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U.S. President Barack Obama signed the JOBS Act (Jumpstart Our Business Startups Act) into law yesterday (Thursday) – and just put more money in Wall Street's overflowing pockets.
The JOBS Act intends to help small businesses and startups raise money and ease the IPO process for "emerging growth companies." These are companies with less than $1 billion in annual revenue, issued no more than $1 billion in debt, floated no more than $700 million in stock, and have gone public within the past five years.
While the law is designed to create jobs and help business growth, the JOBS Act actually is giving Wall Street a new way to soak money out of investors looking for the next huge money-maker. It lightens regulation that was established to prevent firms from encouraging ill-suited investments for their own financial gain.
"This law is a perfect example of how corrupt our lawmakers are," said former hedge fund manager and Money Morning Capital Waves Strategist Shah Gilani. "They're blatant about making laws to benefit paying constituents who will use and abuse the public to line their pockets and those of Congress. The public should be outraged. This is one small step for entrepreneurs and one giant leap for fraudsters."
What the JOBS Act Really Means for Investors
The JOBS Act includes provisions that make it easier for small businesses to go public and find funding. It eases restrictions for these companies because the cost of complying with accounting rules is a bigger burden for them than for larger, established businesses.
These provisions include the following changes:
- Emerging growth companies have up to five years to comply with the accounting regulations that public companies previously had to adhere to before their IPOs.
- Companies only have to report two years of audited financial statements, down from the three required now.
- Businesses will be exempt from certain disclosures, like executive compensation, for the first five years after going public.
"Regulators are furious, and with good reason," said Gilani. "How could a law that gives companies five years to not have to conform to accepted accounting standards, but be able to sell themselves to investors who rely on accounting information to guide them, be enacted?"
Having less information disclosed could be incredibly harmful to investors – but these aren't the most alarming changes.
Other provisions actually reverse regulation specifically put in place to protect investors:
- Qualified companies won't be required to have an auditor review their internal financial controls – a regulation created after the Enron scandal.
- And banks underwriting IPOs can issue research reports on those stocks before the offerings – a conflict of interest prohibited a decade ago after firms pushed shoddy dot-coms on investors.
That fact that the law could override the major 2003 legal settlement that prevented analysts from promoting stocks their companies were underwriting is a huge setback for investor protection. Research that helped lead to that law's passage referenced an analyst e-mail calling a stock a "piece of junk" – while the same analyst told investors to buy it.
"Calling this law a disaster is like calling the Grand Canyon a "ditch,'" said Gilani. "In all my years in the securities business I could never have dreamt that we'd come to this – "this" being the end of integrity as far as the capital markets are concerned."
JOBS Act Will Create Jobs – All the Wrong Kinds
Proponents argue the JOBS Act will live up to its name, boosting U.S. employment opportunities and encouraging small business growth.
But Gilani says instead it will fuel greedy Wall Street profit growth.
"The JOBS Act is aptly named because it will certainly generate tons of work for con-men, fraudsters, boiler room operators, pandering accountants, analysts and banksters, regulators, lawyers, and eventually prison guards," said Gilani.
The JOBS Act also supports online crowdfunding, using the Internet to sell small amounts of stock to many individuals. Companies can raise up to $1 million per year through stock sales to many individuals that wouldn't have to be registered for public trading with regulators.
Critics said this could bring a rise to the "boiler room" tactics where brokers push worthless stock on investors out of the public eye.
U.S. Securities and Exchange Commission Chairwoman Mary Schapiro has said the JOBS Act will "weaken investor protection." The SEC has 180 days from when the bill was signed to implement additional regulations.
The JOBS Act will apply to companies that go public, and those that have started trading on or after Dec. 8, 2011.
As a retired hedge-fund manager, Gilani opens the doors on Wall Street's private money club — where his experience and knowledge uniquely qualify him as an expert on the markets.
Bull market or bear, Shah knows how make money in any market.
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- The New York Times:
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