Monday, March 26, 2012


Passes the Senate

Poster for film Boiler Room
 ~ With the passage of the Senate version of the JOBS Act, the plans for a House vote on that version, and President Obama's support, it seems it will become law.

We should all be careful what we wish for.

I've posted my fears, criticisms, and misgivings already, and won't repeat them all here.

Some further thoughts:

  1. The Senate version does at least slightly rein in what otherwise would have been a free-for-all of public solicitation, requiring that any investors so solicited must be accredited to actually invest. However, since the basic exemption from securities registration under Regulation D, Rule 506 (the only exemption to which this relaxation applies) allows non-accredited investors, it's a tad unclear how restrictive this tweak will be. People do pretend, and years later, who remembers where they first heard about something?
  2. The Senate version also add a requirement that companies raising money through crowdfunding provide some modicum of financial disclosure to potential investors; the House bill, astonishingly, required none at all. Not clear that these new restrictions will survive in the final bill, however.
  3. An attorney friend of mine raised an interesting point--once public solicitation is allowed, what will be the role of angel investor groups? The fees of such groups, both for investors to join, and for entrepreneurs to present, vary considerably, but most are in the thousands of dollars. I suspect most angel groups will lose members, and deal flow will shrink. Not all such angel groups will survive the democratization of seeking startup investment.
On the whole, I agree with Senator Carl Levin (D-MI), who remarked during debate on the bill:
We are about to embark upon the most sweeping deregulatory effort and assault on investor protection in decades. If we pass this bill, it will allow vast new opportunities for fraud and abuse in capital markets. Rather than growing our economy, we are courting the next accounting scandal, the next stock bubble, the next financial crisis.
I hope he is wrong, but the biggest impact of this bill is how it deregulates Wall Street to flog the stocks of small, unknown companies to credulous small investors who will be quickly separated from their money. Seed stage companie will see little benefit, but will bear the brunt of the backlash when this deregulatory experiment blows up.

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