Some of President Obama’s liberal supporters say that he has “pivoted” to a more anti-Wall Street stance in this election year. Matt Taibbi wrote in Rolling Stone that the new JOBS bill that President Obama signed last week puts an end to that idea. He likened the bill’s provisions exempting startup companies from certain reporting requirements during their first five years of operation to a bill exempting baseball players from drug testing during their first five years on the team.
The Jumpstart Our Business Startups Act … … will very nearly legalize fraud in the stock market.
In fact, one could say this law is not just a sweeping piece of deregulation that will have an increase in securities fraud as an accidental, ancillary consequence. No, this law actually appears to have been specifically written to encourage fraud in the stock markets.
Ostensibly, the law makes it easier for startup companies (particularly tech companies, whose lobbyists were a driving force behind its passage) 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.
The law also rolls back rules designed to prevent bank analysts from talking up a stock just to win business, a practice that was so pervasive in the tech-boom years as to be almost industry standard.
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.”
The JOBS Act also loosens a whole range of other reporting requirements, and expands stock investment beyond “accredited investors,” giving official sanction to the Internet-based fundraising activity known as “crowdfunding.”
But the big one, to me, is the bit about exempting firms from real independent tests of internal controls for five years.
There’s just no benefit that the JOBS Act brings to an honest startup company. In fact, it puts an honest company at a severe disadvantage, because now it has to compete against other, less scrupulous companies that can simply make their projections up on the backs of envelopes.
This is like formally eliminating steroid testing for the first five years of a baseball player’s career. Yes, you can pretty much bet that you’ll see a lot of home runs in the first few years after you institute a rule like that. But you’d better be ready to stick a lot asterisks in the record books ten or fifteen years down the line.
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.
Click on Why Obama’s JOBS Act Couldn’t Suck Worse for Taibbi’s full article.
The law was enacted by Congress with bi-partisan support. It is not just President Obama who supported it. It is not as if the Republican leaders are any better. But, as Taibbi wrote, Obama’s signing of the bill shows where he stands in relation to Wall Street.
Friends of mine who voted for Obama say that he is constrained by circumstances. They say he is doing the best he can. They endlessly speculate on his real intentions. But maybe there is no mystery. Maybe what he is doing is what he believes in. If President Obama’s policies really are the limits of the possible, there is no hope and there will not be any change.
Some of the bill’s supporters said that financial disclosure is less important nowadays because investors can do their own research over the Internet. Seriously. Here’s a quote from the New York Times.
While soliciting investment funds online has triggered fears of fraudulent schemes, the law’s backers said the greater availability of information through social media sites like Facebook would allow would-be investors to conduct their own background checks, making it difficult for such schemes to succeed.
“While it seems reasonable to worry about these issues, there is just so much more information these days,” said Timothy Rowe, the chief executive of the Cambridge Innovation Center, which provides office space for start-up firms next to the campus of the Massachusetts Institute of Technology.
Hat tip to The Baseline Scenario.
Click on Something for Nothing? for the Baseline Scenario’s own analysis.
[Added 4/18/12] Matt Taibbi responded to those who blamed the Republican leadership rather than President Obama for the badly flawed JOBS Act.
Three different Obama-created committees contributed major policy ideas to the bill. Obama himself heartily endorsed it through his Statement of Administration Policy. And the bill sailed through the Democratic-controlled Senate when someone up above decided it would be too much trouble to bother with the normal committee process of debate, testimony, and amendments.
Of course the Republicans wanted this bill, pushed for it, wrote its most piggish passages. But the Republicans always suck on these issues. The real political question, as it always is in Washington, is how much the Democrats choose to fight back and do their jobs, versus how much they choose to step aside and take Wall Street money in exchange for “letting nature take its course.” And the JOBS Act is a classic example of a Democratic administration looking the other way while thieves robbed the store.
Click on Yes, Virginia, This Is Obama’s JOBS Act for Taibbi’s whole follow-up article.