THE JOBS ACT – Is it Securities Regulation that Really Hurts Small Business? Part Two of Five

Written by: Phil Feigin

So what does the JOBS Act really do? I don’t profess to be a Wall Street/NYSE economic and public company expert. In my career, I have generally dealt with the other end of the corporate spectrum when it comes to securities regulation and business, with Ponzi schemes, penny stocks, start-up businesses and “man-on-the-street” sort of stuff. I know enough about the exchange world to agree with more sophisticated pundits and reporters that the first two changes brought about in the JOBS Act are of significant concern.

REPEAL NUMBER ONE:  Emerging Growth Companies

It is hard to forget the voodoo accounting at Tyco and Enron and Worldcom and a dozen other firms only a decade ago. They all led to economic calamity. In turn, that led to Sarbanes-Oxley and stricter reporting requirements and accountability.

However, Congress and the President apparently succeeded in doing just that:  forgetting. Under our new JOBS Act, companies with less than $1 billion in annual revenue are freed from filing quarterly and annual reports with the SEC, as long as they have fewer than 2,000 shareholders. Apparently, they are of the view that the cost of preparing and filing these reports was too great. I suppose the idea is that these companies will use the money saved by not having to file these bothersome reports to hire new employees. However, without readily available public information attested to and filed by corporate executives under penalty of perjury and vetted by independent analysts, the value and liquidity of company stock may also suffer. 

REPEAL NUMBER TWO:  Analysts

 In the go-go years of the dot.com boom, a lot of investors listened to the glowing projections of guru analysts and sucked up one hot new issue after another, only to find out later many of their recommendations were perhaps, shall we say, less than objective. Under the new JOBS Act regime, analysts at brokerage firms and investment banks underwriting new offerings by the newly classified “emerging growth companies” will once again be allowed to participate in marketing efforts. I wonder if this go-round, prospective investors will remember that, when they hear an analyst tout a stock in road shows and in other market hyping, if the analyst is secretly thinking the stock and the company are really “doo-doo”?

These fundamental changes will surely lower costs and ease restrictions on “emerging growth companies” in the short term, but may undermine values in the long run. At least lawmakers and regulators will have good models to review in reaction if history repeats itself.

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