Securities Law Prof Blog

Editor: Eric C. Chaffee
Univ. of Toledo College of Law

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Friday, March 23, 2012

Senate Passes JOBS Act

The Senate passed the JOBS Act yesterday by a vote of 73-26.  Because there are some differences from the House Bill, the versions must be reconciled.  This legislation appears to be on a fast track, so this may occur next week, and President Obama is expected to sign it.

Its supporters say the bill will create jobs, although I have not seen any factually-based support for this assertion.  The bill weakens significant investor protections, as many have pointed out in the past few weeks, including Professor John Coffee (Columbia Law), Professor Harvey Goldschmid (Columbia Law and former SEC Commissioner), Professor Simon Johnson (MIT) and SEC Chair Mary Schapiro.

There are three provisions that I find especially troubling.  First, the legislation creates a category of "emerging growth companies," defined as companies with less than $ 1 Billion of annual gross revenues.  Experts estimate this accounts for 90% of publicly traded companies.  Emerging growth companies are exempt from many important financial disclosure and accounting requirements, including the SOX 404(b) requirement that an independent auditor assess internal controls.

Second, the restrictions on research reports and securities analysts' communications are eliminated with respect to these emerging growth companies.  You'll remember that analysts' cheerleading for IPOs was one of the scandals of the dot.com bubble and bust.

Third, the act authorizes "crowdfunding," which, according to Professor Coffee, essentially legalizes boiler room operations.  It permits unregulated offerings of securities up to $1 million to small investors.  The House version limits each investor's participation to $10,000 or 10% of annual income (whichever is less); the Senate version is the greater of $2,000 or 5% of income or net worth if either figure is less than $100,000.  Apparently the philosophy is that if the amount is small enough, unsophisticated investors can be defrauded.

This is dreadful legislation.  Congress has no memory of past frauds, and both Republicans and Democrats alike want to jump on the deregulatory bandwagon under the banner of job creation.

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