Most of us look back on the Gramm–Leach–Bliley Act, and the Commodity Futures Modernization Act with dismay. How did such overwhelming bipartisan majority gleefully undo regulations that had been in place since the great depression, and think that all would end well?
As always, I'd be happy to be wrong, but the more I read about the JOBS Act, I feel like we'll be looking back in a few years and wondering the same thing. Matt Taibbi:
The "Jumpstart Our Business Startups Act" (in addition to everything else, the Act has an annoying, redundant title) will very nearly legalize fraud in the stock market.The next provision he describes sounds the law was designed to promote fraud:
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) to 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."
When I first read this, I asked myself: how does a law exempting a Silicon Valley startup from independent accounting actually encourage investment? If American companies have to have their internal processes independently verified before and after they go public, doesn't that give investors all around the world a big reason to put their money here, instead of investing in, say, Mobbed-Up Siberian Aluminum LLC, or Bangalore Sweatshop Inc.?As we ask with the overwhelmning majorities that passed banking deregulation in the 90s, you ask: Why would people do this? There isn't a majority of tea party members, why on earth would otherwise not completely awful members of congress get behind this bill?
In other words, how does letting www.investonawhim.com go to market (and stay on the market for five years!) without publishing real numbers actually help the industry attract more financing in general, when the whole point of all of these controls is to make investment a less risky experience for the investor?
Get ready for the ostensible answer, because you won't believe it. Here's how CNN explained the reasoning behind that exemption:
Having 500 investors or raising $5 million previously forced a company to register with the SEC -- a costly endeavor. Filling out stacks of legal forms and undergoing independent accounting audits can cost hundreds of thousands of dollars. The law loosens requirements for most companies by raising several thresholds.We needed Barack Obama and the congress to compromise the entire U.S. stock market because it's too expensive for a publicly-listed company with billion-dollar ambitions to hire an accountant? That almost sounds like a comedy routine:
SILICON VALLEY EXECUTIVE: Listen, IJustThoughtOfSomething.com is the hottest thing on the internet. We're so huge it hurts... I can't even walk to my corner bodega without women throwing me their phone numbers!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.
INVESTOR: I'd love to invest. Can I see your numbers from last year?
SILICON VALLEY EXECUTIVE: Well, that's just the thing. We painted the bathrooms last March, and then we also had that Vitamin Water machine put in the lounge. You know, the one next to the ping-pong table? So we just didn't have any money left over for an accountant. But I estimate our revenues for 2014 to be $4.2 billion.
INVESTOR: Sounds hot! Where do I send the check?
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 of asterisks in the record books ten or fifteen years down the line.
The best I can come up with is:
1) Most members of congress are financed heavily by the banks, which makes supporting something that helps them a priority at all times, whether it makes logical sense or not.
2) People in congress are freaking out that the economy sucks and they might lose their jobs, and since one party doesn't care about governing and large portions of the other party are almost as bad, passing a a piece of legislation that promotes fraud that has the word "Jobs" in the name is better than doing nothing. It's low risk, and as they say on Wall Street, by the time this goes bad IBGYBG (I'll be gone, you'll be gone).
It's worth pointing out that things like the JOBS act are exactly why our system is broken. We have the biggest economic collapse since the great depression 4 years ago that was caused in large part due to massive fraud made possible by the non enforcement of existing protections and the deregulation of the banking industry. A mere 4 years since the crisis, congress passes a measure that deregulates these industries in a way that basically encourages fraud.
What's happened with the JOBS Act should basically be studied as a template for why our system is fucked up beyond belief. I don't have any easy answers, but it is worth pointing out how insane this whole thing is.