously awry. As Pozen points out, if the bill’s
regulatory exemptions are exploited by the Bernie Madoffs of the world, investors may become more fearful of buying shares in any small business-making it harder for legitimate small businesses to raise capital.
In other words, without adequate oversight, the JOBS Act could easily backfire on us, leading to less investment – and fewer jobs.