Despite Matt Taibbi's Concern, the JOBS Act Could Suck Way Worse
Recently, Matt Taibbi of Rolling Stone wrote in his characteristic, take-no-prisoners style, that the JOBS Act “Couldn’t Suck Worse”.
First, a law can always suck worse (for example, it could include a provision banning puppies or pulling “Community” off the air). Second, his article focuses on just one part of the law, to the exclusion of other parts that should be much more to his liking. The truth is the JOBS act may not be perfect, but it could be a heck of a lot worse.
Taibbi’s wrath is focused (for now) on Title I of the law, the so-called “on-ramp” for Emerging Growth Companies (companies with up to $1 billion in annual revenue, for the first five years of their SEC registration). These provisions will change the disclosure obligations and timing for EGCs seeking to go public via a traditional IPO. Taibbi’s concerns are familiar: Title I does not force enough transparency or accountability onto these companies and sets investors up to be exploited and defrauded by billion-dollar companies and the big banks. Putting aside whether he is right, I want to highlight that many of the values he thinks are threatened by Title I of the JOBS act – transparency, accountability, and independence from the big guys – are embraced in Title III, the Crowdfunding provision.
First let us talk about transparency. Title III requires companies that are seeking crowdfunding to provide information to investors and the government. This information includes the names of every officer, director, or person who owns more than 20% of the company’s stock, a description of what the company intends to use the money for, and how it priced the securities it is offering. Of course, the most important piece of information is the financial health of the company. Title III requires companies seeking under $100,000 to provide their tax returns and financial statements certified by their principal executive officer to be true and correct. Companies seeking between $100,000 and $500,000 need to provide financial statements reviewed by an independent public accountant, and companies seeking between $500,000 and $1 million must provide audited financial statements. Additionally, the company needs to provide annual updates to both investors and the government. Given both the limited scope and age of the companies likely to seek crowdfunding, and the limited resources these companies have to get their financials prepared, this disclosure is non-trivial.
Of course, disclosure requirements without accountability are meaningless, and here again Title III provides. Under Title III, the principal executive, financial, and accounting officer(s) of a company that makes an untrue statement of a material fact or omits a material fact necessary to make its statements not misleading, if they do not meet the burden of proof that they did not know and could not have reasonably known the mistake, are exposed to personal liability from shareholders. Now for the non-lawyers in the audience, let me explain what this means: If an executive lies, or for that matter simply screws up a material fact on their financials, they are personally responsible for the damages. This means that not only does the company file for bankruptcy, but the officer does as well. When you combine this with the threat of criminal prosecution for fraud or false statements, you see that Title III provides serious incentive for the officers of companies seeking crowdfunding to be both honest and careful.
Finally, if we are concerned about large banks and companies manipulating investors or using their power and connections to crush the competition, Title III provides a way for investors to avoid being beholden to that system. No individual entity, be it a company, portal, or investor will be large enough to dictate the market’s terms, if investors as a whole want more due diligence than the law requires, or better terms on the securities, they won’t have to fight wealthy and entrenched institutions to get them. With crowdfunding, investors no longer have to rely on or work through banks that allegedly put their interests ahead of the investor. We will have a much more direct, participatory economy where the big banks are no longer the gate-keepers and market makers.
Whatever the flaws of the JOBS Act, it provides us with a way to bypass the large and powerful entities that have arguably distorted our economy for their own benefit from the equation. Is the new way going to be perfect? No. There will be problems, there will be frauds, and there will be failures. Of course, there will also be people working to fix those problems. So ask yourself, for the average investor or entrepreneur was the old system any better? I think you will find that it sucked WAY worse.
 It should be noted that some of these requirements will be fleshed-out or adjusted by the SEC during the rulemaking process currently underway, so there may be some changes.