There is so much opposition to the proposed “JOBS” bill that is currently being voted on by the U.S. Senate, after a House version passed recently, and the White House is signaling support. Although the bill provides for revising disclosure for IPOs, it’s the provisions for entrepreneurs regarding changing the rules of the road for raising capital, to permit raising money from unaccredited investors in general solicitations, that is sparking robust debate —a fundraising technique known as “crowdfunding“.
You can say that “crowdfunding” would enable anyone to access the Web with a business concept, and raise money for it. Although some revisions in the bill are likely, under one iteration, if an issuer raise only $1 million that way, the issuer 1) didn’t have to provide financial statements, and 2) is under no obligation whatever to keep investors informed. Further, if an issuer is willing to produce a financial statement when the funds are sought, up to $2 million of funds can be raised. We note that a majority of the CFA Institute, a global association of investment professionals, is against the bill: In fact, according to MarketWatch, only 29% of the CFA want to see the current bill passed.
MIT Professor and former chief economist of the International Monetary Fund, Simon Johnson has called it a colossal mistake of historic proportions. As Professor Johnson notes: “Perhaps the worst parts of the bill are those provisions that would allow “crowd-financing” exempt from the usual Securities and Exchange Commission disclosure requirements. A new venture could raise up to $1-2 million through internet solicitations, as long as no investor puts in more than $10,000 (section 301 of HR3606). The level of disclosure would be minimal and there would be no real penalties for outright lying. There would also be no effective oversight of such stock promotion – returning us precisely to the situation that prevailed in the 1920s.”
The Motley Fool – a strong advocate for investors- has also pointed out that investors in companies with less than $1 billion in revenue (i.e., most companies in the United States today) “would look forward to”:
“The legalization of Wall Street pump-and-dump behavior that was banned after the Enron and WorldCom frauds.
Less clarity in executive compensation and golden parachute disclosure.
Weaker auditing standards.”
Others have decried the JOBS bill as being a template for encouraging boiler plate operations. The AARP has also reportedly come out against the bill, fearing that seniors will be separated from their wallets by unscrupulous salesmen if the current version of the law passes.
There could be serious study of reforms which will enable new ventures and StartUps to raise capital in general solicitations, if the ceiling on amounts that can be raised is very low, and there is an automatic review of the process after one year. But to balance the need for easier methods to raise funds with no limits on disclosure, and no limits on the rights to bring claims for fraudulent statements or omissions, sounds as ominous as Prof. Johnson writes above. Any lawyer who has been involved in anti-fraud actions in securities matters knows potentially how easy it is for unscrupulous issuers to omit material facts and to otherwise misstate important issues. The capital markets should have exemptions to enable startups and new ventures to raise money, and already States have enacted tax credits to foster investment in new businesses, but in the guise of “startup business jobs”, some iterations of this Federal legislation is opening up the doors to boiler room operations, and it is a misnomer to call this a “startup jobs bill.”