Some provisions in JOBS Act are bothersome

Jumpstart Our Business Startups Act or JOBS Act recently passed the House then Senate and is now in the House for the final passage. It has bipartisan backing, President Obama supports and Silicon Valley is all for it. That’s all good but from an investor point of view, it’s the worst thing since the repeal of Glass–Steagall Act of 1933.

Tech pundits and those who cover the industry have promoted JOBS Act as a “crowdfunding” bill that will allow any self proclaimed entrepreneur to raise money through social media. Something similar to Kickstarter for an average Joe to join in the social media gold rush by investing in everything from apps to flying skate boards.

That’s not a bad thing, it will spur innovation. But, at what cost? Less transparency, gradual deregulation and little accountability. Why do we have such a short term memory? In 2008 we saw what happens if any part of an industry, especially one that involves financial markets, is deregulated.

Here’s what bothers me:

Increase in number of shareholders

Before, a company had to go public if it reached 500 shareholders and assets worth $10 Million. This law is primarily responsible for Facebook’s impending IPO as it reached the 500 shareholders mark. The bill relaxes the requirement by increasing the number of shareholders to 2000.

Clearly, 500 is high enough number of shareholders for a company to start opening up its books for investor scrutiny. Increasing the number to 2000 will delay the scrutiny thereby allowing startups that are in red to continue operations in red because of outwardly impression of the next big thing.

Sarbanes-Oxley

The bill adds an “emerging growth companies” category relieving startups from certain regulatory and disclosure requirements when SEC registration statement is filed to go public. IPOs have 2-year phase-in period to comply with Sarbanes-Oxley Act, the result of Enron debacle, but the provision in the JOBS Act will extend the period to 5 years.

I agree that there are compliance costs associated with Sarbanes-Oxley Act but there was a reason the Act was put into place. We had a disaster that gulped Arthur Anderson and Enron. Since the Act being the law, we haven’t had a single accounting scandal that could devastate markets. Relaxing a requirement proven to have succeeded in its goal of resisting fraud is a step in the wrong direction.

Last word.

According to Ryan Caldbeck, who penned an article on TechCrunch recently supporting the JOBS Act, “startup investing is reserved for the 1%” but it doesn’t need to be that way. Sorry, but that’s exactly how it is suppose to be. These are some really rich 1 precenters who can take the risk and have the experience.

The argument Caldbeck uses to persuade his readers that JOBS Act is a good thing is the same argument used by lawmakers who wanted everyone under the sun to get a mortgage. It was a slap in the face to everyone who worked hard, saved for that down payment and maintained good credit. History is repeating itself again, and this time, it’s not the housing market.

Irony is, accredited investors and VCs will be the biggest losers of this bill, even though almost all of them are die hard fans of the bill.

One more thing.