Shall we laugh at Americans for thinking that what ails their economy is the crushing burden of regulation? Or cry at the prospect of the country becoming a patently unsafe place for Canadians to invest?
Your snickers may give way to tears as you learn that there’s a developing bipartisan consensus that the best way to promote job creation in the U.S. is to dismantle most of the significant investor protections enacted over the last decade.
Alert readers of Vox may recall we’ve discussed this before. In October, President Barack Obama gave a warm reception to the proposal by his “jobs council” that there be a broad exemption from the Sarbanes-Oxley law. (SOX, as it’s known, forces companies to certify that their “internal controls” over accounting are sufficient to produce accurate financial statements.)
That, at least, seemed akin to one of those special-commission suggestions that could very well go nowhere. The current threat is both far worse – it undercuts a wide range of laws beyond SOX – and terrifyingly real, as it passed the House of Representatives by a 390 to 23 margin last week, and seems to be steaming toward Mr. Obama’s signature.
Many of the changes are supposed to affect investments in only the smallest “emerging growth companies,” as one of its component bills says. Hence the innocuous title, the “Jump-start Our Business Startups,” or JOBS, Act.
And yet the definition the act’s backers have chosen for “emerging growth company” is $1-billion (U.S.) in revenue or less. Any company that has gone public since last December and meets the revenue criteria gets a pass from a host of established laws for the earlier of five years, or as long as it remains below that billion-dollar threshold. Estimates are between 90 per cent and 98 per cent of recent years’ IPOs would qualify, including guitar-maker Fender Musical Instruments, which was founded in 1946 and filed for an IPO Friday.
Among the benefits of this “emerging” status: The companies’ proxies need not include any data that relate executive pay to the company’s actual performance.
IPO companies need to produce only two years’ worth of audited financials in their registration statements, versus the current three, and have no obligation to disclose any results from periods prior to that.
The “emerging growth companies” get a pass on Sarbanes-Oxley’s internal control rules, and are exempt from any upcoming rules on rotating their audit firms. They don’t have to follow any new accounting rules for public companies, unless those rules also apply to private companies.
And all the rules that restrict sell-side analyst research, adopted after the notable conflicts of interest in the 1990s, would not apply if analysts plan to publish a report on, yes, an “emerging growth company.” Investors could no longer be sure an analyst wasn’t issuing a “buy” recommendation as part of a package of investment banking services.
There are even more investor-unfriendly changes in the JOBS Act relating to the private sales of securities to U.S. investors, including the truly stupid idea to create a “crowd funding” exemption to securities laws, allowing companies to sell stock to large numbers of small investors via the Internet. Columbia Law School Professor John Coffee called this “The Boiler Room Legalization Act of 2011.”
A number of influential groups, including the Council of Institutional Investors and the American Association of Retired Persons, have voiced objections to some or all of the JOBS Act’s provisions.
Barbara Roper of the Consumer Federation of America likens the bipartisan stampede to pass the JOBS Act to the similar rush to approve the Gramm-Leach-Bliley Act, the 1999 financial deregulation law that broke down the walls that kept financial companies from engaging in too many disparate (and risky) lines of business. “These bills,” she wrote in a recent op-ed piece, “have strong support from a business community chafing at what they see as outdated regulations and from political leaders of both parties intent on ignoring warnings that the regulations being rolled back were adopted for a purpose that is still relevant today.”
And, she notes, the act has “no realistic premise that it will create jobs.” Which leads Paul Gillis, a professor and author of the China Accounting Blog, to muse, “I hope it does not become known as the Jumpstart Our Bilking of Suckers Act.”
I wouldn’t put my money on that. Or on any “emerging growth company,” for that matter.