The JOBS Act: An Experiment in Capitalism

Sources:

Forbes: JOBS Act to Jumpstart the Jobs Market

NYT: JOBS Act Jeopardizes Safety Net for Investors

NYT: Obama Signs Bill to Promote Start-up Investments

U.S. Congress: The Jumpstart Our Business Startups Act

WSJ: Obama Signs Bill Easing IPO Rules

The U.S. economy is showing signs of a timid recovery; home sales are increasing, the job market is slowly improving, and the stock market just posted one the best first quarter performances in over a decade. To encourage continued growth, entrepreneurship, and the creation of additional jobs, President Obama signed the Jumpstart Our Business Start-ups (“JOBS”) Act. The JOBS Act is the result of bipartisan efforts to ease securities regulations and make it easier for small businesses to raise money from investors.

The Act simplifies access to funding through the capital markets for small companies by relaxing regulatory requirements for initial public offerings (IPOs). An IPO is a company’s first public sale stock shares, often referred to as “going public.” Historically, the cost and complexity of IPO’s precluded small businesses from participating in this type of fund raising, however the JOBS Act removes some the obstacles and reduces the cost. In addition to other measures, the JOBS Act exempts emerging growth companies (those with less that $1 billion in revenue) from expensive outside audits for up to five years, removes certain marketing restrictions, reduces disclosure requirements, and allows web-based fundraising.

Critics argue that the Act opens the door to potential fraud and high-risk investing as relaxed disclosure requirements allow companies to withhold critical financial information. One provision in particular, called “crowdfunding,” allows companies to raise up to $1 million from online investors with minimal financial disclosure. Under the Act, crowdfunding is largely exempted from securities regulations, offering little protection to investors against profiteering, which contradicts efforts to increase transparency in the financial markets. Critics also argue that the Act negates lessons learned from the high-risk investing strategies and under-regulated markets that lead to the 2008 U.S. financial crisis.

With access to increased financing options, the Act will allow small businesses to expand and potentially create new jobs. While the Act passed with a strong majority in both the House and Senate and offers significant opportunities to small businesses, detractors fear that lowering regulatory standards sends the wrong message in the wake of a three-year recession caused, in large part, by unregulated securities and a lack of transparency in the markets.