Jump-Start Our Business Start-Ups (JOBS) Act

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A Jobs Bill That Will Provide Help, but for All the Wrong People
By JESSE EISINGER
Suzanne DeChillo/The New York TimesStockbrokers arrested in 1998 as part of a crackdown on fraudulent operations known as boiler rooms.

Finally, the House passed a jobs bill last week. And what a bill it is!

Officially called the Jump-Start Our Business Start-Ups Act, it calls for reopening our capital markets to exciting new start-ups by ridding protections for investors and stripping away disclosure requirements for smaller companies.

JOBS has been repeatedly assailed, but it will bring much-needed help to some of the harder hit sectors of the economy.

John Coffee, a Columbia Law professor, has hailed the bill as “the boiler room legalization act.” And rightly so. Boiler room operations were one of the unsung job creators of the 1990s, producing some of America’s greatest penny stocks and boom times for yacht makers and coke dealers.

But these small, hard-working firms have run into hard times. Areas of Long Island and Boca Raton, Fla., still have not recovered since the heyday of the Nasdaq. How long must a lost generation of Lamborghini-loving 20-somethings suffer while their talents for talking quickly go to waste?

Congress is on the case, with Democrats and Republicans working together at last. It’s not just the House. The Senate is expected to pass a similar bill this week.

Since the technology stock blowup, the accounting scandals at Enron and WorldCom and the worst financial crisis since the Great Depression, investors have been needlessly wary of putting their savings into fledgling companies offered by Wall Street banks.

The JOBS bill fixes that. Taking advantage of the revolutionary possibilities of the Internet, the bill loosens decades-old investor protections so that companies can directly advertise to those who would like to be separated from their money. It does that by giving broad exemptions for start-ups that want to “crowdfund” by raising small amounts of money over the Internet. I.P.O. pitches next to “Lose Your Belly!” ads. Sounds like a great idea!

Nigeria shouldn’t be the only country to benefit from the Web. Right here in America, the elderly are increasingly attractive to a variety of entrepreneurial spirits. If JOBS becomes the law, such innovators could flourish.

Let’s not forget Wall Street analysts. Once, men and women could make a good living by stamping glowing ratings on companies offering stock to the public for the first time, even if they secretly believed those companies were dogs. You could even become famous, like Jack Grubman or Henry Blodget.

Ever since the cleanup back then by the New York State attorney general, Eliot Spitzer, analysts have lost some luster. With JOBS enacted, Wall Street analysts will once again be able to shill for the companies that their own investment banks are shepherding through the initial public offering process.

And then there are the short-sellers, the type of investor who ferrets out the overvalued companies, the hype stories and stock frauds.

It’s been about a year now since Chinese reverse-merger companies collapsed. In that scandal, dozens of those small Chinese companies went public in the United States without having to run the gantlet of the Securities and Exchange Commission’s registration rules.

After they blew up by the boatload, the S.E.C. cracked down and tightened its rules.

Since then, short-sellers’ pickings have been slim. By allowing newly public small companies to refrain from disclosing financial information for years, the bill will provide new targets for short-selling hedge funds.

Clearly, the many critics of the law underestimate what a boon this will be. Sure, it would be better not to have the scams in the first place. But now short-sellers will now be able to use their talents to uncover fraud that might not have occurred without JOBS. Capital will pour into this sector of the economy.

Finally, one shouldn’t underestimate how tough things have been for lobbyists promoting financial deregulation. Not in finding work, of course. Legions of civic-minded lawyers have found gainful employment helping banks desperately fight the Dodd-Frank regulatory overhaul.

But these people have suffered no end of social embarrassment. When they go to cocktail parties and say their job is to protect banks from regulations that hurt America, people have been known to laugh.

Now, the lobbyists can point out that even the White House agrees. The Obama administration has backed JOBS and is on the same page as the banks when it comes to the message: safe, tightly regulated capital markets don’t instill confidence in investors, but rather stifle ingenuity and creativity. Expect these same arguments to come up again in the push to revise Dodd-Frank. That’s change we can believe in.

And, anyway, trust and confidence are overrated. Wild West markets are more thrilling. If Americans thought otherwise, Las Vegas casinos would have the buy-and-hold room next to the roulette wheels.

Then again, for entertainment, our capital markets just cannot compete with Congress.

The JOBS Act and the IPO Off Ramp: Discouraging IPOs
Monday, March 12, 2012 at 10:00AM
J. Robert Brown

One of the big developments of late has been the rush to pass legislation designed to reform the capital raising process. The House adopted H.R. 3606, THE REOPENING AMERICAN CAPITAL MARKETS TO EMERGING GROWTH COMPANIES ACT OF 2011. Despite the emphasis on raising capital, the short title for the legislation is the JOBS Act (‘‘Jumpstart Our Business Startups Act’’), suggesting that the purpose of the legislation is to spur jobs.

There is much to be said about this legislation and much to be criticized (certainly of the version that made it through the House). But we want to point out one thing right off the bat.

Section 1 creates a class of companies (called emerging growth companies) then promptly exempts them from a grab bag of requirements that include the need for the advisory vote on compensation (say on pay) and certain financial disclosures. This is the so called "IPO On-Ramp" legislation. By imposing weaker standards on these companies, it is theoretically designed to encourage IPOs. In fact, it is likely to have exactly the opposite effect.

The statute defines emerging growth company as any company with less than $1 billion in gross revenues and allows companies to retain that status until the earliest of: gross revenues exceeding $1 billion; qualification as a large accelerated filer (issuers with an aggregate worldwide market value of the voting and non-voting common equity held by its non-affiliates of $700 million or more), or the fifth anniversary of the "first sale of common equity securities of the issuer pursuant to an effective registration statement under the Securities Act of 1933."

For companies that remain below the $1 billion mark, they can effectively retain their "emerging growth company" status simply by refusing to do an IPO. Given the many exemptions from registration (some provided in the JOBS Act), they can continue to raise capital selling shares but not need to engage in a registered offering. As long as they do not trigger the size/float requirements, they will remain an emerging growth company indefinitely.

The legislation, therefore, creates a strong incentive for public companies under $1 billion not to engage in a public offering, exactly the opposite of what the legislation is trying to accomplish.

The "JOBS" Act: Adding Cost and Confusion to the Capital Raising Process
Tuesday, March 13, 2012 at 06:00AM
J Robert Brown Jr.

Last week, the House adopted H.R. 3606, THE REOPENING AMERICAN CAPITAL MARKETS TO EMERGING GROWTH COMPANIES ACT OF 2011. Despite the emphasis on raising capital, the short title for the legislation is the JOBS Act (‘‘Jumpstart Our Business Startups Act’’), suggesting that the purpose of the legislation is to spur jobs.

The legislation is really a series of laws that were not adequately integrated together. There will be enormous uncertainty, harmful consequences and added expense that arise out of the inartful drafting. Lets look at an example.

Section 12(g) of the Exchange Act provides that companies more than 500 shareholders of record and $10 million in assets (see rule 12g-1) must register with the SEC. Once registered, the company is subject to the periodic reporting requirements, the proxy rules, the tender offer rules and the beneficial ownership reporting obligations (short swing profits) under Section 16.

Counting the number of shareholders "of record" is, therefore, very important. As currently used in the securities laws, the phrase essentially coincides with state law. It counts as a shareholder anyone whose name appears on the list provided to the company by the transfer agent. See Rule 12g-5 (shareholder of record includes "each person who is identified as the owner of such securities on records of security holders maintained by or on behalf of the issuer"). For the most part, these are the shareholders who have an actual certificate.

The approach taken by Congress (it was put in place in 1964) has the benefit of simplicity. Get a list of shareholders from the transfer agent on the last day of your fiscal year, count the number, if its over 500 (and you have more than $10 million in assets) you are subject to Section 12(g). If less, you are not.

The "JOBS" Act is about to make a hash out of this simplicity. The crowdfunding provision provides that anyone purchasing pursuant to the provision will not be treated as an owner "of record." See Section 302 ("For purposes of this subsection, securities held by persons who purchase such securities in transactions described under section 4(6) of the Securities Act of 1933 shall not be deemed to be ‘held of record’.’’).

Another provision proposes to increase the number of record ownes from 500 to 1000. At the same time, however, Section 502 of that provision provides that record ownership does not include "securities held by persons who received the securities pursuant to an employee compensation plan in transactions exempted from the registration 10 requirements of section 5 of the Securities Act of 1933.’’.

So, if those provisions are adopted, a company must undertake a far more complicated and difficult calculation in determining whether it must register under Section 12(g). First the company needs to obtain a list of record owners as of the last day of the fiscal year. Then the company must count the number of record holders but deduct the number who bought under the crowdfunding exemption or pursuant to certain employee benefit plans. Companies will either need to maintain these records or will need to recreate them, a likely expensive process that requires the company to figure out how the shares were obtained in the first instance.

Moreover, while employees and crowdfunding purchasers are not shareholders of record, the statute is silent about the status of the holders who buy from these persons. So a company may not be public (500 shareholders of record) while the shares are held by employees/crowdfunding purchasers but may become public when these share are sold. This may be true even though the actual number of shareholders has not changed.

By tinkering with the record ownership definition (a completely unnecessary thing to do), the legislation adds to the record keeping requirements of all companies, makes the requirements of Section 12(g) more fluid and harder to police, and potentially discourages companies from issuing shares to employees or using the crowdfunding exemption because the shares, once sold, may trigger an obligation to register under Section 12(g). Shareholders will no longer have any certainty as to when companies will be required to register as a result of the 500 shareholders of record test.

In other words, it has the potential to discourage capital raising, the opposite of its purpose.
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