Legislating to create the next Enron - Skip Kaltenheuser
Under the guise of easing the path to an IPO – up to a value of $1billion – the Jumpstart Our Business Startups Act diminishes established transparency requirements, including some aimed at ensuring companies aren't cooking the books.
When Greg Smith, a Wall Street master of the universe, used the New York Times to tell Goldman Sachs its ethics had withered, so they could take his job and…, he set financial and media worlds atwitter. Reacting in the Washington Post, William Cohan, author of Money and Power: How Goldman Sachs Came to Rule the World, reminded us that the firm's nefarious history even includes a ponzi scheme in the '20s and, in 1970, selling Penn Central commercial paper Goldman held to its clients, neglecting to inform them the imperiled railroad was firmly tied to the tracks. That was before the firm became so influential it salted governments with Goldman alums, including US Treasury Secretaries like Robert Rubin, an architect of financial deregulation. Point is, by now it shouldn't shock anyone, even in Washington, that many in the finance sector happily push their interests before their clients'. But recent government maneuvers reveal a lack of willingness to face this head on.
As IBA Global Insight went to press at the end of March, the US Senate passed the JOBS Act, 73-26, which already sailed through the US House, 390-23, with strong White House support. We saw similar warm bipartisanship when so-called patent reform, the America Invents Act, flew through, also touted as a jobs bill and a boon to small business. This seems the ticket to ride, as the election nears. The next time hands are held across the aisle on behalf of such laudable purpose, it should signal danger.
The 'Jumpstart Our Business Startups Act' gained plaudits for its expressed goal of easing financing for new businesses, including from 'crowdfunding' – picking up smaller investments from many investors, made possible by the internet. When capital formation is particularly challenging, it's hard to argue against ideas for making investing more democratic and accessible, not just the territory of the better off. And who isn't a fan of the wisdom of crowds, like those investing fortunes in Dutch tulips in 1637?
Despite the fizzle of most startups, many are keen on crowdfunding's potential. Senator Jeff Merkley, (D, Oregon), managed an amendment increasing protections for crowdfunding investors. For example, the House version doesn't prevent companies from hiring people to anonymously promote stock online or elsewhere, opening the door to 'pump and dump' schemes like those of the 1990s. The Senate version requires paid promoters to disclose they are paid in each communication.
Under the House version, investors can invest the lesser of $10,000 or ten per cent of their annual income in an individual company, without limit on the number of companies. The Senate puts in limits including a total of an individual's aggregate investments across all crowdfunded companies in a given year, with amounts scaled by income. In another wild flight of House fancy, companies can raise up to a million dollars without disclosing financial or other critical information, like shareholder rights, to potential investors. The Senate requires basic disclosures. The Senate also addresses other onerous House omissions, such as the lack of oversight of a website intermediary, and even lack of any intermediary.
'The so-called "JOBS Act" will lower accounting standards and transparency in our markets, which I suspect may result in fewer IPOs, higher costs of capital for businesses, and fewer jobs'
Chair of the Senate's Permanent Subcommittee on Investigations,
Despite getting his amendments through the Senate, Merkley joined those voting against the overall bill. The JOBS Act is one of those multi-headed hydras conjured for dual purpose. Those guarding the gilded caves of the big money are shooting every angle to hobble finance reform efforts like Dodd-Frank.
Under the guise of easing the path to an IPO, established transparency requirements, including some aimed at making sure companies aren't cooking the books, are diminished. Another Senate amendment sought to tame the most egregious hamstringing, but although a majority supported it, the Republican minority successfully filibustered an amendment vote and ended debate.
The Act creates a category of 'emerging growth companies' lessening financial disclosure requirements for those heading toward IPOs. If you're thinking small business, know that these have annual revenue of up to $1billion, which would have included the vast majority of companies that recently went public and those that might do so in the future.
Requirements curbing conflicts of interest regarding research on companies, put in place when the dot-com bubble popped in the late 1990s, are among protections the Act weakens. Moreover, companies can mass-advertise their stock offerings, from roadside billboards and late-night TV to cold calls and senior centres.
Loopholes allow large companies to fudge the number of shareholders – brokerage houses can be shareholder of record for unknown numbers of shareholders – avoiding triggering SEC disclosure and transparency requirements. Banks, of any size, can avoid SEC regulation if they have fewer than 1,200 shareholders.
As chair of the Senate's Permanent Subcommittee on Investigations, Carl Levin (D Michigan) understands business environments with asymmetric information that coax fraud and abuse. 'The so-called "JOBS Act" will lower accounting standards and transparency in our markets, which I suspect may result in fewer IPOs, higher costs of capital for businesses, and fewer jobs,' says Levin.
Why might the Act prove counterproductive? Congressional staffers studying the bill point out that if private companies with unlimited shareholders can avoid IPOs that bring SEC regulation, they can still trade on secondary markets as private companies. The rules and resources for the SEC to wade through that swamp are lacking.
And if the public again loses confidence in a fair shake in the investment casino, it'll flee. SEC chairman Mary Shapiro warned of the Act's potential for confidence-shattering fraud, to no avail.
The blind rush to dump regulation to garner investment steamrolled through despite evidence from scholars of entrepreneurship, like Amar Bhidé, author of The Origin and Evolution of New Businesses, that public stock offerings and venture capital are rarely important funding sources for new companies.
How could such a flawed bill zoom through? It coincides with the frantic chase for campaign funding as elections near. After the healthcare industry, the greatest largesse comes from the finance sector. So, thin odds for a veto from the White House, even one likely to be overridden.
The true cost of campaign money from Wall Street? Priceless.
Skip Kaltenheuser is a freelance journalist and writer. He can be contacted at firstname.lastname@example.org.