AS MUCH AS IT WARMS the cockles of our hearts to see House Republicans, Senate Democrats and President Barack Obama united in their efforts to get more Americans back to work, we are discouraged that they are all rallying behind a set of proposals that inevitably would hurt investors.
The Jump-start Our Business Start-up Act, which was overwhelmingly passed in the House two weeks ago and will be debated this week in the Senate, is a compilation of six bills intended to encourage entrepreneurship and capital formation.
Proponents of the JOBS Act — and they aren't hard to find in an election year — contend that the measure would make it easier for small businesses to raise money, thereby eliminating a major obstacle to job growth.
But the JOBS Act really isn't about job growth. It is about election-year politics. It's about Mr. Obama's desire to make peace with corporate America. And it's about an attempt by our leaders in Congress to appease Wall Street's desire for less regulation and transparency — all in the name of “job creation.”
If passed, the JOBS Act would undo many regulations and protections in place.
One of the most disturbing aspects of the legislation is a provision that would create a new “on- ramp” for initial public offerings.
Under the proposal, so-called emerging companies — that is, those with less than $1 billion in annual gross revenue and $700 million in market capitalization after they went public — would be allowed to delay for up to five years compliance with Section 404(b) of the Sarbanes-Oxley Act of 2002. That rule requires a publicly held company's auditor to attest to and report on management's assessment of its internal controls.
Proponents of the
IPO on-ramp argue that the proposed rule change would allow smaller companies to deploy the capital they otherwise would have spent on complying with Section 404(b) to create jobs.
NEED FOR AUDITORS
Never mind that in April 2011, the Securities and Exchange Commission released a congressionally mandated study of Section 404(b) which found that the costs of implementing the law have declined in recent years for companies with between $75 million and $250 million in market cap.
The report also found “strong evidence that the auditor's role in auditing the effectiveness of [internal control financial reporting] improves the reliability of internal control disclosures and financial reporting overall, and is useful to investors.”
Another aspect of the IPO on-ramp that is disconcerting is that it would give breaks to newly public companies that have nothing to do with job creation. For example, it would allow companies to delay making vital disclosures about executive compensation, shareholder votes on golden parachutes and periodic say-on-pay votes.
The bottom line is that companies that want to raise funds from ordinary investors should be required to provide those investors with accurate and reliable financial information.
That's why the IPO on-ramp is a dead end for investors and should be avoided at all cost.
Another worrisome provision of the JOBS Act is one that would eliminate the prohibition against general solicitation and advertising in private offerings under Regulation D. While the proposal wouldn't ease the requirement that only accredited investors be allowed to buy into the offerings, it would make it easier for issuers to promote their offerings to the general public.
Our concern is that individuals who met the accreditation standard under the letter of the law — but not the spirit of it — would be solicited aggressively.
CROWD FUNDING
We also are wary of a provision in the JOBS Act that would allow startups to solicit funds through online crowd-funding platforms.
If Congress learned anything from its passage of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, it's that serious and far-reaching legislation cannot be rushed to assuage public sentiment.
The JOBS Act is a significant piece of legislation — one that deserves analysis and study that it so far has not received.
