The US Jobs (Jumpstart Our Business Startups) Act has been under severe criticism, ever since the bill was passed in April.
The Act was aimed at encouraging innovation, growth, and jobs, by allowing emerging growth companies to raise direct investment capital from the public. Few startup firms have access to angel investments, which will be provided under Jobs.
However, Kurt Schacht believes that the bill is truly an ill-considered piece of election year pandering. Critics think that it has made the US home ground for unhealthy public offerings. It ends longstanding investor protections, reduces market transparency, and lowers accounting and auditing standards for companies that are planning to go public, leaving investors defenseless against scammers. As Dealbook puts it, ‘The United States, which has long been criticized for its harsh rules surrounding IPOs, is now the place where foreign companies go to avoid regulation.’
Regulation needs to be in place to protect investors from themselves. Investors tend to be impulsive in their decisions and are the stakeholders most detached from the underlying company. Members of the common public are unable to comprehend the concepts and theories underlying valuation. Typical investors are unaware of business risks and financial risks involved in an asset investment, and are unable to adopt enough diversification to avoid these risks.
Loose standards in the marketplace also attract loose morals among those attracting investment. The Jobs Act has set up a welcoming atmosphere for scammers, who now have an open hand to attract gullible investors to nefarious investment schemes. Concern has been expressed over how American markets have evolved towards deregulation over the past few years.
Under the JOBS Act, the SEC is required to lift the ban on general solicitations or mass advertising of nonpublic securities to individual investors. Naïve investors are, as a result, being encouraged under the Jobs Act to make startup investments in unfit businesses.
One of the hot IPOs recently was the Manchester United PLC (NYSE: MANU) IPO. The fabled English football club took advantage of the reduced reporting requirements when it went public with an objective to raise $300 million. The company decided to list on the NYSE Euronext (NYSE:NYX)
Many critics of the Jobs Act feel that Manchester United PLC (NYSE: MANU) hardly qualifies as an emerging growth company with its 134-year history as a football club. Furthermore, Manchester United PLC (NYSE: MANU)’s debts stand at over $655 million, and it is felt that Manchester United PLC is just listing on the NYSE Euronext (NYSE:NYX) to exploit the loose capital market standards. The club passed up the Hong Kong Exchanges and Clearing Limited (HKG:0388) and Singapore Exchange Limited (SGX:S68) for its IPO because of their tight regulation on dual asset class structures with separate voting rights. George Soros filled a 13G with the SEC yesterday, which shows that he owns 3,114,588 Shares or 7.85% of Manchester United.
Trulia Inc., a real estate listing website, also announced an IPO of $75 million by utilizing a provision of the Jobs Act, which allows companies with annual revenue of less than $1 billion to keep their prospectuses out of public view, until at least 21 days before marketing shares to potential investors, in what is known as a road show.
Trulia Inc. represents exactly the kind of companies that will benefit under the Jobs Act at the expense of investors. The company’s reported revenues for the first half of this year increased 78% to $29 million, but it showed a loss of $7.6 million, due to the increase in costs and expenses. The financial prospects of the company are unclear, especially as the Jobs Act has made it easier for the company to hide its accounts from the investing public.
An alternative to the Jobs Act has come forth in the capital markets, in the face of Fostering Innovation Act, HR 6161. HR 6161, approved last week by the House Capital Markets Subcommittee, which would modify the filing status classifications by raising the public float requirement for accelerated filers, from $75 million to $250 million, and adding a new element, a $100 million revenue component. If the bill were enacted as approved by the Subcommittee, issuers with less than $250 million of public float, or less than $100 million of revenues, would be considered non-accelerated filers. Non-accelerated filers are subject to less burdensome reporting requirements than accelerated filers.
HR 6161 also aims to provide support to emerging growth companies and help them in raising capital. The bill would provide some cost saving and partly relieve them from reporting requirements. Some feel that it would go farther than the Jobs Act in providing compliance relief to smaller companies.