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The JOBS Act will very nearly legalize fraud in the stock market

229 points by RyanMcGreal 15y ago

cstross 15y ago
Author of Rolling Stone piece is focussing on the JOBS act as an enabler for stock fraud. They don't seem to be clear on its alternate function of enabling Quickstarter-type ventures where what's being sold isn't stock in a company that is trying to bypass accounting norms for an IPO, but a one-off product development (like the movie "Iron Sky", or any number of items on Quickstarter). It's a totally different business model. (Random example: let's say I, as an author, announce that I'm going to write and sell a book if I can get enough pre-purchases; let's set the gate at 10,000 readers willing to pony up $10 each in order to receive an ebook when I've written it, a year down the line. Right now, as I understand it, if I was in the US I'd be expected to undergo the same accounting procedures as a corporation prepping for an IPO because of the number of people involved -- which would make it a non-starter: the accountant's bill alone would exceed the total revenue, especially as writing a book is a one-off project. The JOBS Act is supposed to relax that requirement for the sort of venture I'm describing. But Taibbi doesn't seem to get this at all.)
- leot 15y ago
  Just because a piece of legislation has a nice feature doesn't mean it can't be horrible for its other properties.
  - cstross 15y ago
    Absolutely correct! But it still seems to me that Taibbi is focussing on one particular aspect of it without any indication that he noticed the other angle.
    - Avshalom 15y ago
      Taibbi focused on the aspect of the JOBS act because the angle you propose is already legal and the advertised angle (kickstarter for IPOs) is (as far as he and others are concerned) just a veneer used to sell it to the rubes.
  - sanderjd 15y ago
    Similarly, just because a piece of legislation has a horrible feature, doesn't mean it can't be fantastic for its other properties. Fraud exists. Fraud will exist after this bill goes into effect. So will non-fraudulent business models and investment opportunities that were unworkable before the bill. Does the benefit of those new opportunities outweigh the cost of the increased fraud potential? I think so, perhaps you think not, neither of us know for sure. What I do know is that I worry more about the entire economy being destroyed by the current powers that be through both fraud and simple incompetence than I worry about losing money to fraudsters preying on unaccredited investors like myself, and I very much look forward to having the opportunity to do so.
- DennisP 15y ago
  I'm a fan of the JOBS Act but doesn't the existence of Kickstarter imply that your scenario was already legal?
  - masonhensley 15y ago
    From my understanding, pre JOBS act, you could not use something like kickstarter to sell equity in your company (especially bc investor accreditation issues.) Kickstarter has been used for preorders/donations. Post JOBS act, I believe a tool like kickstarter could be used to sell micro portions of equity in a company.
    - lysol 15y ago
      Kickstarter specifically excludes businesses, leaning towards projects only. I don't think they specifically preclude offering equity, however.
      - tlholaday 15y ago
        Kickstarter offers no recourse to participants. Whatever equity is, it is not a no recourse payment.
      - jeremyarussell 15y ago
        Just to clarify. Taken from http://www.kickstarter.com/help/faq/kickstarter%20basics#DoesKickTakeSomePercOfOwneOrIntePropOfThinMadeThroKick http://www.kickstarter.com/help/faq/kickstarter%20basics#Doe... "Does Kickstarter take some percentage of ownership or intellectual property of things made through Kickstarter? Absolutely not. Project creators keep 100% ownership of their work." If I'm not mistaken in this context I'm pretty sure "percentage of ownership" is synonymous with equity. At least the way equity as a word is being used in the context of this conversation. Edit: Clarification
      - BHSPitMonkey 15y ago
        IndieGoGo, one of the big competitors to Kickstarter, is a better example. It actually has a category for Small Businesses and doesn't limit what kinds of projects are allowed on the site like Kickstarter does. They do, however, explicitly disallow offering equity as a contribution reward because of the very issue the JOBS act is about. From their FAQ: "What violates our terms? - Offering any monetary return on investment or real property, including: real estate, annuities, lottery contracts, profit-sharing, cash, securities, equity or debt-repayment" The site actually had some excited-sounding announcement about the JOBS act recently, but I can't seem to find it.
- wpietri 15y ago
  I don't think product pre-orders are regulated like that. For the SEC to have some jurisdiction, I think you'd have to be promised a share of the company or the eventual profits. I do think the JOBS Act has been touted as enabling Kickstarter-like things where you actually invest in the enterprise, though: money can be raised from small-net-worth individuals as long as the sums are modest.
  - InclinedPlane 15y ago
    Yup, that's right. Kickstarter already operates in the clear. What JOBS enables is kickstarter with equity involved. That opens up a lot more opportunities. Consider the case of someone who wants to launch a small business to do something that can't be doled out in small chunks to backers. Let's say I want to build a better wheelchair, for example. Well, even if people can tell from my descriptions and existing work that I really know what I'm doing and have a fantastic idea, few people actually need a wheelchair. So with the kickstarter model this could be a tough project to get going, but if equity could change hands it could be a lot easier. Yes, there's going to be fraud with this, lots and lots of fraud. But there's already a lot of fraud in the market. It's not important to attempt to eliminate fraud, it's more important to make sure people have enough information to know when they're doing something risky. On the whole I think it's vastly better for everyone if we enabled startups at the low end at the risk of widespread small scale fraud than if we keep everyone's investments locked away with the "too big to fail" companies where large scale fraud and malfeasance has the potential to topple governments and destabilize the world economy.
    - deong 15y ago
      > It's not important to attempt to eliminate fraud, it's more important to make sure people have enough information to know when they're doing something risky. I suspect it's at least as hard to do the latter as it is to do the former, and almost certainly harder. At least with the regulatory framework in place, the person you have to con is a professional auditor. Without that regulation, it's going to be trivially easy to con the average investor.
- gcb 15y ago
  everytime i browse kickstarter-like sites I keep wondering how that affect tax. i'm buying a book from this guy, but it's not a product still, as he will work on it. but it's not service either, because i have no say on what he will write. and i will get a book in the end, so it's a product. unless he never get's to write it. oh well, one more experience ruined by tax filling month paranoia.
  - rhubarbquid 15y ago
    When you order a pizza it doesn't exist at the time you order. That doesn't change the fact that you're purchasing a product. Though I think with kickstarter you're technically making a donation. Either way I don't see how that could affect your taxes (other than sales tax) unless you're backing something you want use as a deduction...
    - gcb 15y ago
      Donation is very different from purchase. but i was thinking mostly for the guy receiving the money. There's then a distinction for selling and servicing. The pizza analogy is not that fitting, because there's no wording saying the pizza may not materialize.
- el_presidente 15y ago
  Author of Rolling Stone piece is focussing on the JOBS act as an enabler for stock fraud. That's because, at this point in time, fraud should be the focus of anything related to the financial sector.
joeag 15y ago
Researching and writing about Goldman pushed Taibbi around the bend on anything having to do with finance. A few tidbits: Even worse, the JOBS Act, incredibly, will allow executives to give "pre-prospectus" presentations to investors using PowerPoint and other tools in which they will not be held liable for misrepresentations. These firms will still be obligated to submit prospectuses before their IPOs, and they'll still be held liable for what's in those. But it'll be up to the investor to check and make sure that the prospectus matches the "pre-presentation." Oh my gosh - you mean before I invest my hard earned money I should read the PROSPECTUS. Say it ain't so. Then he goes on to say: In the same way, get ready for an avalanche of shareholder suits ten years from now, since post-factum civil litigation will be the only real regulation of the startup market. In fact, there are already supporters talking up future lawsuits as an appropriate tool to replace the regulations being wiped out by this bill. Isn't "post-factum civil litigation" an even better mechanism for enforcement? Look companies that are "bad actors" are going to cheat the SEC and the public anyway, and companies that aren't "bad actors" had to go through the additional expenses to comply with the SEC regs that have now been relaxed. I would rather have motivated shareholders (and their lawyers) with an axe to grind policing the markets than bureaucrats. If you look at the job bureaucrats have done to date,the track record is not so great. Read more: http://www.rollingstone.com/politics/blogs/taibblog/why-obamas-jobs-act-couldnt-suck-worse-20120409#ixzz1rqj2pYk2 http://www.rollingstone.com/politics/blogs/taibblog/why-obam...
- smacktoward 15y ago
  > Isn't "post-factum civil litigation" an even better mechanism for enforcement? Only if you prefer getting ripped off and then having to pay lawyers for ten or fifteen years to get back a tiny part of your losses to not getting ripped off in the first place.
  - rhubarbquid 15y ago
    Assuming there's anything left to sue for...
- deleted 15y ago
  [deleted]
guelo 15y ago
I wonder if all the problems with Groupon's train wreck IPO would have been discovered ahead of time under this new regime.
- hammock 15y ago
  Seems it would be the opposite: The law makes it easier for startup companies (particularly tech companies, whose lobbyists were a driving force behind its passage) to attract capital by, among other things, exempting them from independent accounting requirements for up to five years after they first begin selling shares in the stock market.
  - jellicle 15y ago
    Correct! If Groupon started today we would still be at least a year and half away from having any chance at all to discover their fraudulent accounting, and their stock would probably be at $1000/share.
marshallp 15y ago
As opposed to the fraud that IS the stock market today? (For the average person the stock market offers no return, the 20th century was good but now it is so efficient that any extra is skimmed off by the smarter hedge funds). There is an overinvestment in the stock market today, the excess money needs to go somewhere so elsewhere, which for the past few years was the housing bubble. However housing is not a wealth producing exportable industry (and is already overinvested/iverpriced), and so the capital needs a new outlet - private equity (which includes venture capital). The fact that this investment option has been closed of to ordinary people is the real fraud (that has been occurring for 80 years now).
- seanp2k2 15y ago
  Don't forget the scum that is HFT...ooh, I'm sorry, I meant to say "liquidity providers".
T_S_ 15y ago
The act allows mom and pop to invest with little or no "burdensome" ongoing disclosure. I run a startup and would love to have their cash, but the sharks will get it instead. Instead of doubling down on opacity, Congress should take a leaf from the non-profit industry. There, at least everybody's tax return (Form 990) is available for public inspection. Some of them are very illuminating. Even just that would be a better start than this. The idea that continuous disclosure has to be burdensome is a relic from the past. You want to raise money from my mom? Let me monitor your Quickbooks online account.
- clavalle 15y ago
  III. Requirements on Issuers (A) name, legal status, address, website, etc. (B) names of directors, officers, and 20% stockholders (C) “a description of the business of the issuer and the anticipated business plan of the issuer” – the devil is really in the details of this one, and it remains to be seen whether the SEC will require this “description” to be 4 pages or 40 in order to be sufficient (D) prior year tax returns, plus financials – see below for details (E) description of intended use of proceeds (F) target offering amount, deadline, and regular progress updates through the life of the offering (G) share price and methodology for determining the price (H) a description of the ownership and capital structure of the issuer, including a lot of detail about the terms of the securities being sold, the terms of any other outstanding securities of the company, a summary of the differences between them, a host of disclosures about how the rights of shareholders can be limited, diluted or negatively impacted, “examples of methods for how such securities may be valued by the issuer in the future, including during subsequent corporate actions”, and a disclosure of various risks to investors II. Requirements on Intermediaries The JOBS Act requires crowdfunding intermediaries to register with the SEC, either as a broker (which is an expensive and onerous process), or as a new thing called a “funding portal”. Funding portals will also be required to register with FINRA, the financial industry self-regulatory organization. A) providing certain disclosures and investor education materials to investors (B) ensuring that the investor has reviewed educational materials and answers questions indicating that he/she understands the risks involved (C) performing certain background checks on the issuer (D) provide a 21 day review period before any crowdfund securities are sold (E) ensure that an issuer does not receive investment funds until its target investment minimum has been reached, and that investors may cancel their commitments to invest as provided by the SEC (no word yet on how these cancellation provisions are going to look) (F) ensure that no investor surpasses the investment limits set forth above in a given 12 month period in the aggregate – i.e. the limits described above with respect to investors apply to all crowdfunding investments in a given 12 month period, not just to individual investments, and the burden is on the intermediary to monitor this (G) take steps to protect the privacy of investors (H) not pay finders fees to promoters or lead generators with respect to investors (it appears to be okay to pay finders fees for issuer leads) (I) not allow the intermediary’s directors, officers or partners to have a financial interest in an issuer using its services There are /plenty/ of disclosure requirements and more coming down the pike when the Commission is through drafting what else is required. It is not like there is going to be a Kickstarter where people just start throwing money at random ideas with no way to check who and what they are investing in.
joshbuddy 15y ago
What will this mean for RSUs?
eblume 15y ago
I have a feeling that the JOBS act could actually be a very, very good thing if the right company (or, better yet, marketplace of companies) came around to offer a gateway service to these micro-investments. Personally I would implement - or would purchase an account on - such a site where companies would advertise for investment, and would be required to provide a certain minimum of disclosure. The site would provide avenues for that disclosure (basically, a feed of reports issues by the companies themselves and perhaps also relevant news stories, a'la Google News) as well as investment portfolio tracking. It would (still) be up to the user to verify the disclosure and make sure they are looking at companies that are disclosing the right quantity, quality, and purview of information - but the site would hopefully make it very clear what is and isn't being disclosed and how that compares to other companies. Of course another key feature could be investor/analyst reviews, but this would need an extremely well-engineered system to prevent or discourage astroturfing & other social engineering schemes. Personally I doubt anything less than only allowing authenticated professional journalists (affiliated with reputable publications) could be acceptable, at which point you wonder about the real utility of such a thing. I feel like this would make an excellent Startup, actually, and might do some work in that regard. I think step 1, though, is spending a lot of time reading about the ins and outs of the law. It would be very easy to grab a 'legal third rail' with both hands with this project and expose yourself to a lot of liability. I find that intimidating, but maybe not too much so.
- guelo 15y ago
  Sounds like a free market version of a SEC regulated exchange. Not sure what the free market theory is for why it would be less susceptible to regulatory capture.
  - SoftwareMaven 15y ago
    It wouldn't be susceptible because there could be more than one competing. Different providers would optimize for different types of investors.
    - guelo 15y ago
raheemm 15y ago
I disagree with Taibbi on this one. Making it easier for startups to raise money does not equate to fraud on Wall Street. Yes, there are some who will take advantage. But it will also means that the engines of the economy, small businesses and startups will get a massive lift off. In the end, you have to balance regulation with ease of doing business, raising capital, etc.
- jellicle 15y ago
  >Making it easier for startups to raise money does not equate to fraud on Wall Street. Eliminating independent accounting requirements is as close to equaling fraud as makes no difference.
- adestefan 15y ago
  According to [0] "...new research by the Treasury Department finds that small businesses — defined as those with income between $10,000 and $10 million, or about 99 percent of all businesses — account for just 17 percent of business income, and only 23 percent of them pay any wages at all." It's pretty hard to argue that makes them the "engines of the economy." [0] http://www.nytimes.com/2011/10/24/opinion/small-businesses-arent-key-to-the-economic-recovery.html?_r=2&ref=opinion http://www.nytimes.com/2011/10/24/opinion/small-businesses-a...
  - wpietri 15y ago
    Not quite. When people say things like "the engines of the economy, small businesses and startups", they are referring to job growth and innovation. Large businesses have most of the revenue, but small, new businesses are where tomorrow's champions come from: Each wave of firm startups creates a substantial number of jobs. In the first years following entry, many startups fail [...] but the surviving young businesses grow very fast. In this respect, the startups are a critical component of the experimentation process that contributes to restructuring and growth in the U.S. on an ongoing basis. -- http://www.nber.org/papers/w16300.pdf http://www.nber.org/papers/w16300.pdf
- whyenot 15y ago
  It's not just startups and small businesses. The JOBS act covers companies with annual income up to $1 billion. The crowd funding stuff in the bill is great, but it's like a few drops of honey on top of a turd.
jellicle 15y ago
Apparently third time's the charm for this story. See also: http://37signals.com/svn/posts/3160-lets-ride-this-bull http://37signals.com/svn/posts/3160-lets-ride-this-bull
grellas 15y ago
Securities laws, in general, have never been absolute in the United States. When companies offer stock or other securities to purchasers, the broad rule is that "you can offer anything you want, even something junky, so long as you disclose all material elements associated with the offering such that a reasonable investor can make an informed decision in deciding to purchase it." In other words, there is no all-seeing, all-knowing authority supervising the process who declares that the offering is substantively sound. It may or may not be. All that is required is that the issuer meet the requirements imposed by securities laws for disclosing all material facts relating to the investment. That is what the registration statement does in a public offering. And that is all it does. If that is done, and junk is offered, and the public wants to buy junk, the securities laws permit this. Even respecting disclosure, though, the U.S. securities laws have always tempered the burdens associated with making detailed disclosures of the type required in a registration statement with important rules saying, in effect, "we as regulators realize that requiring companies to go through a multi-million process just to offer their securities to investors is too much and therefore we will exempt a broad number of categories from the registration and detailed disclosure requirements to enable small companies to offer their stock for sale as well." That premise underlies a whole range of securities law "exemptions" that permit small offerings, etc. so that companies can grow and develop without choking on process. The ultimate exemption under federal law is Section 4(2) of the Securities Law of 1933, which basically exempts private placements from the burdens of going through the registration process. Section 4(2) has been around forever and has no formal requirements. It simply provides that anything that is a true private placement, as opposed to a public offering, is exempt. Because the assessment of what is a private versus a public offering turned on detailed facts and circumstances, and this in turn led to substantial uncertainty and lots of litigation (is an offering made to 20 people "public"? how about if you don't know them? how about if you advertise the offering to get them interested? how about if they are small, unsophisticated investors?), the ultimate exemption - or, more accurately, "safe harbor" that assured an issuer that an offering would be exempt - was Regulation D, adopted by the SEC in 1982 and widely used by startups ever since that date to make tons of private placements that have been streamlined, simple, and cost-efficient ways of offering their stock to investors. As is apparent from the above, the securities laws have always sought to strike a balance between imposing regulatory requirements (and burdens) that are aimed at protecting investors, on the one hand, and moderating the burdens so imposed to facilitate capital formation for situations where it makes no sense to impose needlessly burdensome requirements on small issuers and where less burdensome, fallback protections can be used instead of the full panoply of protections that apply to larger-scale offerings. By definition, this means that U.S. securities laws have always recognized a trade-off between having strong regulatory requirements aimed at investor protection, on the one hand, and lessening such requirements for some situations so as to give practical routes for capital formation for companies unable to meet the rigorous requirements. At many points along the way, the legislators who pass such laws and the regulators who administer them make multiple social policy judgments saying, in effect, "this is a situation that calls for the maximum protections but this one will leave investors fairly protected with more minimal protections in place." That is why it costs many millions of dollars to do the legal and accounting work to take a company public but only a couple of thousand to issue stock in a new corporation and only a few tens of thousands to raise a few million in a Series A private placement. The law is designed to accommodate the practical needs of companies that want to raise capital. Securities laws don't vanish in the private placement context. They simply impose far fewer requirements aimed at investor protection and all the more so when investors are presumed to have a strong ability to protect their interests (this is why offerings are often limited to "accredited investors," i.e., high net-worth or high income individuals, among others). The JOBS Act is a piece of legislation that takes the rather burdensome accounting requirements first imposed by Sarbanes-Oxley on all publicly traded companies - and adding $1M+ in annual costs to even the smallest issuer in order to attain regulatory compliance under those rules - and exempts a set of relatively smaller publicly-traded companies from having to comply with those requirements for a 5-year ramp-up period after first going public. This part of the Act says, in effect, "we realize that the IPO market has been moribund ever since SOX was enacted and, because part of the reason is the heavy regulatory burdens imposed by SOX, we will seek to encourage more IPOs by giving issuers more incentive to go public without having to face huge expenses right out the gate." Now, this social policy judgment made by Congress may or may not be sound. But it is a policy judgment declaring that the SOX rules are just too much for relatively small companies just going public and therefore should be relaxed for such companies in order to enable them to realize their practical goals of going public, building momentum, and only later having to comply with the full SOX rules. One can question this judgment but one cannot question that it falls squarely within the pattern and practice of U.S. securities laws as implemented for decades. It is always a trade-off between optimum investor protections and practical limitations on such protections in the name of letting legitimate capital formation get done. Will this "legalize fraud," as suggested in this piece? I doubt it. The SOX rules have a short history and securities laws go back to the 1930s, more or less ably protecting investors during their long tenure before SOX took effect. Such protections will continue to exist for offerings made by these small issuers who will get some interim relief from SOX requirements. One can argue that it is bad policy to afford such relief. But to suggest that it "legalizes fraud" is to absurdly overstate the case. The JOBS Act similarly loosens requirements for crowd-funding, for enabling private companies to have larger numbers of shareholders before having to register as publicly-traded companies, and for other contexts as well. On balance, it is aimed at promoting more effective capital formation by loosening otherwise strict SEC rules when new conditions warrant. This, to me, is very good for startups and the Act as a whole should, in my judgment, lead to many excellent results. That is why it has received almost uniform and very strong support from pretty much the entire startup community. It does not legalize fraud. It strikes a classic balance between formal investor protections and real-world practicalities. If the balance proves wrong, nothing will stop Congress from pulling back. In the meantime, let's see if crowd-funding can be used to give us new ways of raising capital and if the IPO market can't be rejuvenated after a long dead spell. The Act stands to benefit startups in major ways and, though not exempt from criticism, is by no means some radical departure away from investor protection under U.S. securities laws. On the contrary, it stands squarely within the traditions of those laws and is a good example of precisely how such laws have been implemented for many decades.
patrickgzill 15y ago
What? There isn't fraud in the stock market today? Free Jon Corzine! Oh, nevermind... BTW, Univac (I believe) got their start issuing stock in exactly this fashion. You could buy a share for either $1 or $5.
bdunbar 15y ago
I'm no expert - but I did work part-time for a new business. It was hard as heck to raise capitol. So much so that it was nearly not worth the effort. We spent as much, or more, time on investing than we did working. At one point I was named as a defendant by one state for the content of an email I sent on behalf of the CEO. We settled that, the boss got me removed from the thing, paid the fine. Paid the investor back his funds. The investor took the money, went to his _other_ home across the state line, sent the money back. It seemed like a lot of work on the part of the state regulatory branch - going after a small company for a negligible amount of money, on behalf of the sole investor from that state who really wanted to invest. It sure soured me on the idea of taking any company I launch public.
hager 15y ago
Any investor that is worth their salt will do their own homework and come up with their own metrics for how they value a company. The government should get out of the business of deciding what is appropriate for companies to report. As history has shown the government does a terrible job(Volt, Solar, etc.) of investing / guiding investments(mortgages).
earbitscom 15y ago
Haha. Honest startups are going to be at a disadvantage to those who make their projections on the back of a napkin. We're honest as hell but if you invest based on the detailed and honest projections we made in the first five years and not more so on the team, market and other real data, you're an idiot.
rachelbythebay 15y ago
Could an existing company take advantage of this by doing some new stock offering? They could put parts of their business behind this "wall" and operate unreviewed for five years. That's plenty of time to drain the coffers and set sail for a sunny island.
10dpd 15y ago
If its legal is it fraud? Just sayin..
NHQ 15y ago
He seems to be griping about all the best parts. Now small businesses and producers can get financing from the crowd? I've been dreaming about this. Yet I really had no idea the jobs act was pushing it. Whoever needs a developer partner to launch a crowd funder for private shares, hollar at me. I want to focus on local goods and manufacturing.
stanfordkid 15y ago
Just discussed this bill with the head of a mid-size investment bank today. The crowd funding provisions are not really that important. He said that the most impact will be the reduction of disclosure requirements for emerging growth companies enabling them to raise up to $50 million rather than just $5 million. It will mostly be institutional investors buying into even smaller size IPO shares -- these are savvy investors and the mania of the dot-com bubble has certainly not been forgotten. The thing is there isn't really a huge market for these deals at the moment -- his bank specializes in deals of this size and I asked him if he thinks more mid-range banks will popup to serve this market and he said that probably not until the deal flow comes in.
- erichocean 15y ago
  Can you disclose the bank? The JOBS act really helps my company -- we're too far along for VC, but not far enough along for a public IPO. The post-VC, private equity market makes the most sense, but as you noted, the amount of money you can raise that way pre-JOBS act is far too low, making companies like mine (Pixar for live-action filmmaking) either at the mercy/generosity of a Steve Jobs-like figure (literally), or simply not funded at all since we exist in the Government-created financial no-mans land. Either is far from ideal. The JOBS act, at least for our company, changes this and makes a previously non-viable-through-inadvertent-regulation company suddenly viable. That's why I supported it, and continue to do so.
  - stanfordkid 15y ago
    I don't want to post on a forum but send me you email and I can connect you.
    - erichocean 15y ago
      Thanks! My email is eocean@fohr.com.
  - deleted 15y ago
    [deleted]
  - deleted 15y ago

229 points by RyanMcGreal 15y ago

Author of Rolling Stone piece is focussing on the JOBS act as an enabler for stock fraud. They don't seem to be clear on its alternate function of enabling Quickstarter-type ventures where what's being sold isn't stock in a company that is trying to bypass accounting norms for an IPO, but a one-off product development (like the movie "Iron Sky", or any number of items on Quickstarter). It's a totally different business model. (Random example: let's say I, as an author, announce that I'm going to write and sell a book if I can get enough pre-purchases; let's set the gate at 10,000 readers willing to pony up $10 each in order to receive an ebook when I've written it, a year down the line. Right now, as I understand it, if I was in the US I'd be expected to undergo the same accounting procedures as a corporation prepping for an IPO because of the number of people involved -- which would make it a non-starter: the accountant's bill alone would exceed the total revenue, especially as writing a book is a one-off project. The JOBS Act is supposed to relax that requirement for the sort of venture I'm describing. But Taibbi doesn't seem to get this at all.)

leot 15y ago
Just because a piece of legislation has a nice feature doesn't mean it can't be horrible for its other properties.
- cstross 15y ago
  Absolutely correct! But it still seems to me that Taibbi is focussing on one particular aspect of it without any indication that he noticed the other angle.
  - Avshalom 15y ago
    Taibbi focused on the aspect of the JOBS act because the angle you propose is already legal and the advertised angle (kickstarter for IPOs) is (as far as he and others are concerned) just a veneer used to sell it to the rubes.
- sanderjd 15y ago
  Similarly, just because a piece of legislation has a horrible feature, doesn't mean it can't be fantastic for its other properties. Fraud exists. Fraud will exist after this bill goes into effect. So will non-fraudulent business models and investment opportunities that were unworkable before the bill. Does the benefit of those new opportunities outweigh the cost of the increased fraud potential? I think so, perhaps you think not, neither of us know for sure. What I do know is that I worry more about the entire economy being destroyed by the current powers that be through both fraud and simple incompetence than I worry about losing money to fraudsters preying on unaccredited investors like myself, and I very much look forward to having the opportunity to do so.
DennisP 15y ago
I'm a fan of the JOBS Act but doesn't the existence of Kickstarter imply that your scenario was already legal?
- masonhensley 15y ago
  From my understanding, pre JOBS act, you could not use something like kickstarter to sell equity in your company (especially bc investor accreditation issues.) Kickstarter has been used for preorders/donations. Post JOBS act, I believe a tool like kickstarter could be used to sell micro portions of equity in a company.
  - lysol 15y ago
    Kickstarter specifically excludes businesses, leaning towards projects only. I don't think they specifically preclude offering equity, however.
    - tlholaday 15y ago
      Kickstarter offers no recourse to participants. Whatever equity is, it is not a no recourse payment.
    - jeremyarussell 15y ago
      Just to clarify. Taken from http://www.kickstarter.com/help/faq/kickstarter%20basics#DoesKickTakeSomePercOfOwneOrIntePropOfThinMadeThroKick http://www.kickstarter.com/help/faq/kickstarter%20basics#Doe... "Does Kickstarter take some percentage of ownership or intellectual property of things made through Kickstarter? Absolutely not. Project creators keep 100% ownership of their work." If I'm not mistaken in this context I'm pretty sure "percentage of ownership" is synonymous with equity. At least the way equity as a word is being used in the context of this conversation. Edit: Clarification
    - BHSPitMonkey 15y ago
      IndieGoGo, one of the big competitors to Kickstarter, is a better example. It actually has a category for Small Businesses and doesn't limit what kinds of projects are allowed on the site like Kickstarter does. They do, however, explicitly disallow offering equity as a contribution reward because of the very issue the JOBS act is about. From their FAQ: "What violates our terms? - Offering any monetary return on investment or real property, including: real estate, annuities, lottery contracts, profit-sharing, cash, securities, equity or debt-repayment" The site actually had some excited-sounding announcement about the JOBS act recently, but I can't seem to find it.
wpietri 15y ago
I don't think product pre-orders are regulated like that. For the SEC to have some jurisdiction, I think you'd have to be promised a share of the company or the eventual profits. I do think the JOBS Act has been touted as enabling Kickstarter-like things where you actually invest in the enterprise, though: money can be raised from small-net-worth individuals as long as the sums are modest.
- InclinedPlane 15y ago
  Yup, that's right. Kickstarter already operates in the clear. What JOBS enables is kickstarter with equity involved. That opens up a lot more opportunities. Consider the case of someone who wants to launch a small business to do something that can't be doled out in small chunks to backers. Let's say I want to build a better wheelchair, for example. Well, even if people can tell from my descriptions and existing work that I really know what I'm doing and have a fantastic idea, few people actually need a wheelchair. So with the kickstarter model this could be a tough project to get going, but if equity could change hands it could be a lot easier. Yes, there's going to be fraud with this, lots and lots of fraud. But there's already a lot of fraud in the market. It's not important to attempt to eliminate fraud, it's more important to make sure people have enough information to know when they're doing something risky. On the whole I think it's vastly better for everyone if we enabled startups at the low end at the risk of widespread small scale fraud than if we keep everyone's investments locked away with the "too big to fail" companies where large scale fraud and malfeasance has the potential to topple governments and destabilize the world economy.
  - deong 15y ago
    > It's not important to attempt to eliminate fraud, it's more important to make sure people have enough information to know when they're doing something risky. I suspect it's at least as hard to do the latter as it is to do the former, and almost certainly harder. At least with the regulatory framework in place, the person you have to con is a professional auditor. Without that regulation, it's going to be trivially easy to con the average investor.
gcb 15y ago
everytime i browse kickstarter-like sites I keep wondering how that affect tax. i'm buying a book from this guy, but it's not a product still, as he will work on it. but it's not service either, because i have no say on what he will write. and i will get a book in the end, so it's a product. unless he never get's to write it. oh well, one more experience ruined by tax filling month paranoia.
- rhubarbquid 15y ago
  When you order a pizza it doesn't exist at the time you order. That doesn't change the fact that you're purchasing a product. Though I think with kickstarter you're technically making a donation. Either way I don't see how that could affect your taxes (other than sales tax) unless you're backing something you want use as a deduction...
  - gcb 15y ago
    Donation is very different from purchase. but i was thinking mostly for the guy receiving the money. There's then a distinction for selling and servicing. The pizza analogy is not that fitting, because there's no wording saying the pizza may not materialize.
el_presidente 15y ago
Author of Rolling Stone piece is focussing on the JOBS act as an enabler for stock fraud. That's because, at this point in time, fraud should be the focus of anything related to the financial sector.

joeag 15y ago

Researching and writing about Goldman pushed Taibbi around the bend on anything having to do with finance. A few tidbits: Even worse, the JOBS Act, incredibly, will allow executives to give "pre-prospectus" presentations to investors using PowerPoint and other tools in which they will not be held liable for misrepresentations. These firms will still be obligated to submit prospectuses before their IPOs, and they'll still be held liable for what's in those. But it'll be up to the investor to check and make sure that the prospectus matches the "pre-presentation." Oh my gosh - you mean before I invest my hard earned money I should read the PROSPECTUS. Say it ain't so. Then he goes on to say: In the same way, get ready for an avalanche of shareholder suits ten years from now, since post-factum civil litigation will be the only real regulation of the startup market. In fact, there are already supporters talking up future lawsuits as an appropriate tool to replace the regulations being wiped out by this bill. Isn't "post-factum civil litigation" an even better mechanism for enforcement? Look companies that are "bad actors" are going to cheat the SEC and the public anyway, and companies that aren't "bad actors" had to go through the additional expenses to comply with the SEC regs that have now been relaxed. I would rather have motivated shareholders (and their lawyers) with an axe to grind policing the markets than bureaucrats. If you look at the job bureaucrats have done to date,the track record is not so great. Read more: http://www.rollingstone.com/politics/blogs/taibblog/why-obamas-jobs-act-couldnt-suck-worse-20120409#ixzz1rqj2pYk2 http://www.rollingstone.com/politics/blogs/taibblog/why-obam...

smacktoward 15y ago
> Isn't "post-factum civil litigation" an even better mechanism for enforcement? Only if you prefer getting ripped off and then having to pay lawyers for ten or fifteen years to get back a tiny part of your losses to not getting ripped off in the first place.
- rhubarbquid 15y ago
  Assuming there's anything left to sue for...
deleted 15y ago
[deleted]

guelo 15y ago

I wonder if all the problems with Groupon's train wreck IPO would have been discovered ahead of time under this new regime.

hammock 15y ago
Seems it would be the opposite: The law makes it easier for startup companies (particularly tech companies, whose lobbyists were a driving force behind its passage) to attract capital by, among other things, exempting them from independent accounting requirements for up to five years after they first begin selling shares in the stock market.
- jellicle 15y ago
  Correct! If Groupon started today we would still be at least a year and half away from having any chance at all to discover their fraudulent accounting, and their stock would probably be at $1000/share.

marshallp 15y ago

As opposed to the fraud that IS the stock market today? (For the average person the stock market offers no return, the 20th century was good but now it is so efficient that any extra is skimmed off by the smarter hedge funds). There is an overinvestment in the stock market today, the excess money needs to go somewhere so elsewhere, which for the past few years was the housing bubble. However housing is not a wealth producing exportable industry (and is already overinvested/iverpriced), and so the capital needs a new outlet - private equity (which includes venture capital). The fact that this investment option has been closed of to ordinary people is the real fraud (that has been occurring for 80 years now).

seanp2k2 15y ago
Don't forget the scum that is HFT...ooh, I'm sorry, I meant to say "liquidity providers".

T_S_ 15y ago

The act allows mom and pop to invest with little or no "burdensome" ongoing disclosure. I run a startup and would love to have their cash, but the sharks will get it instead. Instead of doubling down on opacity, Congress should take a leaf from the non-profit industry. There, at least everybody's tax return (Form 990) is available for public inspection. Some of them are very illuminating. Even just that would be a better start than this. The idea that continuous disclosure has to be burdensome is a relic from the past. You want to raise money from my mom? Let me monitor your Quickbooks online account.

clavalle 15y ago
III. Requirements on Issuers (A) name, legal status, address, website, etc. (B) names of directors, officers, and 20% stockholders (C) “a description of the business of the issuer and the anticipated business plan of the issuer” – the devil is really in the details of this one, and it remains to be seen whether the SEC will require this “description” to be 4 pages or 40 in order to be sufficient (D) prior year tax returns, plus financials – see below for details (E) description of intended use of proceeds (F) target offering amount, deadline, and regular progress updates through the life of the offering (G) share price and methodology for determining the price (H) a description of the ownership and capital structure of the issuer, including a lot of detail about the terms of the securities being sold, the terms of any other outstanding securities of the company, a summary of the differences between them, a host of disclosures about how the rights of shareholders can be limited, diluted or negatively impacted, “examples of methods for how such securities may be valued by the issuer in the future, including during subsequent corporate actions”, and a disclosure of various risks to investors II. Requirements on Intermediaries The JOBS Act requires crowdfunding intermediaries to register with the SEC, either as a broker (which is an expensive and onerous process), or as a new thing called a “funding portal”. Funding portals will also be required to register with FINRA, the financial industry self-regulatory organization. A) providing certain disclosures and investor education materials to investors (B) ensuring that the investor has reviewed educational materials and answers questions indicating that he/she understands the risks involved (C) performing certain background checks on the issuer (D) provide a 21 day review period before any crowdfund securities are sold (E) ensure that an issuer does not receive investment funds until its target investment minimum has been reached, and that investors may cancel their commitments to invest as provided by the SEC (no word yet on how these cancellation provisions are going to look) (F) ensure that no investor surpasses the investment limits set forth above in a given 12 month period in the aggregate – i.e. the limits described above with respect to investors apply to all crowdfunding investments in a given 12 month period, not just to individual investments, and the burden is on the intermediary to monitor this (G) take steps to protect the privacy of investors (H) not pay finders fees to promoters or lead generators with respect to investors (it appears to be okay to pay finders fees for issuer leads) (I) not allow the intermediary’s directors, officers or partners to have a financial interest in an issuer using its services There are /plenty/ of disclosure requirements and more coming down the pike when the Commission is through drafting what else is required. It is not like there is going to be a Kickstarter where people just start throwing money at random ideas with no way to check who and what they are investing in.

joshbuddy 15y ago

What will this mean for RSUs?

eblume 15y ago

I have a feeling that the JOBS act could actually be a very, very good thing if the right company (or, better yet, marketplace of companies) came around to offer a gateway service to these micro-investments. Personally I would implement - or would purchase an account on - such a site where companies would advertise for investment, and would be required to provide a certain minimum of disclosure. The site would provide avenues for that disclosure (basically, a feed of reports issues by the companies themselves and perhaps also relevant news stories, a'la Google News) as well as investment portfolio tracking. It would (still) be up to the user to verify the disclosure and make sure they are looking at companies that are disclosing the right quantity, quality, and purview of information - but the site would hopefully make it very clear what is and isn't being disclosed and how that compares to other companies. Of course another key feature could be investor/analyst reviews, but this would need an extremely well-engineered system to prevent or discourage astroturfing & other social engineering schemes. Personally I doubt anything less than only allowing authenticated professional journalists (affiliated with reputable publications) could be acceptable, at which point you wonder about the real utility of such a thing. I feel like this would make an excellent Startup, actually, and might do some work in that regard. I think step 1, though, is spending a lot of time reading about the ins and outs of the law. It would be very easy to grab a 'legal third rail' with both hands with this project and expose yourself to a lot of liability. I find that intimidating, but maybe not too much so.

guelo 15y ago
Sounds like a free market version of a SEC regulated exchange. Not sure what the free market theory is for why it would be less susceptible to regulatory capture.
- SoftwareMaven 15y ago
  It wouldn't be susceptible because there could be more than one competing. Different providers would optimize for different types of investors.
  - guelo 15y ago

raheemm 15y ago

I disagree with Taibbi on this one. Making it easier for startups to raise money does not equate to fraud on Wall Street. Yes, there are some who will take advantage. But it will also means that the engines of the economy, small businesses and startups will get a massive lift off. In the end, you have to balance regulation with ease of doing business, raising capital, etc.

jellicle 15y ago
>Making it easier for startups to raise money does not equate to fraud on Wall Street. Eliminating independent accounting requirements is as close to equaling fraud as makes no difference.
adestefan 15y ago
According to [0] "...new research by the Treasury Department finds that small businesses — defined as those with income between $10,000 and $10 million, or about 99 percent of all businesses — account for just 17 percent of business income, and only 23 percent of them pay any wages at all." It's pretty hard to argue that makes them the "engines of the economy." [0] http://www.nytimes.com/2011/10/24/opinion/small-businesses-arent-key-to-the-economic-recovery.html?_r=2&ref=opinion http://www.nytimes.com/2011/10/24/opinion/small-businesses-a...
- wpietri 15y ago
  Not quite. When people say things like "the engines of the economy, small businesses and startups", they are referring to job growth and innovation. Large businesses have most of the revenue, but small, new businesses are where tomorrow's champions come from: Each wave of firm startups creates a substantial number of jobs. In the first years following entry, many startups fail [...] but the surviving young businesses grow very fast. In this respect, the startups are a critical component of the experimentation process that contributes to restructuring and growth in the U.S. on an ongoing basis. -- http://www.nber.org/papers/w16300.pdf http://www.nber.org/papers/w16300.pdf
whyenot 15y ago
It's not just startups and small businesses. The JOBS act covers companies with annual income up to $1 billion. The crowd funding stuff in the bill is great, but it's like a few drops of honey on top of a turd.

jellicle 15y ago

Apparently third time's the charm for this story. See also: http://37signals.com/svn/posts/3160-lets-ride-this-bull http://37signals.com/svn/posts/3160-lets-ride-this-bull

grellas 15y ago

Securities laws, in general, have never been absolute in the United States. When companies offer stock or other securities to purchasers, the broad rule is that "you can offer anything you want, even something junky, so long as you disclose all material elements associated with the offering such that a reasonable investor can make an informed decision in deciding to purchase it." In other words, there is no all-seeing, all-knowing authority supervising the process who declares that the offering is substantively sound. It may or may not be. All that is required is that the issuer meet the requirements imposed by securities laws for disclosing all material facts relating to the investment. That is what the registration statement does in a public offering. And that is all it does. If that is done, and junk is offered, and the public wants to buy junk, the securities laws permit this. Even respecting disclosure, though, the U.S. securities laws have always tempered the burdens associated with making detailed disclosures of the type required in a registration statement with important rules saying, in effect, "we as regulators realize that requiring companies to go through a multi-million process just to offer their securities to investors is too much and therefore we will exempt a broad number of categories from the registration and detailed disclosure requirements to enable small companies to offer their stock for sale as well." That premise underlies a whole range of securities law "exemptions" that permit small offerings, etc. so that companies can grow and develop without choking on process. The ultimate exemption under federal law is Section 4(2) of the Securities Law of 1933, which basically exempts private placements from the burdens of going through the registration process. Section 4(2) has been around forever and has no formal requirements. It simply provides that anything that is a true private placement, as opposed to a public offering, is exempt. Because the assessment of what is a private versus a public offering turned on detailed facts and circumstances, and this in turn led to substantial uncertainty and lots of litigation (is an offering made to 20 people "public"? how about if you don't know them? how about if you advertise the offering to get them interested? how about if they are small, unsophisticated investors?), the ultimate exemption - or, more accurately, "safe harbor" that assured an issuer that an offering would be exempt - was Regulation D, adopted by the SEC in 1982 and widely used by startups ever since that date to make tons of private placements that have been streamlined, simple, and cost-efficient ways of offering their stock to investors. As is apparent from the above, the securities laws have always sought to strike a balance between imposing regulatory requirements (and burdens) that are aimed at protecting investors, on the one hand, and moderating the burdens so imposed to facilitate capital formation for situations where it makes no sense to impose needlessly burdensome requirements on small issuers and where less burdensome, fallback protections can be used instead of the full panoply of protections that apply to larger-scale offerings. By definition, this means that U.S. securities laws have always recognized a trade-off between having strong regulatory requirements aimed at investor protection, on the one hand, and lessening such requirements for some situations so as to give practical routes for capital formation for companies unable to meet the rigorous requirements. At many points along the way, the legislators who pass such laws and the regulators who administer them make multiple social policy judgments saying, in effect, "this is a situation that calls for the maximum protections but this one will leave investors fairly protected with more minimal protections in place." That is why it costs many millions of dollars to do the legal and accounting work to take a company public but only a couple of thousand to issue stock in a new corporation and only a few tens of thousands to raise a few million in a Series A private placement. The law is designed to accommodate the practical needs of companies that want to raise capital. Securities laws don't vanish in the private placement context. They simply impose far fewer requirements aimed at investor protection and all the more so when investors are presumed to have a strong ability to protect their interests (this is why offerings are often limited to "accredited investors," i.e., high net-worth or high income individuals, among others). The JOBS Act is a piece of legislation that takes the rather burdensome accounting requirements first imposed by Sarbanes-Oxley on all publicly traded companies - and adding $1M+ in annual costs to even the smallest issuer in order to attain regulatory compliance under those rules - and exempts a set of relatively smaller publicly-traded companies from having to comply with those requirements for a 5-year ramp-up period after first going public. This part of the Act says, in effect, "we realize that the IPO market has been moribund ever since SOX was enacted and, because part of the reason is the heavy regulatory burdens imposed by SOX, we will seek to encourage more IPOs by giving issuers more incentive to go public without having to face huge expenses right out the gate." Now, this social policy judgment made by Congress may or may not be sound. But it is a policy judgment declaring that the SOX rules are just too much for relatively small companies just going public and therefore should be relaxed for such companies in order to enable them to realize their practical goals of going public, building momentum, and only later having to comply with the full SOX rules. One can question this judgment but one cannot question that it falls squarely within the pattern and practice of U.S. securities laws as implemented for decades. It is always a trade-off between optimum investor protections and practical limitations on such protections in the name of letting legitimate capital formation get done. Will this "legalize fraud," as suggested in this piece? I doubt it. The SOX rules have a short history and securities laws go back to the 1930s, more or less ably protecting investors during their long tenure before SOX took effect. Such protections will continue to exist for offerings made by these small issuers who will get some interim relief from SOX requirements. One can argue that it is bad policy to afford such relief. But to suggest that it "legalizes fraud" is to absurdly overstate the case. The JOBS Act similarly loosens requirements for crowd-funding, for enabling private companies to have larger numbers of shareholders before having to register as publicly-traded companies, and for other contexts as well. On balance, it is aimed at promoting more effective capital formation by loosening otherwise strict SEC rules when new conditions warrant. This, to me, is very good for startups and the Act as a whole should, in my judgment, lead to many excellent results. That is why it has received almost uniform and very strong support from pretty much the entire startup community. It does not legalize fraud. It strikes a classic balance between formal investor protections and real-world practicalities. If the balance proves wrong, nothing will stop Congress from pulling back. In the meantime, let's see if crowd-funding can be used to give us new ways of raising capital and if the IPO market can't be rejuvenated after a long dead spell. The Act stands to benefit startups in major ways and, though not exempt from criticism, is by no means some radical departure away from investor protection under U.S. securities laws. On the contrary, it stands squarely within the traditions of those laws and is a good example of precisely how such laws have been implemented for many decades.

patrickgzill 15y ago

What? There isn't fraud in the stock market today? Free Jon Corzine! Oh, nevermind... BTW, Univac (I believe) got their start issuing stock in exactly this fashion. You could buy a share for either $1 or $5.

bdunbar 15y ago

I'm no expert - but I did work part-time for a new business. It was hard as heck to raise capitol. So much so that it was nearly not worth the effort. We spent as much, or more, time on investing than we did working. At one point I was named as a defendant by one state for the content of an email I sent on behalf of the CEO. We settled that, the boss got me removed from the thing, paid the fine. Paid the investor back his funds. The investor took the money, went to his _other_ home across the state line, sent the money back. It seemed like a lot of work on the part of the state regulatory branch - going after a small company for a negligible amount of money, on behalf of the sole investor from that state who really wanted to invest. It sure soured me on the idea of taking any company I launch public.

hager 15y ago

Any investor that is worth their salt will do their own homework and come up with their own metrics for how they value a company. The government should get out of the business of deciding what is appropriate for companies to report. As history has shown the government does a terrible job(Volt, Solar, etc.) of investing / guiding investments(mortgages).

earbitscom 15y ago

Haha. Honest startups are going to be at a disadvantage to those who make their projections on the back of a napkin. We're honest as hell but if you invest based on the detailed and honest projections we made in the first five years and not more so on the team, market and other real data, you're an idiot.

rachelbythebay 15y ago

Could an existing company take advantage of this by doing some new stock offering? They could put parts of their business behind this "wall" and operate unreviewed for five years. That's plenty of time to drain the coffers and set sail for a sunny island.

10dpd 15y ago

If its legal is it fraud? Just sayin..

NHQ 15y ago

He seems to be griping about all the best parts. Now small businesses and producers can get financing from the crowd? I've been dreaming about this. Yet I really had no idea the jobs act was pushing it. Whoever needs a developer partner to launch a crowd funder for private shares, hollar at me. I want to focus on local goods and manufacturing.

stanfordkid 15y ago

Just discussed this bill with the head of a mid-size investment bank today. The crowd funding provisions are not really that important. He said that the most impact will be the reduction of disclosure requirements for emerging growth companies enabling them to raise up to $50 million rather than just $5 million. It will mostly be institutional investors buying into even smaller size IPO shares -- these are savvy investors and the mania of the dot-com bubble has certainly not been forgotten. The thing is there isn't really a huge market for these deals at the moment -- his bank specializes in deals of this size and I asked him if he thinks more mid-range banks will popup to serve this market and he said that probably not until the deal flow comes in.

erichocean 15y ago
Can you disclose the bank? The JOBS act really helps my company -- we're too far along for VC, but not far enough along for a public IPO. The post-VC, private equity market makes the most sense, but as you noted, the amount of money you can raise that way pre-JOBS act is far too low, making companies like mine (Pixar for live-action filmmaking) either at the mercy/generosity of a Steve Jobs-like figure (literally), or simply not funded at all since we exist in the Government-created financial no-mans land. Either is far from ideal. The JOBS act, at least for our company, changes this and makes a previously non-viable-through-inadvertent-regulation company suddenly viable. That's why I supported it, and continue to do so.
- stanfordkid 15y ago
  I don't want to post on a forum but send me you email and I can connect you.
  - erichocean 15y ago
    Thanks! My email is eocean@fohr.com.
- deleted 15y ago
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- deleted 15y ago