The JOBS act repealed much of securities law in the name of job creation. Historically you needed to be an accredited investor who theoretically could afford the risk of investing in private and speculative securities. We’re going to avoid a discussion on the overall merits of how the markets function and if public companies are safer than private companies for a minute and instead focus specifically on the act at hand.
An important thing to note is that it is NEVER easy to raise money. It is almost always time consuming and annoying, even if you have access to capital. It takes time and not everyone deserves to be funded. Funds and the public markets function as a filter for the broader market on what can raise money. The easier access to capital, the easier access to fraud. Remember cheap mortgages circa 2000? Where did that end up? Mortgage fraud, en masse. The easier it is with less regulation to raise money, the easier it is for fraud. Now this is not to say that I will not utilize these new tools in my own ventures – I don’t know yet but its important to pause for a moment and think about what this all means.
On the surface the jobs act makes it easier to raise money, lets more people invest and makes it easier for companies to tap public capital without SEC requirements. It seems overall makes it easier to raise money. Yes it appears as such though let’s look at the risks. The SEC was set up specifically to police the market. They OFTEN FAIL as in Enron, Worldcom etc… yet now the SEC becomes a toothless tiger in many regards to small companies. How will this likely play out?
5 big risks with the JOBS act:
- 1. Small investors. Now anyone can invest in private companies. That means you can solicit your neighbor who doesn’t have a lot of money to invest. Most likely he doesn’t see a lot of investments and doesn’t know how to diligence it. Now lets assume he finds the opportunity online without even knowing the principal. He likely is not educated to make good decisions and likely will invest in lower end opportunities and will be susceptible to fraud.
- 2. Deregulation of SEC requirements: Its easier to raise money with less regulations about it. There is already a lot of securities fraud.
- 3. Lack of disclosure yet ability to be public. You can now be publicly traded without full disclosure. This basically means ‘I like the sound of zynga and I think they are doing well so I should invest’ While this happens all the time, this will allow smaller investors to take the same blind risk of bigger investors. Dangerous. Bigger investors have experience. Smaller investors generally don’t.
- 4. Easier access to investment opportunities. There will be millions of things trying to raise money now. How many will be real?
- 5. Lack of filters: If its easier to invest and find deals to look at – who will be the filter or what will help filter out bad opportunities? No one. This is fine for institutions who are used to saying no though it seems like a lot of smaller investors will lack the filter for it or not know where to go. If you’re a mechanic in IOWA how do you have the tools to invest in an opaque NYC based company with no disclosure and no access to management? Hmm…
Overall the JOBS act is noble and will lead to good companies getting funded though appears shortsighted on regulation – which has been proven to lead to fraud. I just hope we have good controls going forward.