A bill the House passed last week to make it easier for companies to raise money could also make it easier for companies to cheat investors, the chairman of the Securities and Exchange Commission says.
It’s called the Jobs Act — an acronym for “Jumpstart Our Business Startups” — and lawmakers of both parties have promoted it as a way to boost a weak economy. But regulators and investor advocates have argued that it could expose investors to fraud.
SEC Chairman Mary L. Schapiro added her voice to the criticism in a letter sent to leaders of the Senate banking committee on Wednesday night.
“Too often, investors are the target of fraudulent schemes disguised as investment opportunities,” Schapiro wrote. “As you know, if the balance is tipped to the point where investors are not confident that there are appropriate protections, investors will lose confidence in our markets, and capital formation will ultimately be made more difficult and expensive.”
At a time when corporations have been pushing for regulatory relief and the Obama administration has been seeking common ground with Republicans on the issue, the Jobs Act would deliver some major items on the business world’s wish list.
Currently, companies seeking to go public must make elaborate disclosures about their finances and operations. The SEC vets those filings before authorizing an initial public offering. Major technology companies have chafed at the requirements and have sought to postpone the day when they must file regulated disclosures.
Under the bill, investment banks that underwrite stock offerings could publish research reports before the IPOs, offering investors information that would compete with the regulated disclosures required by the SEC, Schapiro said.
The SEC highlighted the risks of pre-IPO investments in enforcement actions Wednesday, charging that investment managers misled investors trading in shares of Facebook and other technology companies.
The Jobs Act would lower regulatory hurdles for “emerging growth companies” trying to raise money through public stock offerings. But Schapiro said that the definition of emerging growth companies — those with up to $1 billion in annual revenue — “is so broad that it would eliminate important protections for investors in even very large companies.”
In the aftermath of accounting scandals at firms such as Enron and WorldCom, public companies have been generally required to allow audits of their internal controls. Businesses have protested that the audits are burdensome, and the Jobs Act would carve out new exemptions for emerging growth companies. Schapiro said the exemption was unwarranted.
The bill would also allow companies to raise up to $2 million through “crowd funding” — using social media to raise small amounts of money from a large number of investors without filing the standard disclosures. Schapiro said in her letter that the crowd-funding provision “needs additional safeguards.”
Schapiro said the bill “would weaken important protections” put in place after the dot-com era financial scandals, when research analysts at investment banks were shown to have helped their firms promote stocks that they privately derided.
Investment bankers profit by helping companies sell shares, while research analysts are supposed to offer objective advice about the merits of stocks, including whether to buy or sell. In the dot-com era, research analysts at investment banks were accused of essentially serving as shills.
The investment bankers were found to have promised potential clients favorable research reports in return for lucrative underwriting assignments, Schapiro noted. She said she was concerned the Jobs Act “could foster a return to those practices and cause real and significant damage to investors.”
The Jobs Act passed the House with wide bipartisan support — 390 to 23 — and Senate Majority Leader Harry M. Reid (D-Nev.) has said the Senate will try to pass similar legislation quickly.
Last week, the White House encouraged Congress to send a bill to the president’s desk without delay.On Wednesday, the White House said it supported efforts “to ensure that there are sufficient safeguards to prevent abuse.” Proponents say the bill would help companies hire workers and expand. Rep. Scott Garrett (R-N.J.) said the changes “will unleash the entrepreneurial spirit.”
In a statement Tuesday, Senate Minority Leader Mitch McConnell (R-Ky.) all but dared Democrats to stand in the way of the bill. Doing so, he said, would send a message “that they’re just not serious when they say they’re focused on jobs.”
But critics, such as state securities regulators, say any benefits from the legislation would come at a steep price. “While well intentioned, the JOBS Act . . . sacrifices essential investor protections without offering any prospects for meaningful, sustainable job growth,” Jack E. Herstein, president of the North American Securities Administrators Association, said in a statement last week.
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