Obama's JOBS Act Is Actually Hurting Smaller Companies
That's not just my opinion; it's a fact. To be exact, 49 potential beneficiaries of this atrocious law say that the JOBS Act may actually hurt them by making them less attractive to investors. They've said so in filings with the Securities and Exchange Commission.
How did America's emerging growth companies get into this mess? Thank Congress and President Obama. As we all recall, the JOBS Act sailed through Congress with bipartisan support, at the behest of the president, for the ostensible purpose of encouraging job growth. But it sought to carry out that goal not by doing something constructive -- such as increasing spending in the public sector or repairing the nation's decaying infrastructure -- but by removing regulatory oversight from the capital-raising process for the smallest companies, where fraud has been a nagging problem.
I was part of the chorus of voices that decried the JOBS Act as a giveaway for stock fraud. The law gave its blessing to "crowd-funding," which basically lets small investors gather on the Internet and finance small business. Sort of the investment equivalent of one of those Mickey Rooney-Judy Garland musicals where the kids get together to put on a show. But the wholesome facade is phony. As I explained when that terrible idea reared its head in September, crowd-funding can be used as a cover for fraud in the private placement of securities. The JOBS Act also carved out exemptions for small "emerging" companies from the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act, and rules goverrning executive compensation disclosure.
From almost the moment the ink dried on the law, which took effect on April 5, dozens of companies that "benefit" from the JOBS Act have in their SEC filings been quietly listing that blessing as among the "risk factors" that weigh upon them.
A search of SEC records on the agency's Edgar Web site shows that identical language, raising the possibility of the JOBS Act actually hurting the companies' ability to raise money. It's appeared in 74 SEC disclosures filed by 49 companies since April, beginning on April 20 with the prospectus of a software developer called Splunk Inc., and continuing through the present day. Most recently (at least, as of this writing), this stern-sounding language could be found in the registration statement filed on Monday by Natural Grocers by Vitamin Cottage Inc., a Colorado-based natural foods and nutritional supplements retailing chain.
This isn't fine print, but serious warnings set out in bold type. All point out that they are eligible for JOBS Act exemptions from regulations, but "we cannot predict if investors will find our common stock less attractive because we may rely on these exemptions." All but two of those filings add a further cautionary note that "if some investors find our common stock less attractive as a result, there may be a less active trading market for our common stock and our stock price may be more volatile."
Here, take a look. And there may well be more that don't use quite the same language that didn't show up in this search.
Word of these filings so far hasn't made much of a ruckus. There have only been trade-press mentions such as this piece at CFO.com. But I expect that this is going to pose a serious issue for companies in the months ahead. After all, it's not their fault that the JOBS Act was passed, yet they must reap its "rewards" -- a watered-down set of disclosure requirements that put investors at a disadvantage.
Those of us with long memories may recall a similar experiment in watered-down regulation that also went awry.
Remember the American Stock Exchange's Emerging Company Marketplace? That was established in 1992 by James Jones, a former congressman who was head of the Amex at the time. The idea was to give small-company stocks an alternative to the Nasdaq small-cap market and the over-the-counter market. So the Amex relaxed its listing standards and 23 new companies joined the ECM.
It was a disaster. The companies were, in effect, selected not for any good reason but for bad ones -- that they couldn't meet the already relaxed listing standards of a second-rate stock exchange. They were, by definition, mediocre companies, and they behaved that way. By 1994, 16 of the 23 stocks had collapsed or ceased trading altogether, even as small-stock indices soared. A spate of scandals commenced. The head of one company was found to have been a convicted arsonist. The ECM probably hit its nadir when it was publicized that one of the companies was run by a lady who had a stock-fraud record as a man, before her sex-change operation.
"It has been a real, real negative" to the reputation of the exchange, said Richard F. Syron, who succeeded Jones as heads of the exchange, and later went on to glory as CEO of Freddie Mac. Syron told The New York Times in 1995, when the ECM was shut down, that "he had found that the bad image of the Emerging Company Marketplace had made it more difficult for the exchange to get other companies to list on its primary exchange.
What lesson should we have learned from the failure of the ECM? One -- rather obvious, given all that's happened over the years -- is that investors are hurt when regulators relax their standards. But what's often overlooked is that companies don't benefit either. The ECM companies probably would have performed just as badly if they had traded over-the-counter, or on the Nasdaq small-cap market. All the ECM did was draw attention to their inferiority and hurt their reputations.
That same mistake is being repeated with the JOBS Act. A host of small-company stocks now have to list the JOBS Act in their prospectuses as a kind of scarlet letter. After all, why should investors take kindly to relaxed regulatory standards? They don't, but Congress forgot about that. In effect, we now have a kind of two-tier market -- the companies that don't come under the JOBS Act and the sorry ones that do.
There's one solution to this mess that Congress created. Companies should voluntarily decline to take advantage of the "gifts" lavished upon them by the JOBS Act. They should voluntarily come into full compliance with Sarbanes-Oxley and not avail themselves of "crowd-funding" or executive disclosure loopholes and other JOBS Act exemptions.
Voluntarily waiving the JOBS Act would help, but that bad law is going to weigh down on the markets until Congress realizes it made a mistake. It takes a lot to shame Congress, so don't hold your breath.
Gary Weiss's most recent book is AYN RAND NATION: The Hidden Struggle for America's Soul, published by St. Martin's Press.