(image via Forbes.com)
In April of this year, President Obama signed the Jumpstart Our Business Start-ups (“JOBS) Act, a proposal designed to ease federal regulations in order to make it easier for small businesses to find investors and obtain funding. The concept is really quite straightforward. You need to raise money in order to start a new business and there are only a few avenues through which to raise money—friends, banks, or investors. Before the JOBS Act, potential investors of a business had to have some sort of pre-existing relationship with the business or the entrepreneur seeking capital. Start-ups and operating businesses could only raise money through private investors as opposed to raising money through a public offering. The new provisions of the Act allow companies to advertise for investors and to raise capital through general solicitation, facilitating a start-up’s ability to raise the necessary capital.
This Act has important implications for economic recovery. The fundamental intention of the JOBS Act is to create new jobs and new industries and to stimulate the American economy by making it easier for people to fund start-ups. The Act would eliminate so much of the red tape that hinders the success of small businesses and it would permit these businesses to use the power of the Internet to raise capital needed to survive and prosper. Additionally, easing governmental restrictions would allow start-ups to grow before they are handicapped by various costly and time-consuming regulations, in turn giving businesses the opportunity to exist long enough to create new jobs.
There are, however, some serious disadvantages of the JOBS Act. It creates a new classification of businesses called “emerging growth companies,” though it provides no guidance as to what constitutes an “emerging growth company” or how long a company can remain in this category (although not longer than 5 years). It does, however, give emerging growth companies exemptions from certain financial disclosures, including reporting requirements and internal controls. This could ultimately do away with the regulations that would assist businesses in preventing fraud and costly accounting errors, bringing us back to the era of disastrous accounting scandals like Enron and WorldCom.
However, the most problematic flaw of the Act is that it discards a lot of investor safeguards that have been in place for years. Since the Act allows for general solicitation of investors with little regulation and accountability for advertisers, it could leave people vulnerable to misleading advertising and claims that each proposed investment will lead to effortless riches.
Though these negative effects of the JOBS Act should be taken quite seriously, they in no way impede the ultimate goal of the Act to encourage entrepreneurs and promote small businesses by easing SEC restrictions on finding investors. We need to get rid of our paternalistic notions that people are unable to provide for their own financial wellbeing and that they cannot make their own investment decisions. Yes, maybe potential investors will be lured by the promise of easy riches, but it is their responsibility to do the research and what they want to do with their own money should ultimately be their choice to make.
