JOBS Act Favors Businesses, Not Investors

April 6, 2012 Updated: September 29, 2015

News Analysis

NEW YORK—President Barack Obama signed the Jumpstart Our Business Startups (JOBS) Act into law on Thursday. The legislation could have game-changing effects on small businesses seeking to raise capital.

Obama and Congress tout the bill as a boon for smaller businesses looking for new investors. The measure was introduced by the Republicans and gained bipartisan support.

The new law relaxes certain rules and regulations that the U.S. Securities and Exchange Commission (SEC)—which regulates public companies and operations of the nation’s financial markets—imposes on any company seeking to raise funds through an initial public offering (IPO) of stock.

Under the act, businesses seeking IPOs could delay meeting some of the SEC requirements, such as audits by independent accountants and other important disclosures and analyses for prospective investors, by up to five years after listing shares on a public exchange. The rule easing applies only to companies with less than $1 billion in annual revenues.

Qualified companies seeking to list shares will be able to bypass the highly paid investment banks, which often buy a portion of the shares themselves and are tasked with marketing new shares, usually to sophisticated investors. Instead, small businesses will be able to solicit investors on the Internet, through the mail, and via billboards. Such activities have been forbidden under Regulation D of the SEC.

Step Back for Investor Protection

Just as thousands of small businesses are preparing their stock filings, scam artists are probably simultaneously licking their chops.

The bill is a definite step back for investor protection. It pulls back on certain laws enacted after the market crash and the spectacular collapses of corporate giants like Enron and WorldCom. The open solicitation also could invite fraudsters. Going forward, a letter in the mail asking for investments could come from both legitimate companies and scam artists.

Investors must recognize that this bill could invite scams, and it’s now up to investors themselves to determine whether a newly listed company is a good investment or a rip-off.

“This legislation will unleash a new wave of damaging investment fraud, undermine market transparency, and increase the cost of capital for the small companies it purports to benefit,” said Barbara Roper, director of investor protection at the Consumer Federation of America, in a statement.

CrowdCheck, one of the biggest crowd funding firms, applauded the legislation but warned about its downsides.

“The new law will unleash the power of the Internet to bring investors and entrepreneurs together without the established financial institutions calling all the shots,” said co-founder and securities attorney Sarah Hanks. “But everybody needs to be vigilant. Whenever money is involved, you can expect to see fraud.”