The JOBS Act is for Wall Street, not jobs
April 12, 2012 12:34 PM   Subscribe

The JOBS Act or "Jumpstart Our Business Startups Act" is not really about creating jobs but about loosening regulations on companies planning to IPO. SOX compliance and other financial regulations have made going public an expensive and time consuming process for young companies, and many are now staying private or getting acquired rather than going public. Fewer regulations encourages more IPOs, but what are the unintended consequences of "exempting [companies] from independent accounting requirements for up to five years after they first begin selling shares in the stock market"?
posted by lubujackson (85 comments total) 5 users marked this as a favorite

 
more fraud. I don't like this act.
posted by Ironmouth at 12:38 PM on April 12, 2012 [4 favorites]


Are our regulations that much stricter now than during the dotcom booms? Isn't the real limiting factor on IPOs the amount of money the underwriting bank manages to hoover up? I'd expect that loosening regulations attracts fraud without helping real startups.
posted by jeffburdges at 12:38 PM on April 12, 2012 [1 favorite]


surely, intended consequences is a more accurate way to describe the inevitable increase in fraud. it's predictable and and I think undisputed, so I pretty much can't see it as unintended.
posted by mwhybark at 12:40 PM on April 12, 2012 [9 favorites]


Whoever named this act knew what they were doing; you don't block JOBS legislation in an election year
posted by 2bucksplus at 12:41 PM on April 12, 2012 [5 favorites]


Yours for $1billion
posted by Damienmce at 12:41 PM on April 12, 2012


Dear USA: If you want to jumpstart your startups, then nationalize your health care. You've got a million entrepreneurs in your country shackled to shitty corporate-drone desks because they have families and can't afford to lose their health coverage.

Set those people free to start their businesses. This isn't about your goddamn financial-porn IPOs.
posted by mhoye at 12:43 PM on April 12, 2012 [103 favorites]


B-b-but the initials spell 'JOBS'. It has to be good for jobs. Are you saying that acronym's lie?
posted by Garm at 12:44 PM on April 12, 2012 [3 favorites]


Man, this legislation sounds like more of exactly the same crap that caused the real estate markets in Florida to collapse, and that caused the collapse of the economy more generally. The proposals regarding IPOs, specifically, are a terrible idea virtually guaranteed to have devastating bad consequences!

President Obama: Seriously, don't keep making the same mistakes your colleagues in the Democratic party keep making over and over again. We cannot deregulate and free-market our way out of all our problems! This legislation will only help to create an enormous new bubble that will burst and put us in an even deeper hole, and as Taibbi correctly points out, further undermine confidence in the integrity of US stock markets! This is the kind of legislation I want you in office to guard against congress' passing--not the kind you should be championing!

Dear god--if more of this is what the future has in store in the US, we're in serious trouble...
posted by saulgoodman at 12:48 PM on April 12, 2012 [2 favorites]


Are our regulations that much stricter now than during the dotcom booms? Stricter.
Isn't the real limiting factor on IPOs the amount of money the underwriting bank manages to hoover up? no doesn't work like that.
I'd expect that loosening regulations attracts fraud without helping real startups. yep.
posted by JPD at 12:49 PM on April 12, 2012


Next up, the FREE MONEY Act!

(Also known as the Fire Rapidly Every Employee, Make Oligarchs New Expensive Yachts Act)
posted by Scientist at 12:51 PM on April 12, 2012 [24 favorites]


Finally, the President's plan calls for Congress to pass comprehensive patent reform, increase guarantees for bonds to help small businesses compete for infrastructure projects and to remove burdensome withholding requirements that keep capital out of the hands of job creators.

Holy crap, does he actually buy this crap? Consumers are the job creators. Without more of them, there will be no economic recovery or job growth. Are these idiots in Washington really still not getting this?
posted by saulgoodman at 12:52 PM on April 12, 2012


If we can just manage to kiss corporate ass a little harder, we'll all be free!
posted by Benny Andajetz at 12:52 PM on April 12, 2012 [1 favorite]


When will we outlaw the internal christening of proposed legislature? Enforce objectivity, these bills receive bias from inception due to their names
posted by MangyCarface at 12:53 PM on April 12, 2012 [5 favorites]


Oh, they get it Saul. They get it.
posted by Scientist at 12:53 PM on April 12, 2012 [2 favorites]


Are these idiots in Washington really still not getting this?

Until we can all afford our own Congressional Idiot, no.
posted by mephron at 12:53 PM on April 12, 2012


I'll just link to my comment in a thread earlier today and quietly walk away before the eye-rolling gives me a headache.
posted by oneswellfoop at 1:01 PM on April 12, 2012


Next up on the list for the Obama Administration: the Character and Retraining Efficient Employment Redevelopment Act of 2012 or CAREER Act. What would it do?

- Offers tax breaks for starting a new collection agency or law firm (Someone has to collect all that debt, jhaaaabs! And have you seen how many lawyers there are sitting around now?)
- Lowers the fees on registering as a lobbyist (There’s too much regulation!)
- Grants a one time 50% discount rate on taxes on repatriated corporate income earned abroad (Because corporations will use that money to hire people, right? Right?)
- Raises the interest rate on Stafford and Grad PLUS Parent student loans to 8.6% (Fucking kids, not getting a jhaaaab after bilking the government for a free education.)
- Offers a 1 time $100/hire tax credit for energy companies hiring minority or women workers in the fracking industry. (Sure, it’s an energy giveaway, but its also for minorities! And jhaaaabs! Sorry, treehuggers. Maybe next time.)

Oh Obama, you so progressive!
posted by T.D. Strange at 1:02 PM on April 12, 2012 [2 favorites]


This sounds beyond bad. Of course, I am starting a vacuum cleaning company.
posted by parmanparman at 1:03 PM on April 12, 2012


Another tech bubble wouldn't be all bad. It could be a boon for the Aeron-chair-and-foosball-table liquidation industry.
posted by theodolite at 1:05 PM on April 12, 2012 [1 favorite]


Mmmm. Aeron-chair-and-foosball liquid.
posted by nebulawindphone at 1:17 PM on April 12, 2012 [1 favorite]


Time to start my Social Cloud 2.0 startup!
posted by Joe Chip at 1:26 PM on April 12, 2012


the bill passes, facebook goes public, and after 5 years we realize that it's over valued because if people aren't using ad-blocking software already, they never click through the ads.
posted by cupcake1337 at 1:28 PM on April 12, 2012 [1 favorite]


It could be a boon for the Aeron-chair-and-foosball-table liquidation industry.

Man, I have gotten crazy good at foosball over the last year at work. To the point where me and a coworker have talked about going to local bars and hustling college kids. Do people gamble on foosball? Cause I think we could take some money.
posted by empath at 1:36 PM on April 12, 2012


empath: I lost 10 bucks on a work foosball tourney wager last week, so yes.
posted by Joe Chip at 1:39 PM on April 12, 2012


Time to start my Social Cloud 2.0 startup!

And don't forget to register IJustThoughtOfSomething.com and investonawhim.com!

Uh oh, too late. Those were both registered the day the article went up.
posted by trueluk at 1:47 PM on April 12, 2012


Time to start my Social Cloud 2.0 startup!

Good luck finding investors willing to wait five years before finding out if you're just making it all up.
posted by saulgoodman at 1:50 PM on April 12, 2012


Are our regulations that much stricter now than during the dotcom booms? Isn't the real limiting factor on IPOs the amount of money the underwriting bank manages to hoover up? I'd expect that loosening regulations attracts fraud without helping real startups.
Sarbanes Oxley - a consequence of Enron - is a big change since the dot com era. The requirements for an IPO are complex enough that most startup founders would rather just sell out to existing public companies. This isn't a problem for the startup founders at all, particularly with $1 billion acquisitions. Of course, it could be that SOX is sufficiently well understood, a decade later, that compliance isn't really that bad. But it is one more thing to worry about.

I'm concerned about the potential for fraud, but one of the things that Taibbi's rant missed is that the SEC still gets to make the rules for this new class of public companies.

The other thing that Taibbi glosses over is that the general public has effectively been excluded from the wealth (and losses!) generated by tech startups since the dot com bust. Sure, you can go to Kickstarter and fund a cool project, but that cool project can only give you a product in return. It can't give you a share of future profits in return. That is fine for many small startups, but it kind of sucks for small investors. The only way for the average person to get involved (prior to the JOBS act) is to join a startup, or personally know the founders and lend them money directly.

There is already a ton of money in the VC world targeted at tech startups, so the JOBS Act may have little or no impact on them. It may enable startups that the VC world isn't focused on right now. Or it may just enable fraud.
posted by b1tr0t at 1:52 PM on April 12, 2012 [7 favorites]


See this I don't get:
In the old days, in the fifties and sixties for instance, you would never take a company public that wasn't profitable at the time of the IPO, or didn't have a multi-year track record of solid revenues.

When the banks stopped insisting on proven track records or real profitability before taking a company public, there was a sudden explosion of stock-market investment into heretofore unknown internet firms. Companies with no track records went from having literally no revenues at all to having five or six billion dollars' worth of market capitalization overnight. Banks explained that the new way to measure a company was by the quality of its ideas, not boring old indicators like revenues.
What's the problem? For 30+ years venture capital has existed to allow companies to short circuit the usual bootstrapping growth based just on good ideas and occasionally the strength of the management team. VCs typically get their money from limited partners that represent pools of wealth: pensions, endowments, etc.

The IPO market has been, for almost as long, the source of capital for businesses that couldn't or didn't want to raise additional institutional capital. Whether or not those companies were actually profitable, companies typically go IPO because they (or their founders) want some capital breathing room and the public theoretically is happy to buy in.

It's not like it's a shocking new thing that companies get capital prior to gaining profitability (you could buy a share of GRPN today!); there are all sorts of companies that simply could not exist without an early infusion of cash and traditionally there were only a few sources for that capital to come from. The main push of the JOBS act is mere to allow that IPO-like public funding to exist at extremely low levels and from "ordinary" people.

The bank deregulation stuff I don't fully understand enough to have an opinion on, that sounds bad. But the 'kickstarter for everything' model is in fact democratization of funding, for good and bad.
posted by 2bucksplus at 1:56 PM on April 12, 2012 [4 favorites]


It seems like everyone here has just decided to take everything Matt Taibbi says at face value. When did that become a good idea?

This seems like a more rational assessment: http://news.ycombinator.com/item?id=3834015
posted by pascal at 2:01 PM on April 12, 2012 [1 favorite]


Clickable: This seems like a more rational assessment.
posted by pascal at 2:03 PM on April 12, 2012 [2 favorites]


Investing in startups without audited financials would be risky, yes, but that's why I probably wouldn't invest heavily in any of them.
posted by IanMorr at 2:07 PM on April 12, 2012


But with fewer investor protections, does it make sense to get even more unsophisticated investors in the game ("democratizing investment," as someone puts it up-thread)?

I can't believe even Republicans are advocating this stuff, much less the president.

This legislation seems to be reproducing exactly the same kinds of conditions that created the disastrous real-estate bubble, only this time in the context of stock market start-ups and IPOs: it's making it easier for less sophisticated people to get into the game and simultaneously making fraud easier.

How is this any different, in practical effect, than the deregulation in real estate that caused the real estate bubble and collapse?

I can't believe anyone is suggesting this as a serious approach to fixing our economy. I'm not surprised that Republicans/"moderate" Dems in congress would advocate these ideas; but I'm disappointed these are the ideas the president would opt to embrace.
posted by saulgoodman at 2:11 PM on April 12, 2012


This legislation seems to be reproducing exactly the same kinds of conditions that created the disastrous real-estate bubble, only this time in the context of stock market start-ups and IPOs: it's making it easier for less sophisticated people to get into the game and simultaneously making fraud easier.
Another thing that Taibbi misses is that "non-accredited investors" will be allowed to invest 10% of their annual income or $10k, whichever is less in exchange for shares in a startup. So you can't dump your entire net worth into one startup (though you might be able to dump it into ten, which isn't enough to properly diversify. Even the most successful VC funds typically see way less than one in ten of their investment break even). You also aren't dumping your money into your residence. So in the worst case, you've dumped some excess capital into a hole. That's not an ideal situation, but it isn't going to lead to your residence getting foreclosed. Unless you've somehow managed to leverage the paper value of your investments into your mortgage somehow.

By comparison, if you were to buy a new BMW 535i sedan at the list price of $52k, you probably drop at least $10k just driving it off the lot. No one is worried about protecting non-accredited investors from buying expensive luxury cars.
It seems like everyone here has just decided to take everything Matt Taibbi says at face value.
If, by face value, you mean a rant full of omissions and factual inaccuracies, then yeah. He does manage to incidentally make a few valid points though.
posted by b1tr0t at 2:35 PM on April 12, 2012 [3 favorites]


I'm not surprised that Republicans/"moderate" Dems in congress would advocate these ideas; but I'm disappointed these are the ideas the president would opt to embrace.


But...it has JOBS right there in the title!

Also, encouraging more startups is a pretty piss poor way of tackling the ongoing employment crisis just on its face. Startups don't actually employ very many people and the kinds of people that need the most help reentering the job market (former construction workers, laid off teachers and other public sector workers, long term unemployed, marginally attached workers and workers who might require employment accomodcations, low or median-credentialed high school and college graduates entering the work force for the first time) are exactly the opposite types of people that a boost in startup creation would help. Sucessful startups are likely to hire either lateral movers with similar vocational experience and high risk tolerance, or the top ranks of college students who likely would have decent job outlooks anyway absent the startup company.
posted by T.D. Strange at 2:41 PM on April 12, 2012 [2 favorites]


Investing in startups without audited financials would be risky, yes, but that's why I probably wouldn't invest heavily in any of them.
Yeah, this. Investing in startups is not for everyone, but it doesn't seem fair to limit it to only the rich. That's basically what the approach has been until now. If you are rich, you can go ahead and invest in hedge funds, PE funds, VC funds, that are all minimally regulated by the SEC. If you lose your Prada shirt, it is your own damn fault.

Allowing middle class* folks to invest in startups might be a really good thing. People who have more education than money are likely to bring a more critical viewpoint to their investing. Their investments may outperform those of the rich. Or they may not. But is it fair to completely exclude them simply because they lack sufficient net worth?


*I'm just guessing that if you don't have a middle class income, you won't have enough capital to invest. Though one might choose to live an extremely minimal lifestyle in order to free up more capital to invest.
posted by b1tr0t at 2:43 PM on April 12, 2012


Also, encouraging more startups is a pretty piss poor way of tackling the ongoing employment crisis just on its face.

One wonders if anyone bothered to look at the first link in the post, which talks about a wide variety of other measures that are part of the act. The startup part doesn't even get it's own top-level heading.
posted by pascal at 2:46 PM on April 12, 2012


Won't this just allow banks to sell terrible mini-hedge-fund financial instruments to middle-class consumers, mimicking GS's business model for the 99% set? Party on, I suppose.

And yeah, the reason why this bill got through is that it contains the infrastructure funding authorization and the payroll tax-cut extension. Veto-proof, the Dems have been waiting on that shit for months.
posted by mek at 2:49 PM on April 12, 2012


I like how the word PATRIOT is no longer seriously used.
posted by telstar at 2:51 PM on April 12, 2012


Sucessful startups are likely to hire either lateral movers with similar vocational experience and high risk tolerance, or the top ranks of college students who likely would have decent job outlooks anyway absent the startup company.
In my experience, startup founders and employees are often a lot more marginal than that. I know a number of founders who would never be hired by the companies that ultimately bought their startups because they lack the requisite credentials (college degrees, industry experience, etc.). It is damn hard to hire people into startups out of those well-paying corporate jobs, so often you have to settle for employees that lack those same credentials, have weird personality issues, and are otherwise hard to deal with. Sometimes it can be a blessing to have most of your employees work from home.

That said, tech startups are unlikely to help construction workers, teachers, former government employees, etc. But if the bar to raising funds is lowered, will construction workers, teachers and former government employees create new and interesting businesses? I hope so, because tech startups are already swimming in capital.
Won't this just allow banks to sell terrible mini-hedge-fund financial instruments to middle-class consumers, mimicking GS's business model for the 99% set? Party on, I suppose.
Hard to say, since the SEC hasn't written their part of the rules yet. Or if they have, they haven't made them public yet.
posted by b1tr0t at 2:52 PM on April 12, 2012


1000 Groupons will bloom across the land, bringing prosperity for all.
posted by benzenedream at 2:55 PM on April 12, 2012 [2 favorites]


Is there anything really preventing a kickstarter for venture capital that doesn't actually result in a public company but sidesteps the banks, b1tr0t?
posted by jeffburdges at 2:57 PM on April 12, 2012


Is there anything really preventing a kickstarter for venture capital that doesn't actually result in a public company but sidesteps the banks, b1tr0t?
I think the core problem is that "a kickstarter for venture capital" would necessarily require advertising to the public. Public advertisement is one of the triggers for SEC regulation. The Y Combinator link that pascal posted above goes into this in some more detail.

The way things work now is that there are private groups of small investors ("angels") that have private meetings. They can host meetings where startups come to them, but a startup cannot go post on their blog "hey, I need some money. I'm offering XX shares for $YY." Nor could anyone aggregate such posts. The best you can do is go around and have private meetings and solicit investment. That's probably why NYC and SF are hotbeds of startups and Detroit isn't. I wouldn't be shocked if more startups start to spring up in economically depressed areas like Detroit because the JOBS act makes them less reliant on NYC and the Bay Area for funding. Hiring would be tough, but hiring is always tough.


Note: I'm not a securities lawyer, but I've been involved in several startups on the technical side. I'm unlikely to make use of crowd funding, but that's because I've spent the last decade networking into the startup world. I hope someone with a relevant securities background will correct any inaccuracies that I've introduced here.
posted by b1tr0t at 3:13 PM on April 12, 2012 [3 favorites]


Is there anything really preventing a kickstarter for venture capital that doesn't actually result in a public company but sidesteps the banks, b1tr0t?

Lots and lots of regulation, at least up till now. There really are lot of "you must have $X million to play" rules for many forms of investment. The pro to this is that it protects most people from scams and bubbles (well, directly, indirectly we can still get shafted!). The con is that it also "protects" us from some of the most lucrative forms of genuine investment.

I would consider investing in a crowdfunded startup, I would consider crowdfunding a startup of my own, I think it's a good idea, and I think Taibbi is missing the actual genuine reason which such a thing could be a boon for companies and investors. However, even with the 10% / $10K limit, there is a HUGE potential for trouble, including both fraud and non-malicious bubbly catastrophe. So we'll see.
posted by feckless at 3:19 PM on April 12, 2012 [1 favorite]


As for whether it will create a lot of new jobs: of course not. If anyone thought it really would, it would never have passed with Republican support before the election.
posted by feckless at 3:20 PM on April 12, 2012


Those of you that think this is enabling scamming don't understand how difficult it is to raise capital. There is a tradeoff going on here, it's not simply "hey, let's make it easier for scammers".

Before the JOBS act, it was illegal to market your company in a gathering of like-minded people such as a hackerspace or convention. You have no idea how many hassles there was to raising capital, it will make your head spin. We're talking CPA fees of tens of thousands of dollars even if you get VC backing. Higher regulations on the low end just means more intermediaries and more fees.

We have two classes of rules in this country. If you're an accredited investor, you have one set of rules that exempt you from Rule 505 and 506 if you have over $1,000,000. That means you can do whatever the hell you want if you're a millionaire, but it is illegal for you to do so if you have less than one million dollars. While it's ostensibly justified as "millionaires know how to invest", it disadvantages the smart small investor. The JOBS act enables the small investor to act and use their capital more effectively than millionaires (as there is a $10,000 cap per person). This gives some marked advantages to the small investor and disadvantages millionaires.

The JOBS act lets the little guy invest wisely where it was previously illegal for them to do so. If you had less than $1,000,000 of capital it was illegal for a start-up to approach you. You can say that this is to protect the individual, but it's ridiculous that a biotech start-up cannot market to fellow peers. If you're worried about unsophisticated investors, they'll avoid this after the first year, there may be some scams the first year, but I'm fairly certain the percentage of scamming will be less than the pink-sheets/OTC/penny-stock market (where filing fees go into the hundreds of thousands of dollars and isn't realistically feasible for small startups), where scamming is endemic.
posted by amuseDetachment at 3:57 PM on April 12, 2012 [11 favorites]


Rule 505 and 506 exemption for accredited investors
posted by amuseDetachment at 3:59 PM on April 12, 2012 [3 favorites]


Maybe startups would have an easier time if they didn't blow all their cash on slides and Nerf Gun fights.

But keep the dogs.
posted by mccarty.tim at 4:09 PM on April 12, 2012


I bet Obama would be really popular if he repealed the Affordable Care Act/"Obamacare" and reinstated the same damn law as the "Breakfast for Supper" bill.

Everyone likes pancakes for dinner.

And who would vote for a member of the party that stopped that?
posted by mccarty.tim at 4:12 PM on April 12, 2012


Seriously, folks, this is unlikely to cause an increase in fraud. The fraudsters are already bilking grandma out of her pension. This finally makes it a bit easier for people to risk their money on my startup the same way that they can gamble in Vegas or buy lottery tickets.

When you outlaw investing, only outlaws will invest. Wait, that's not right...
posted by bpm140 at 4:31 PM on April 12, 2012 [1 favorite]


But with fewer investor protections, does it make sense to get even more unsophisticated investors in the game ("democratizing investment," as someone puts it up-thread)?

Yes, the protections in the JOBS act (like a 10%/$10k annual ceiling) are more than sufficient. It's true that some of those investments will be fraudulent, just like products have a risk of being defective. But a 10% limits prevents people losing their shirt. It's also true that a lot of these ventures will fail, but that's not necessarily a bad thing. On the other hand, some people are unable to tell the difference between failure and fraud, so those people will see it as an unmitigated disaster. Such people should stay away from investments with a high risk premium.
posted by anigbrowl at 5:14 PM on April 12, 2012 [2 favorites]


If you are reading this and don't know anything about the JOBS act - don't be fooled by the negative slant of this one sided weak post or the drivel in the Rolling Stone article it highlights. bpm140 puts his finger on it in the post above.... consider:

US Venture Capital amounted to $22 Billion in 2010.
American Gambles approximately $54 Billion a year.

That is so freak'n messed up. Any other suggestions on how we can free America's entreprenurial animal spirit? In the big picture, a hundred dollars wasted on a failed company is worth more than $100 in quarters won from a slot machine; slots are a zero sum game and the house always wins. Why should the better odds of investing in America be reserved for the rich? Your Grandmother is no fool. Stop forcing her onto the bus to Vegas. Let her invest in ideas and people she believes in. She is more likely to invest in your kid than the inbred old money fools you'll find at the decks of most of today's VCs. Talk about leaving the power in the hands of the 1%!


The JOBS act is such a good idea on so many levels; it blows my mind how anyone could work so hard to twist and distort details just to squeeze some kind of stink out of it.
posted by astrobiophysican at 5:21 PM on April 12, 2012


bpm140: "Seriously, folks, this is unlikely to cause an increase in fraud. The fraudsters are already bilking grandma out of her pension."

Perhaps the law isn't so much about new IPOs, but protecting the oddball accounting practices of recent ones.
posted by pwnguin at 5:44 PM on April 12, 2012


pwnguin: The JOBS bill has nothing to do with playing around with GAAP accounting for publicly traded companies on the major exchanges.

Groupon is assuredly a ponzi scheme, and regulators should get on that. Most anyone that has read 10-K statements that has even taken a cursory look at Groupon knows their company is as poorly run as Pets.com. The fact that they passed all SEC regulations should give you pause on the current efficacy of regulations in capital markets. More enforcement is certainly necessary for large public companies, especially as they can afford it. Dicking around with non-GAAP income statements and weird Chinese buy-out roll-up scams (see: Sino-Forest) needs to get shut down, but this has existed even without the JOBS bill. The JOBS bill doesn't let you IPO into a billion dollar company, it's exclusively for small companies, as there's a set cap on revenue, equity, and illiquidity -- buying stock via the JOBS bill regs means you cannot sell it for one year, unless you're (surprise, surprise) an accredited investor.

Throwing out the baby with the bathwater and rejecting a viable method of capital raising due unrelated fraud may not be the best for the economy.
posted by amuseDetachment at 6:27 PM on April 12, 2012 [1 favorite]


Good luck finding investors willing to wait five years before finding out if you're just making it all up.
Much of the investment comes prior to the company going IPO anyway, at which point they don't have the reporting requirements anyway. It's only after a company gets big (like the size of Facebook) that they want to IPO.

If you look at Facebook, for example, they basically realized they didn't really need to do an IPO, they could keep raising revenues indefinitely.

But that meant that investment banks like Goldman Sachs missed out on all the massive profits they get from taking a company public. What SOX did, paradoxically was make companies reconsider going IPO if they were profitable, which meant cutting wall street out of the loop.

The problem, though is that if you don't go public, your employees can't cash out. And if you're stocks not on the market, it makes it harder to buy companies with stock, since you have to figure out valuation.

I think letting 'ordinary' people invest in tech startups could be fun, but at the same time I can imagine some crazy bubble action. Just imagine a bunch of suburbanites trying to guess which company will be the next Instagram. People would invest on pure hype. It would certainly be entertaining, I don't think many people will make a lot of money.
This finally makes it a bit easier for people to risk their money on my startup the same way that they can gamble in Vegas or buy lottery tickets.
That's probably what you'll see: people essentially gambling on startups. However, you would have a net economic benefit, rather then a cash sink like with a casino.
posted by delmoi at 7:23 PM on April 12, 2012 [2 favorites]


Just imagine a bunch of suburbanites trying to guess which company will be the next Instagram.
One way to address the problem of popular investment manias would be to limit the public float to 1 million shares. That would prevent everyone from buying a share, but could accelerate momentum-driven bubbles.
posted by b1tr0t at 8:51 PM on April 12, 2012


So it's going to be another economic circus act that saves us, eh?

I can't help but notice that it's generally the same voices being so sanguine about the benefits of this kind of proposal that always seem to argue that the markets could take care of us all properly if we would just let them by getting government out of the way.

Maybe more people are ready to fall for that line again already than I suspect, but I'm just not optimistic this is going to do anything more than create even more opportunities for fraudsters to operate just like every other deregulatory push I've personally lived through in the last 30 years, from the S&L debacle to the deregulation of loan origination here in Florida.

It's always the same sales pitch, and eventually, it's always the same result. I just don't see why I'm supposed to believe this time is going to be any different, and why after everything we've seen over the last ten years, we should already be ready to trust the high finance gurus to be right.

How is it not insane that we keep trying to deregulate our way out of problems deregulation more than likely caused in the first place? How many more legislative experiments in laissez-faire economics do we have to see end badly before we can stop trying new variations on that same tired theme?

That's probably what you'll see: people essentially gambling on startups. However, you would have a net economic benefit, rather then a cash sink like with a casino.

What it would do, in all likelihood, is provide another mechanism for concentrating wealth in the hands of those who already have most of it. One way or another, if there's a game to be played here that's potentially profitable for anyone, those who already have more to invest in winning the game will win it.
posted by saulgoodman at 8:52 PM on April 12, 2012 [2 favorites]


saulgoodman: The reason I'm much more sanguine about this is because if there's a bubble, it will be an equity inflated bubble, as opposed to a debt inflated bubble. Debt bubbles, such as the previous housing bubble, are always disasters. Equity bubbles are a lot less likely to kill the entire economy as collateral damage. You didn't see the entire banking system fail with the wholly equity financed Dotcom bubble. Fundamentally, equity capital raising is wholly compatible with Islamic finance, which has some benefits with regards to the resiliency of markets / black swan events, there's a historical promotion of equity financing in religious texts for a reason -- it's less likely to ruin lives. Equity financing doesn't face the principal-agent problem as strongly, it's more difficult to screw it up wholesale nationwide like subprime debt. By definition, you can't go underwater under a pure equity capital raise.
What it would do, in all likelihood, is provide another mechanism for concentrating wealth in the hands of those who already have most of it.
It will be very difficult for Venture Capitalists to invest in the seed round for the next Facebook or whatever when average people are throwing money at them, this law doesn't benefit old money all that much.
posted by amuseDetachment at 9:06 PM on April 12, 2012


It will if old money finds large-scale ways to harvest all those credulous small-time investors' capital without really producing anything economically valuable for it.

Imagine you're a middle class guy who decides to invest his life savings (believe it or not, $10,000 is probably not far from what that would amount to, for a lot of us) in a start-up because you're desperate for any economic opportunity that might somehow one day lead to the possibility of a decent retirement situation.

What happens when the slick looking start-up (or investment pool) you sink your life savings in turns out to be a fraud? The company dissolves and everybody but the lowly common stock investor gets first dibs on whatever worthwhile property there is in the enterprise--meanwhile, the CEO from year one has already walked away pocketing a tidy sum in executive compensation, and there's no legal recourse because he had a perfectly legal contract guaranteeing that compensation.

That's just after five seconds of thinking about it. I'm sure once the details of the law are all set, there'll be plenty of people with more time and resources conceiving entirely new, much more sophisticated business models around how best to exploit the newly relaxed regulatory environment.

I'm not interested in the theoretical arguments anymore; those have a demonstrated way of leading to whatever conclusions the theoretician prefers. I want to know what evidence from reality is there that the worst-case scenario won't ultimately be the case?
posted by saulgoodman at 9:41 PM on April 12, 2012


There's nothing stopping that same person from losing all their money in a pump and dump penny stock scheme without the JOBS act.

In terms of fraud, pump and dump penny stocks are a far superior avenue for fraud, as the person pumping the stock doesn't have to have principal ownership in the stock, they just pick one random OTC stock at random and tell old granny to buy it. It's incredibly hard if they're operating out of Panama and have zero relationship with the board and executives of that company.

It's impossible to legislate and regulate your way out of people losing their money or getting scammed, it's only relative risks. Your example is currently occurring with companies like Groupon, and that is completely legal with large stocks that are audited and go through the full gamut of SEC regulation. Now obviously that doesn't make it okay or imply that we don't need to ensure that companies like Groupon need to be penalized for lying. It's just wrongheaded to say we need to shut down ALL large IPOs wholesale because of companies like Groupon, as it may not be a good idea to shut down all public micro-cap equity investments for non-millionaires.

A 10% cap on income for investments is a very fair way to ensure that people don't get completely burned with the JOBS Act, while encouraging investments in markets that desperately need it.
posted by amuseDetachment at 9:56 PM on April 12, 2012


What happens when the slick looking start-up (or investment pool) you sink your life savings in turns out to be a fraud?
Hang on, stop right there. It doesn't have to be a fraud because most startups simply fail. Vanishingly few pay back their initial investment. Fewer become moderately successful, and almost none become Facebook.

Investing all your money in a startup is completely stupid, unless your savings are little more than a few months' salary.
posted by b1tr0t at 9:59 PM on April 12, 2012 [1 favorite]


There's good regulation and bad regulation. I can't see how a law that prevents middle class people from polling their resources to build companies and restricts the best investment opportunities to millionaires is an example good regulation.

There's a lot of ridiculous nonsense getting funded in SV these days. But why should blowing your blowing disposable income on crazy ideas be limited to the rich?
What happens when the slick looking start-up (or investment pool) you sink your life savings in turns out to be a fraud?
If your life savings is only 10% of your income, you'll make it back in less then a month and a half.
posted by delmoi at 10:17 PM on April 12, 2012


Hang on, stop right there. It doesn't have to be a fraud because most startups simply fail.

The response was specific to the question of how old money could exploit the newly relaxed regulations to further consolidate the national wealth.

I was proposing one model that might be exploited, depending on how the regulations are implemented. History has shown that aggressive marketing can go a long way toward encouraging otherwise people to invest their money in things that they don't need and that aren't in their own long term interests.

In the same way that banks started offering and aggressively advertising financial products not fit for consumers to help grow the real estate bubble, I'd expect to see wealthier investors investing in new business models designed specifically to exploit the newly relaxed reporting requirements for the newly-created special class of start-ups.

Why wouldn't that happen this time?

Investing all your money in a startup is completely stupid, unless your savings are little more than a few months' salary.

Getting a no-documentation ARM is stupid, too. Didn't stop it from happening a lot more than it should have for the health of our economy.
posted by saulgoodman at 10:18 PM on April 12, 2012


I was proposing one model that might be exploited, depending on how the regulations are implemented. History has shown that aggressive marketing can go a long way toward encouraging otherwise people to invest their money in things that they don't need and that aren't in their own long term interests.
How is that different then, for example, starting a luxury handbag maker and selling those handbags at an extreme markup? Both transfer disposable income to the rich. The difference here is that the same system also allows people to potentially make a profit if it's not a scam.

Also, there's no reason why the people making money on this would need to be rich themselves. Anyone could start this kind of company. That's like saying Kickstarter transfers wealth from the poor to the rich because only rich people start kickstarter projects.

What we're talking about is something like kickstarter, except users get equity in the projects, rather then just a project.
posted by delmoi at 10:22 PM on April 12, 2012


otherwise sensible people

There's a lot of ridiculous nonsense getting funded in SV these days. But why should blowing your blowing disposable income on crazy ideas be limited to the rich?

That's not the part I'm objecting to. It's the part where, suddenly, a new special class of start-ups gets to be exempted from financial disclosure requirements that everyone else has to meet for five years, making fraud that much easier.
posted by saulgoodman at 10:23 PM on April 12, 2012


saulgoodman: You are already exempt from disclosure if all your investors are millionaires before the JOBS Act. This just lets non-millionaries to get in on the VC gravy train.
posted by amuseDetachment at 10:31 PM on April 12, 2012


Hmm. I'll have to mull this over a bit more before I'm convinced. But I'm slightly less inclined to think this is the worst idea ever anymore. Only slightly though.

Also, there's no reason why the people making money on this would need to be rich themselves. Anyone could start this kind of company.

But really rich people would start companies that organize such start-up companies and extract fees from them or something, and all sorts of other creative innovations designed to plausibly look like they're adding value when they're really just mechanisms for returning more revenue to their owners would crop up. If you think IP trolls are obnoxious, who knows what ugly new species of free market predator this kind of deregulation/expansion of markets is likely to produce.

Also, wealthy investors are more likely to be able to afford the legal muscle to fight back when they are scammed. Small time investors will not be in that position, making fraud even more likely.

Maybe I'm wrong. But the potential for unintended negative consequences seems much higher than I'm comfortable with, especially given how emboldened would-be financial fraudsters must feel after what we just went through as a nation.
posted by saulgoodman at 11:00 PM on April 12, 2012


"the VC gravy train."

yeeeeeeah.
posted by mwhybark at 11:36 PM on April 12, 2012 [1 favorite]


The response was specific to the question of how old money could exploit the newly relaxed regulations to further consolidate the national wealth.

You're hopelessly paranoid. If you don't want to take the risk, don't invest in such a venture. Risk means that you may lose all the money you invest, and it's your responsibility to decide what level of risk you can tolerate. The government is not your damn parents.
posted by anigbrowl at 8:00 PM on April 15, 2012


step right up, get your tickets here to board the VC gravy train, yessir, two for a dollar, come one come on, we don't have all day son!
posted by mwhybark at 10:38 PM on April 15, 2012


Well in between mocking it, what do you suggest people who have less wealth than the accredited investor threshold should do if they want to invest some of their money in a new business, and have sufficient expertise to judge the business model/financials for themselves? I know a lot of people in the startup space and there have certainly been times when I saw firm that I wish to put a few thousand in early-stage capital into but was unable to do so because I don't have an annual income $250,000 or a million dollars in available capital. It's also been a royal pain up until now to raise small amounts of capital for independent projects, such as independent films that might need to raise a few hundred thousand $ but aren't necessarily flashy enough to get on the radar of professional investors.
posted by anigbrowl at 11:08 PM on April 15, 2012


I would suggest going into business as a smallholder, as I have done.
posted by mwhybark at 11:16 PM on April 15, 2012


Let me amend that. I am not so sure that I would suggest it so much as that I think it is the only rational option available to small-capital members of our economy.
posted by mwhybark at 11:18 PM on April 15, 2012


You misunderstand. I've been self-employed for many years, but I might also want to invest in someone else's project without necessarily working on it, for reasons of time or geography.
posted by anigbrowl at 11:19 PM on April 15, 2012


and let me amend that further in that I am quite clear my own motivations for so doing are NOT rational and that the economic theory of the rational actor is not something I subscribe to.
posted by mwhybark at 11:20 PM on April 15, 2012


I'm beginning to suspect alcohol has become a participant in the discussion.
posted by anigbrowl at 11:23 PM on April 15, 2012


Great, you may be able to interpolate my paypal address. ;)

I operate as a C-corp in order to create a larger administrative and tax burden for myself, and I have structured the corporation such that I cannot seek additional shareholders. My lawyer and tax account tell me I am doing it wrong. I smile.
posted by mwhybark at 11:24 PM on April 15, 2012


actually, no, but it is late and i become opinonated.
posted by mwhybark at 11:24 PM on April 15, 2012


and typolated. frustrating. I apologize for the misspellings.
posted by mwhybark at 11:26 PM on April 15, 2012


I operate as a C-corp in order to create a larger administrative and tax burden for myself, and I have structured the corporation such that I cannot seek additional shareholders. My lawyer and tax account tell me I am doing it wrong. I smile.

If you want to pay more tax, you can send a check here, though depressing few people do so. But I can't see what benefit to yourself or your fellow results from additional administration, or what advantage there is over and above being a sole trader, other than that of limited liability - which might fail in the unlikely event that you were found to be using it to load up on debt that you did not intend to pay.

Anyway, I fail to see the relevance of all this to people who may wish to invest small sums of capital in businesses run by somebody else but have until now been forbidden to do so.
posted by anigbrowl at 11:39 PM on April 15, 2012


true enough.

the additional tax and admin burdens are desirable to me personally for aesthetic and political reasons and also to, in essence, make the task at hand harder, as well as to force me to master processes and ideas I would never touch otherwise.

the benefit to you is that I pay a higher federal tax rate than if I were operating as an LLC. I suppose the benefit to the economy is that I hire lawyers and accountants who tell me I'm doing it wrong.

I haven't been inclined to engage on the thread topic other than in drive-by fashion; I certainly owe it to you now.

You note the government is not our mom. True enough. Personally, I think the highest function of government is to slow down economic development in order to minimize the development of capital concentration, and as a desireable side effect of this, to provide sufficient time for political culture to adequately balance the demands of capital and market forces against other interests. This is a viewpoint totally unrepresented in the United States by elected officials or, unsurprisingly, by large capital interests.

The economic history of my adulthood has been the total and complete collapse of my viewpoint as viable within the sphere of politics in this country, and this act is an extension and expression of that collapse. Thus, mockery.

I have seen, personally, an ill-prepared and undereducated friend participate in what he thought was a legitimate investment opportunity which clearly was not. I, personally, told him not to invest and that the investment was an illegal scam (it was a kind of pyramid scheme, illegal even under this act). He lost $10,000 on an estimated annual income of $30,000, if that.

In essence, I am irreducibly skeptical about and antithetical toward the idea of wide-scale public participation in capital investment. Lucky for you, I have no possibility of securing effective political representation for my views in the foreseeable future.

We disagree.
posted by mwhybark at 12:25 AM on April 16, 2012


One other thing: you and a couple of other commenters in this thread have been very articulate in your expressions of interest and enthusiasm for this legislation, and it has been appreciated and illuminating. Thank you.
posted by mwhybark at 12:35 AM on April 16, 2012


True enough. Personally, I think the highest function of government is to slow down economic development in order to minimize the development of capital concentration, and as a desireable side effect of this, to provide sufficient time for political culture to adequately balance the demands of capital and market forces against other interests. This is a viewpoint totally unrepresented in the United States by elected officials or, unsurprisingly, by large capital interests.

That strikes me as teleological to the point of irrationality; I think you're overlooking the possibility of disruptive actors in markets, because not all capitalistic activity comes from the top down; a lot of it comes from the bottom up, and disrupting an overly-cozy mono/duo/oligopoly requires the ability to raise capital as well. Historically it's been a lot harder to raise the first million than any subsequent ones, and while I would expect that to remain the case I don't see any good reason to put excess legal barriers in the way of people who are trying to get a new venture off the ground.

I have seen, personally, an ill-prepared and undereducated friend participate in what he thought was a legitimate investment opportunity which clearly was not. I, personally, told him not to invest and that the investment was an illegal scam (it was a kind of pyramid scheme, illegal even under this act). He lost $10,000 on an estimated annual income of $30,000, if that.

I have no doubt that more people will experience such financial rude awakenings, although under this legislation they'll be limited to 10% of their income/assets. However, I am OK with this; experience is the best teacher, and if my view is that if you structure your regulation around the least capable participants in the economy then you're optimizing for a lowest common denominator. If people are allowed to blow money on overpriced cars, trips to Vegas and so forth, then it's irrational to prevent them from participating in business ventures solely on the basis of potential risk. Fraud is not OK, but informed risk has a place in society. After all, there are many activities like skydiving or bungee jumping where there's a risk that you will die or be seriously injured, and we accept people's rights to make judgments about those even though the potential economic loss to the individual/family is very high indeed. Of course, the risk that a new business will fail is considerably higher than the risk involved in such sporting activities, and harder to insure against; but then the rewards are potentially much higher as well.

What bothers me about lowest-common-denominator regulation is that it often ends up becoming self-defeating. In California, for example, a ballot initiative called Proposition 65 mandates that any item or facility containing known carcinogens be clearly marked as such. Sounds great, right? Except that it says nothing about the concentration or relative risk of carcinogens, so almost every single commercial or public building, and a great many products, bear prominent labels warning about 'substances known to the State of California to cause cancer'. So many places and things have Prop. 65 warnings on them (because so many different substances have the potential to be carcinogenic in sufficient quantity) that they've become meaningless, and instead of making the public better informed they've simply desensitized people at best, and left them paranoid at worst. The legislation has also been abused by businesses relying on prophylactic declarations and frivolous lawsuits targeting any business or product that doesn't have such declarations. The list of offending chemicals is 22 pages long but not actually very helpful to consumers. It includes things like silica particles of respirable size (ie tiny grains of sand) with the result that every beach has to have a proposition 65 warning, because beaches are fill of sand. Every barbecue grill has to have a proposition 65 warning because barbecuing involves setting fire to things, and fire results in smoke, and smoke is potentially carcinogenic. And so on. The warnings are so ubiquitous that the costs (of compliance by business and contemplation by consumers) vastly exceed the benefits.

It seems to me that an excess of financial regulation can end up having the same effect: if you swamp people in disclosures and disclaimers, they'll end up ignoring them as boilerplate and missing potential red flags in the mistaken belief that the dangers have been regulated away. And the more exclusive and smaller the capital market, the more likely the established players are to form a separate class. I suggest that the existing limitation of capital formation to accredited and institutional investors is partly to blame for the relative lack of small shareholder democracy in the US, by excluding small investors from interaction with or influence over corporate boards at a critical formative stage.
posted by anigbrowl at 12:28 PM on April 16, 2012 [1 favorite]


I am OK with this

He was not; he is now dead.

I am also not OK with this.
posted by mwhybark at 5:37 PM on April 16, 2012 [1 favorite]


He was not; he is now dead.
I'm sorry for the loss of your friend. But it seems to me that the root issue is that your friend was desperate enough to throw far too much of his money at a highly dubious financial "opportunity." It sounds like the loss of his money ultimately drove your friend to suicide.

Although your friend's story is a sad one, I don't see how it applies to this discussion. Your friend probably needed a good therapist more than anything. Without that, even if you had been successful at dissuading your friend from that scam, it seems likely that your friend would have poured their money into some other dangerously high-risk financial activity like gambling. Or penny stocks, or derivatives, or forex.

I'm not OK with the loss of your friend, but I'm also not OK with drawing an equivalence between the JOBS Act and your friend's unfortunate passing.
posted by b1tr0t at 9:08 AM on April 17, 2012


He was not; he is now dead. I am also not OK with this.

You gave him good advice that he chose to ignore, which is neither your fault nor mine. As you say, an illegal pyramid scheme would be illegal under this new act. I'm saying that I'm OK with people losing some money as long as they are adequately and honestly informed ahead of time about the risk involved.

Personally, I can't see the attraction in going to Las Vegas or some other casino destination, because the odds are poor and I would be embarrassed to lose any serious amount of money on something as random as the turn of a card or the roll of a dice. The potential upside of something-for-nothing doesn't appeal to me enough to make gambling for more than $20 or $30 an enjoyable pastime. Some people engage in such activities compulsively, which I find even less able to understand than engaging in them casually. But I don't think Las Vegas should be shut down or that people should be protected from participating in risky activities even if those activities are a bad idea - in general or for the particular person involved. Unless someone is so foolish as to be legally incompetent, then it's up to them to exercise some responsibility on their own behalf. That's why I'm OK with people making investments that end in a loss, even if they were overly optimistic.
posted by anigbrowl at 4:33 PM on April 17, 2012


« Older There are some former child celebrities who want t...  |  A group of students at Duke Un... Newer »


This thread has been archived and is closed to new comments