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"It places honest companies at an active disadvantage because they're expending all this energy trying to conform and make all the numbers really add up, whereas this other company can just make up all the numbers and go to investors and say, 'Here’s some numbers that we just cooked up and you're free to believe them or not.'"
There is a real risk that Congress’s actions could harm the market. People pay more for American stocks than they would for those in other countries because we have enhanced antifraud rules. If investors lose faith in the United States market, stocks may decline in value.
The JOBS act—or the House version of it, at least—is packed with provisions to reverse the regulatory tide. It allows “emerging growth companies” with under $1 billion in revenue, hardly small change, to skip various reporting requirements and internal audits. It amends accounting rules. It loosens compensation constraints. And it allows limited online “crowdfunding” by equity investors who are not designated as “sophisticated” (shorthand for being rich). The law also provides protection against often intrusive state regulations and reduces the restrictions on underwriters using public offerings to fund research.
Only a few things are certain. Like past efforts in deregulating the New Deal legacy of investor-protection laws, the JOBS act will be a road to hell paved with good intentions, to paraphrase Dr. Johnson.
I have a dozen more examples where Wall Street has devoted considerable time, effort and campaign contributions to snuff out financial reform designed to protect the public. It’s been relentless. So do I believe that the SEC or any other agency will offer genuine protection to investors? Don’t take my word for it. Here’s what securities regulators, as represented by the North American Securities Administrators Association (NASAA), stated when the JOBS Act passed: “The JOBS bill the President signed today is based on faulty premises and will seriously hurt all investors by either eliminating or reducing transparency and investor protections. It will make securities law enforcement much more difficult, said Jack E. Herstein, NASAA President and Assistant Director of the Nebraska Department of Banking & Finance, Bureau of Securities. Investors need to prepare themselves to be bombarded with all manner of offerings and sales pitches. Congress has just released every huckster, scam artist, and small business owner and salesman onto the internet, Herstein added.
Issuers who use the crowdfunding exemption will be required to disclose a minimal amount of information to the SEC, but the bill includes a provision, strongly opposed by NASAA, that will preempt state securities regulators from reviewing or registering securities sold under the crowdfunding exemption in their states. Lacking adequate funding, the SEC has neither the resources nor the time to effectively police these relatively small, localized securities offerings before they are sold to the public, Herstein said. As a result, crowdfunding offers are likely to receive little regulatory scrutiny until after a fraudulent sale has been committed. This is an investor protection disaster waiting to happen.”