[Vision2020] A Sneaky Way to Deregulate

[Art Deco]

[image: Opinionator - A Gathering of Opinion From Around the
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March 3, 2013, 9:00 pmA Sneaky Way to DeregulateBy STEVEN
RATTNER<http://opinionator.blogs.nytimes.com/author/steven-rattner/>

SLAPPING a catchy acronym like the JOBS Act on a piece of legislation makes
it more difficult for politicians to oppose it — and indeed that’s what
happened with the Jumpstart Our Business Startups Act.

Unveiled a year ago by House Republican leaders, the proposal was rushed
into law with large majorities just two months later; its provisions are
gradually taking effect.

Its enticing acronym notwithstanding, the JOBS Act has little to do with
employment; it’s a hodgepodge of provisions that together constitute the
greatest loosening of securities regulation in modern history.

Most troublesome is the legalization of “crowd funding,” the ability of
start-up companies to raise capital from small investors on the Internet.
While such lightly regulated capital raising has existed for years, until
now, “investors” could receive only trinkets and other items of small
value, similar to the way public television raises funds. As soon as
regulations required to implement the new rules are completed, people who
invest money in start-ups through sites similar to Kickstarter will be able
to receive a financial interest in the soliciting company, much like buying
shares on the stock exchange. But the enterprises soliciting these funds
will hardly be big corporations like Wal-Mart or Exxon; they will be small
start-ups with no track records.

Picking winners among the many young companies seeking money is a tough
business, even for the most sophisticated investors. Indeed, most
professionally run venture funds lose money. For individuals, it’s pure
folly. Buy a lottery ticket instead. Your chance of winning is likely to be
higher.

Supporters say the amounts that can be lost will be limited. But an
American earning $40,000 can still risk $2,000 per year.

Other major provisions of the JOBS Act are less terrifying but still
problematic.

For the first time, private equity and hedge funds will be able to
advertise — and thereby separate inexpert individuals from their savings.
Putting money in these alternatives is yet another type of investing that
Americans shouldn’t try at home. Until now, only a small percentage of
Americans who qualified to invest this way (the law requires they have an
income of $200,000 per year for an individual or a net worth of $1 million)
did so. The possibility that advertising will lure more people to
participate does no one any favors. Besides, these days, the most
successful private equity and hedge funds can already raise all the capital
they can efficiently manage without advertising.

So I’ll wager that most of this new advertising will come from firms that
sophisticated institutional investors wouldn’t consider investing in. No
wonder that the Securities and Exchange Commission, whose former chairwoman
Mary Schapiro opposed the legislation, has been taking its time writing the
regulations to implement these provisions.

At the least, the S.E.C. should insist on standardized disclosure for these
funds, particularly of performance and fees, similar to what is required of
mutual funds.

Already in effect is the section of the act that makes it easier for small
companies (defined as less than $1 billion in annual revenues) to go
public. For example, these companies no longer have to file as much
financial information as their larger brethren. By some estimates, that
could have benefited as many as 90 percent of recent I.P.O.’s, including
such prominent names as LinkedIn, Zynga and Pandora Media.

More recently, companies as diverse as the Manchester United soccer team
(founded in 1878) and dodgy Chinese businesses have taken advantage of the
provisions.

To be sure, the Sarbanes-Oxley securities regulation law, passed in the
wake of the dot-com meltdown and the Enron fraud, has overly burdened
public companies and deterred initial public offerings.

But the JOBS Act’s update for “emerging growth companies” goes too far,
particularly in relaxing the prohibition on research analysts to recommend
stocks while their firms are underwriting them.

Although 25 Democratic senators and one independent, Bernie Sanders,
opposed the legislation, it had broad support from business groups and from
some research organizations like the Kauffman Foundation. The Obama
administration signed on, convinced that the need to encourage start-up
capital was great and that the legislation’s shortcomings could be fixed
during the implementation phase.

The largest number of jobs likely to be created by the JOBS Act will be for
lawyers needed to clean up the mess that it will create.


-- 
Art Deco (Wayne A. Fox)
art.deco.studios at gmail.com
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