Sunday, March 25, 2012

JOBS Act Will Do More Help Than Harm To Enterprise Finance

I first took note of the Jumpstart Our Businesses Act, a.k.a. the JOBS Act, in one of John Robb's posts.  It seemed like a cute idea but I was skeptical that such a liberalizing reinvention of the capital markets would make it into law.  The U.S. financial system is so skewed towards large institutions that something so amenable to small capital raises would have to swim against the tide.  I thought it was some lawmaker's hobby horse or a gesture to the venture capital sector.  I fully expected that it would either die before reaching a floor vote or emerge unrecognizable as TBTF-friendly filler.

I took further note of the bill when I read a scathing criticism in the Huffington Post signed by William Black and Janet Tavakoli, two names among many whom I respect for their analysis of the financial crisis.  They are alarmed at the possibility that the JOBS Act may engender further criminality and ensure continuing economic crises.  As much as I respect their concern over financial market health and investor protection, I believe their objections to the JOBS Act are based on incorrect premises.

Bill Black correctly identified deregulation as a major contributor to the savings and loan crisis of the 1980s.  His objection to the JOBS Act rests on a similar premise:  Lack of regulatory supervision of small institutions will embolden them to make irresponsible decisions with other people's money, and the consequences of those decisions will then be borne by taxpayers.  My response is that the 2008 financial crisis was engendered by several actions that had little to do with securities registration for undercapitalized small businesses.  The repeal of the Glass-Steagall Act created an environment where financial supermarkets could make equity and derivative bets backstopped by taxpayer-guaranteed savings accounts.  A policy bias toward homeownership spanning several administrations incentivized government-sponsored mortgage poolers (specifically Fannie Mae and Freddie Mac) to securitize things that should never have been securitized.  The Federal Reserve's loose monetary policy under Alan Greenspan kept the cost of capital so low that mortgage creation seemed to be a no-risk road to profit.  All of these things led to multiple asset bubbles that popped.  None of these things had anything to do with the needs of small enterprises for capital.

The JOBS Act makes minor changes to regulation that will allow ordinary non-millionaire investors to take equity in privately-held companies.  The critics' concern that this approach will engender fraud is misplaced.  Existing securities rules require public companies to file regular financial statements with the SEC.  The statements for thousands of penny stocks are available at the click of a button and yet too many investors buy the stocks anyway, thinking they're getting bargains.  Check out the dozens of blog articles I've written in the past few months on useless stocks whose SEC statements routinely cast doubts on their legitimacy.  People invest in them anyway.  Enron, Worldcom, Tyco, AIG, Lehman Brothers, and now MF Global were all well-known companies that plenty of smart institutional investors thought were great investments.  They failed anyway.  Regulation and disclosure help people who spend time doing homework.  They can't cure human stupidity.

The JOBS Act will not eviscerate an American financial regulatory regime whose main deficiency is lack of enforcement for existing rules.  It will energize small businesses by granting them access to a capital pool beyond accredited investors.  It may even remove the "hair on the deal" excuse some VCs use as a reason not to back a startup.  If plenty of ordinary people can invest in plenty of startups, hairs on deals have a lot less stigma.

I spent this weekend at a startup hackathon in San Francisco where multiple teams of technology experts created business solutions.  They are all long on talent and enthusiasm but short on capital.  The JOBS Act will give them the extra juice they need to win.  I support its enactment into law.