The JOBS Act and unintended consequences

jobs actSo key components of the JOBS Act look more and more like a dog by the day. CFO Magazine reports that companies that are actually taking advantage of JOBS Act’s looser reporting restrictions are listing the JOBS Act, itself, as an additional risk factor in their prospectuses:

Over the past week, at least 13 companies — including HomeTrust Bancshares, Plesk Corp., and LegalZoom.com — have warned investors in their prospectuses filed with the Securities and Exchange Commission that the JOBS Act’s breaks on SEC rules could actually be a turnoff. “We cannot be certain if the reduced disclosure requirements applicable to emerging growth companies will make our common stock less attractive to investors,” reads a statement in boldface type by Cimarron Software in an S-1 form submitted to the SEC yesterday.

Irony much? That’s not quite the vote of confidence investors are hoping for. But these danger signs are, in fact, warranted. From the Wall Street Journal:

“Special-purpose acquisition companies” and “blank check” companies, basically empty shells with almost no employees that are used in mergers or as a backdoor route to U.S. stock listings, have been quick to identify themselves in regulatory filings as “emerging growth companies.”

The optics on this are so awful that even one of the legislation’s chief lobbyists is forced to admit it, telling WSJ that he didn’t “think anybody was thinking this was going to be applied to reverse mergers and the like.”

It doesn’t help that there is a substantial recent history of fraudulent companies (usually from China) using this reverse merger route to get a listing on US exchanges while bypassing the scrutiny and enhanced disclosure regulations that governs US IPOs. (See this.) Or governed, I should say since the point of the JOBS Act was to free small, “job creating” companies from the tedium and expense of doing this. CFO Mag sums it up best:

[Under the JOBS Act] so-called emerging-growth companies — those that take in less than $1 billion a year in revenue — can wait up to five years after their IPO before following all of the rules that larger listed businesses have to follow. They can submit two audited financial statements with the SEC instead of three, they can avoid holding say-on-pay votes, and, most significantly, they are not required to get their auditors’ signoffs on internal controls over financial reporting. 

How can this be fixed? It will up to the SEC to tighten up the rules on which kind of companies may and may not take advantage of the JOBS Act. Right now it seems happy to let these so-called “blank check” companies waltz right through the door. So really, the best line of defense is a well-informed and skeptical investor.

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