Tag Archives: JOBS bill

This Must Be a Joke

By James Kwak

From the Times article on President Obama’s signing of the JOBS Act (emphasis added):

While soliciting investment funds online has triggered fears of fraudulent schemes, the law’s backers said the greater availability of information through social media sites like Facebook would allow would-be investors to conduct their own background checks, making it difficult for such schemes to succeed.

“While it seems reasonable to worry about these issues, there is just so much more information these days,” said Timothy Rowe, the chief executive of the Cambridge Innovation Center, which provides office space for start-up firms next to the campus of the Massachusetts Institute of Technology.

The thing speaks for itself.

(True, the phrase “social media sites like Facebook” is paraphrase from the reporter, not a direct quotation, but I have no reason to believe it isn’t an accurate representation of what the act’s backers said.)

Something for Nothing?

By James Kwak

The so-called JOBS act is a victory of faith over basic logic. The motivating idea seems to be that if we reduce the regulations that govern the process of raising capital, small companies will find it easier to raise money, and that money will translate into jobs. Many people have pointed out some of the problems with the bill: recently, for example, Andrew Ross Sorkin highlighted the potential for companies to take advantage of investors, and Steven Davidoff pointed out that regulation is probably not the reason for the decline in the number of small company IPOs.

There are a couple of more fundamental misunderstanding I want to focus on, however. First, it’s not clear that relaxing regulations will actually make it cheaper for companies to raise money. Sure, eliminating the independent audit requirement will save companies a few bucks. But what really affects the cost of capital is not out-of-pocket fees but the price that investors are willing to pay for equity. The less confidence that investors have in a company’s prospects, the cheaper that company will have to sell its stock. If small companies are allowed to provide less information to investors, that could simply make it more expensive for them to raise money.

Continue reading

Last Ditch Attempt To Save A Little Bit Of Investor Protection In The United States

By Simon Johnson

As it currently stands, the “JOBS” bill now before the Senate would gut investor protection in the United States.  The title of the bill is a complete misnomer – anything that weakens investor protection makes it more risky to invest in companies and increases the cost of capital to honest entrepreneurs.  (For more background on the bill and links, see this piece.)

Much of the 1930s-era Securities legislation, which served us well for more than 70 years, is about to be repealed in a moment of bipartisan madness.

Almost all attempts to amend the House version of this legislation – and to make it more favorable to investors – have now failed in the Senate, and the “cloture motion” received more than 60 votes (so the bill cannot be filibustered).  But Senator Jack Reed (D., Rhode Island) is leading one last charge to make the Senate version more reasonable. Continue reading

“JOBS” Disaster Looms

By Simon Johnson

The House “JOBS” bill is a thinly disguised repeal of investor protection in the United States.  This legislation would help unscrupulous people in the securities industry but it would be bad for nonfinancial businesses – by raising the risks to investors, it would push up the cost of capital for honest entrepreneurs.   Investment professionals belonging to the CFA Institute have expressed their serious concerns and strong opposition.  Attempts to amend this legislation – and to make it more sensible – failed in the Senate yesterday.

The Senate will vote today on whether to adopt the main provisions of the House bill.   Passing this bill would be a major public policy mistake – akin to the disastrous (and bipartisan) deregulation of the financial sector in the 1990s.  This kind of excessive deregulation leads to disaster – and to fiscal crisis.  (For more background and the historical comparison, see this piece.) Continue reading

CFA Institute Against the “JOBS” bill

By Simon Johnson

The Senate is due to vote today on the so-called “JOBS” bill – a piece of legislation, originating in the House, which aims to reduce disclosure and other securities law protections for investors (see my review yesterday; a link to HR3606 is here).

Supporters of the law claim that it will greatly increase the number of companies going public – and that this will boost economic growth and job creation.  Opponents argue that by weakening investor protection, the risks of investing in start-up companies will increase – there will be more frauds and scams – and this will increase the cost of capital for honest entrepreneurs.

Members of the CFA Institute have an interest in getting this right – this is the “global association of investment professionals” and they make their living by figuring out what is a good investment and what is likely to become a losing proposition.  These people also have a lot of expertise on the key issue – which is better for business, weakening investor protections or keeping them in place?  Which way are these experts voting?

Overwhelmingly, members of the CFA Institute are against the “JOBs” bill as it currently stands. Continue reading

A Colossal Mistake of Historic Proportions: The “JOBS” bill

By Simon Johnson, co-author of White House Burning: The Founding Fathers, Our National Debt, And Why It Matters To You

From the 1970s until recently, Congress allowed and encouraged a great deal of financial market deregulation – allowing big banks to become larger, to expand their scope, and to take on more risks.  This legislative agenda was largely bipartisan, up to and including the effective repeal of the Glass-Steagall Act at the end of the 1990s.  After due legislative consideration, the way was cleared for megabanks to combine commercial and investment banking on a complex global scale.  The scene was set for the 2008 financial crisis – and the awful recession from which we are only now beginning to emerge.

With the so-called JOBS bill, on which the Senate is due to vote Tuesday, Congress is about to make the same kind of mistake again – this time abandoning much of the 1930s-era securities legislation that both served investors well and helped make the US one of the best places in the world to raise capital.  We find ourselves again on a bipartisan route to disaster. Continue reading