In a leap of faith in America’s entrepreneurial spirit and the strength of U.S. security regulators, President Barack Obama signed the JOBS Act into law last week. Although the bill received rare bipartisan support, security agencies and consumer advocates do not share the same confidence, concerned that the JOBS Act decreases transparency and opens the way for fraud.
“The bill dismantles many investor protections Congress put in place a decade ago after accounting scandals at Enron, WorldCom, and other companies,” said Council of Institutional Investors Executive Director, Ann Yerger in a statement.
The JOBS Act, an acronym for ‘Jumpstart Our Business Startups,’ will make it easier for startups to raise capital and will reduce regulatory processes, with longer exemptions from having to disclose financial information.
The statute also allows for ‘crowdfunding,’ which permits small online sales of stock to a large number of investors. Under the new initiative, companies will be required to register with the Securities and Exchange Commission only when they have 2,000 shareholders, as opposed to the current 500.
The president described the JOBS Act as a “game-changer” and “exactly the kind of bipartisan action we should be taking in Washington to help our economy.”
“I’ve always said that the true engine of job creation in this country is the private sector, not the government. Our job is to help our companies grow and hire. That’s why I pushed for this bill.”
Crowdfunding will allow small businesses to raise up to $1 million annually from numbers of small-dollar investors through web-based platforms.
“Because of this bill, startups and small business will now have access to a big, new pool of potential investors—namely, the American people. For the first time, ordinary Americans will be able to go online and invest in entrepreneurs they believe in.”
North American Securities Administrators Association (NASAA) described the bill as “a disaster waiting to happen,” saying it was unlikely to increase jobs, but would increase fraud.
“Election-year politics have blinded Congress and the White House to the unintended consequences of their actions, which however well-intentioned, could open the floodgates to investment fraud,” said Jack E. Herstein, NASAA president.
Americans for Financial Reform, a coalition of more than 250 national and state organizations, said they were disappointed that the Democrat-dominated Senate had passed the bill, saying a lack of transparency could lead to the abuse of investor trust.
“With the country still suffering from high unemployment and hard times in the wake of the financial crisis, it is almost unbelievable that the Senate would rush passage of measures that will undermine transparency and accountability in the capital markets, and expose our families to a new round of fraud and abuse,” said AFR Executive Director Lisa Donner, in a statement.
The Senate responded to fraud concerns and made some modification to the original House bill, approving a proposal by Sens. Jeff Merkley (D-Ore.), Michael Bennet (D-Colo.), and Scott Brown (R-Mass.), which strengthens investor protections on crowdfunding only.
The changes required that crowdfunding occur through platforms registered with a self-regulatory organization and regulated by the SEC. It also required annual combined investments in crowd funding securities be limited based on an income and net worth test.
The bill passed 73 to 26 in the Senate March 22, and 380–41 in the House March 27.
House Majority Leader Eric Cantor (R-Va.) and Rep. Scott Garrett (R-N.J.) welcomed the bill, standing behind the president as he signed the bill.
“The JOBS Act will allow America’s small businesses to unleash their entrepreneurial spirit on our economy by removing the heavy hand of government that has been standing in the way of economic growth,” Rep. Garrett said in a statement.
The bill also received strong support from startups and their respective associations.
Albert Santalo, CEO of Miami’s healthcare IT company, CareCloud, was at the signing of the bill. He said it would help smaller companies compete against the larger more established outfits.
“I think this helps democratize the whole entrepreneurial initiative, so that more and more people who, either because of fear or access to resources, can now access the world in terms of investment to get their companies and their ideas going,” he told PBS.
President Obama noted security and fraud concerns, saying that startups and small businesses would be subject to “rigorous oversight” from the Securities and Exchange Commission (SEC). “It’s going to be important that we continue to make sure that the SEC is properly funded, just like all our other regulatory agencies, so that they can do the job and make sure that our investors get adequate protections.”
The SEC, however, raised its own concerns about the JOBS Act. Chairman Mary Schapiro sent a letter to the Senate, noting that too often investors were targets of fraudulent schemes, The Washington Post reported. She warned that, if a repeat of these failings were to occur as a result of the JOBS Act, it would drive investors further away from startups in the future.
“As you know, if the balance is tipped to the point where investors are not confident that there are appropriate protections, investors will lose confidence in our markets, and capital formation will ultimately be made more difficult and expensive,” she wrote.