Book of the Month

Does The JOBS Act Really Suck?

Matt Taibbi has a recent blog giving his analysis of a  jobs bill signed into law by our President, Barack Obama. Taibbi believes it is a very bad law. He gives his view and quotes the opinion of others in position to have informed opinions.

Boy, do I feel like an idiot. I've been out there on radio and TV in the last few months saying that I thought there was a chance Barack Obama was listening to the popular anger against Wall Street...

Then the JOBS Act happened.

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.

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.

I would like to know if there is a legitimate counter-argument to the points that Taibbi makes. Are the faults that he sees just a part of an overall good law? Or, is he accurate when he says:

In the meantime, let's just say this is a dramatic step taken by Barack Obama. Nobody should have any illusions about where he stands on Wall Street corruption after this thing. Boss Tweed himself couldn't have done any worse.

Read more: http://www.rollingstone.com/politics/blogs/taibblog/why-obamas-jobs-act-...


The first comments replying to Taibbi's blog strongly disagree with him but offer no argument except that the law saves startup companies a lot of paperwork. Is this enough to justify the problems apparent in the law?

Who was it who said America is a country of used car salesmen? A large part of the US economy is hucksters selling overpriced stuff to suckers, it's an American tradition. This may grease the skids for that sort of activity, but 'nearly legalize fraud on Wall Street'? This after Bernie Madoff ran his Ponzi scheme for 10-15 years, even when the SEC was tipped off, even after the SEC investigated, and after the SEC cleared him? Caveat Emptor still applies.

It says 'start up tech companies' will find it easier to raise money. If some people with too much money or looking for the quick buck decide to invest in start-ups instead of the lottery or casino gambling, so what, they may have a better chance of getting a return.  At least this isn't selling a war. 

I have not read the details of the bill, but as a small business owner I am instinctively attracted to the idea of going on-line and selling stock in my company. Why should large companies have all the sweetheart opportunities for fraud while we little guys are frozen out? We get no special deals, can't deduct layoffs as departmental closings, can't issue bonds for 1% interest, can't put our companies in portfolios and then pay ourselves for managing them under a ruse of "carried interest", can't get no respect from the local banker cause we're small potatoes, can't afford to hire lawyers to set up off shore accounts, still have to personally guarantee "business loans"---which makes them home equity loans and not business loans, still have to comply with OSHA even though as a percentage of sales its much more burdensome than the same regulatory requirement for a large business---and until now, couldn't afford to sell shares to the public because of all the goddamned regulations which require expensive lawyers to ferret out the details. And now some jerk pundit wants to take away the only fucking perk we've gotten in the last fifty years? The question is not whether I think it's a good law. The question is why do I still call myself a "liberal". You can't make this shit up! 

  Thanks for the response. You made some very good points, I think, and that is what I was hoping for, seriously, the view of someone with skin in the game that had an informed perspective and maybe a different conclusion. But; "... the only fucking perk we've gotten in the last fifty years". Seriously? Still, after reading your response I was ready to vote for putting Taibbi into a big bag of feral cats, maybe tied back to back with Greenwald, and pitching them into the nearest river. Have these "jerk pundits" ever said anything worth examining since Bush has been gone?  Then Donal comes along and muddies the water with some sensible points in agreement with Taibbi. So confusing.

On a more serious note, so far the media coverage has been at the extremes, a new Indian restaurant in London, a guy with a bamboo keyboard idea in Vail and then the larger companies---which is what I think Taibbi is talking about. The middle market, the market of actual companies, say in the million dollar range with successful histories is what interests me because crowdfundidng is the biggest opportunity for capital that has come along in my memory.

The larger companies, say the $100 million ones, or the $20 million tech startup will be getting a lot more latitude. Taibbi can complain all he wants to. I still don't expect to have a real opportunity to buy into a high quality tech startup trying to raise $10 or $20 million. If it's that good a deal it will stay with private funding until more leverage is generated. Caveat Emptor and Sour Grapes all around. And it's one of the best stimulus ideas to come around in the last four years, imo. 

For small companies like mine the real hit is in the opportunity to do crowdfunding--specifically, the ability to raise up to a $1million a year in equity financing. This is a startling development. As the owner of a successful business my decision will be whether I want to give up my independence and whether a larger company is really worth the changes in my life it would bring. I can't get a $50 K credit line from a bank without signing away my house equity. But I now have a real source of financing---if I want it. If it would be legal for me to put offers up on my website or talk to existing contacts, I no doubt could now legally raise the money. 

I started the company by begging, borrowing, maxing out credit cards. home equity loans and worse. Somehow I got everyone paid back and the company made it. VC was just not an option. Nor was bank financing in a straight commercial loan. One learns how to buy a small piece of equipment and work his way up with rolling stock, etc. But none of this is cheap and nothing about it represents a straight commercial loan or venture capital in the traditional sense. 

The new legislation offers something entirely different. And there are some safeguards for small investors---a $2K per year limit of CF for an individual making less than $100K a year. Sure there will be fraud. Some guy will take out a home equity loan, give friends $2K on a side deal which they will invest for him---what's new. My son-in-law went to twenty rock concerts last year. Should I worry about his on line investing at a $2K per year level?

I have started investigating crowdfunding sites, which are springing up like blue bonnets in a Texas cow pasture.THey run the gamut. Essentially you pitch your idea and see if the site accepts you. There seems to be a serious one for retail called Circle Up and others with special slants. These sites will come under some regluation---and that's a good thing as long as they don't shut down the basic idea. I give it six months and there will be some serious sites, connected to securities firms, which will offer a real service to actual investors and companies with ongoing track records. Do I want this? That's a much bigger question. 

 

 

I don't think the problem is large, middle or small.   The worry is that this act just made flim-flam and criminality even easier than it was before.

Sure you would like to avail yourself of crowdfunding.  So would I.  So would every con man with a laptop and a place to plug it in.

Dan, technically, I didn't say I would like to "avail" myself. What I tried to say, maybe not clearly, is to say while there is opportunity, taking on outside investors in whatever capacity raises a lot of issues. I will consider this option over the coming year. It is truly revolutionary. It might be the answer to a personal conundrum of estate planning for me. As always, the key is the quality of people you deal with---meaning the various crowdfunding ideas and sites which are springing up. There is no free lunch but an exciting new lunch counter just opened up--I'm evaluating the menu and the prices. 

One of the essential problems we have in the economy and monetary policy,imo, is that the "transmission" system is not working and I suspect that one of the reasons is simple mechanics---small banks and community banks simply don't have the systems and staff to make small loans. Crowdfunding is very much an alternative to what used to be a system of commercial loans to small businesses. Why don't we focus of whether the law needs to be tweaked rather than condemn something across the board  which has such great potential for funding enterprises across the spectrum, including, perhaps, new forward looking economics institutes. 

I have great respect for your writing and analysis. I agree that fiscal policy and stimulus is needed. But I also think creative solutions which remove bottlenecks should be given a chance.

By the way, I'm just curious. Do you think a $2000 per year limit for investing in crowdfunding for a person making less than $100 K a year is not sufficient government protection for a person who would otherwise not be able to properly evaluate the quality of an on line investment. I think the actual availability of on line "product" reviews, plus social media, would go a long way in evaluating crowdfunding sites and their deals and even seeking redress. For myself, one or two bad product reviews on Amazon will put me off a product. It would be the same with me for a crowdfunding site---either as deal provider or as customer.   

Oxy,

Just happened across this, made me think of some of the things you said on this thread, and even though it goes way beyond what you were talking about, thought it might be of interest to you:

http://www.huffingtonpost.com/klaus-schwab/end-of-capitalism----_b_14233...

My initial take was the same as Taibbi's.  During the financial journalism part of my career I covered a lot of scams involving private placement investments in start-up companies with murky financials, operating with little regulation other than the general anti-fraud laws that govern commerce and investing.

The government's solution to this, which the JOBS Act changes somewhat, has been to say that such investments could only be sold to qualified investors or investment vehicles that cater to qualified investors or institutions such as hedge funds, private equity funds and venture capital funds. Presumably, these people have the means to know what they're getting into.

The counter argument to this is that it's not fair.  It means that I can't invest, say, $5,000 in Instagram when it was worth $20 million in exchange for $250,000 when the company was sold to Facebook for $1 billion.  No 50 times return for me, but it's okay for hedge funds and rich people?

Am I really less qualified to invest my $5,000 than somebody who is already a millionaire and is thus considered "qualified?"  How do I ever get to be a millionaire if my investment activities are restricted to the 8% (hopeful) returns that I'll get from the public equity markets in the long run?

Taibbi may well argue that he is protecting me from myself.  I have no way of separating the next Instagram and from the next Instascam.  I may as well buy 5,000 scratch cards if I'm investing by my wits. 

At least, if I'm restricted to the public markets I can rely on filings that the executives have signed off on as true and accurate.  The JOBS Act says that prior to filing a prospectus, corporate executives are not responsible for the veracity of the financial statements that they make.  Taibbi takes big issue with this, and so do I.

But, the counter-argument is that securities, whether in a private or public transaction, are only sold by prospectus, not by marketing presentations or press releases.  So you are expected to receive, read and analyze a prospectus before you plunk down your money.

Another counter is that we're talking small amounts of money, pooled.  Crowdsourcing the investment also means crowdsourcing the due diligence.  Maybe that helps.  But we don't let small investors into hedge funds on the argument that they will be safe swimming with the bigger fish.

I also wonder is a quality company like Instagram will even want crowdsourced money.  Many of the best companies get to choose who their investors are.  They want the big Venture firms and the big hedge funds because they're looking for long-term partners and maybe even some advise.  If the best companies remain on the hunt for the best investors, that leaves the mediocre companies and fraudsters to go after the Kickstarter-type money.  That's what makes me think Taibbi is right, though it's not as cut and dried as he says.

 

All 'jobs' programs that funnel money to people through third parties suck, imo.    They channel money the wrong way round thereby failing to get maximum bang for every buck.  

Since a knowledge-based economy is supplanting the industrial one, why do we not consider paying people to acquire (and teach) assortments of desirable and useful skill sets.  Maybe even consider paying people for being the healthcare guinea pigs we have become.  Study us, learn from us, and be truly scientific -- and humane -- about it.  

Why not pay to prepare us for the future, the present, too.  Let the past go already.

 

James Kwak:

The so-called JOBS act is a victory of faith over basic logic. The motivating idea seems to be that if we reduce the regulations that govern the process of raising capital, small companies will find it easier to raise money, and that money will translate into jobs. Many people have pointed out some of the problems with the bill: recently, for example, Andrew Ross Sorkin highlighted the potential for companies to take advantage of investors, and Steven Davidoff pointed out that regulation is probably not the reason for the decline in the number of small company IPOs.

There are a couple of more fundamental misunderstanding I want to focus on, however. First, it’s not clear that relaxing regulations will actually make it cheaper for companies to raise money. Sure, eliminating the independent audit requirement will save companies a few bucks. But what really affects the cost of capital is not out-of-pocket fees but the price that investors are willing to pay for equity. The less confidence that investors have in a company’s prospects, the cheaper that company will have to sell its stock. If small companies are allowed to provide less information to investors, that could simply make it more expensive for them to raise money.

Kwak also points out this NY Times quote as absurd:

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.

The problem I see is that background checks will probably switch you over to Facebook Timeline. Yecch.

Thanks for those links, they are well worth reading if the root subject is of interest.

There are 2 kinds of the people in the world: people who want to give their money away and people who want to take it. We grease the wheels of industry when we make it easier for those people to get together. Problem solved!

Taibbi expands on his critique of the jobs bill

 

http://www.rollingstone.com/politics/blogs/taibblog/yes-virginia-this-is...

 

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