It's the old saw that Washington seems to have down to an art: The road to Hell is paved with good intentions.
And once again, in an effort to help get the wheels of the US economy turning more briskly, the government has managed to grease the axle and flatten the tires at the same time.
Thanks to the JOBS Act (Jumpstart Our Business Start-Ups), issuers pushing things like start-ups, established companies, and more importantly venture funds, private equity investments and hedge funds can advertise for investors if they want.
Yes, by altering restrictions in existing rules and regulations, the Securities and Exchange Commission is going to allow hedge funds and the like to advertise their wares.
The grand intent is that more small businesses will get funded, and more struggling companies will be able to raise capital to keep their doors open.
Unfortunately, it's likely that the jobs the JOBS Act is most likely to create will be for lawyers; lawyers to protect investors, lawyers to sue issuers, lawyers to keep issuers from regulatory shackles and for lawyers to fight the lawyers with new jobs.
While general advertising hits everyone, not all interested investors can participate in these newly advertised offerings. The SEC still mandates that if you're an individual you have to be an "accredited investor" to play.
The criteria states that you have to have a minimum net worth of $1 million dollars (excluding your home) or have an income of $200,000 or more in the past two years and a "reasonable expectation" you'll make that much in the current year.
The definition for married couples is a little different, but the underlying idea is the same: If you have money you must be a sophisticated investor.
I know a lot of people with a lot of money and they are not sophisticated, but whatever.
In the old days, say you were raising money for a hedge fund, all an issuer of interests in the fund had to do to determine if potential investors were accredited was to have them check a few boxes on some forms.
The new rules require issuers to actually check out potential investors and determine if they are indeed accredited or qualified.
However, what's not clear is how the regulators, who are usually behind the curve when it comes to regulating, are going to protect investors from issuers who are pretenders themselves.
Yes, that's right. The SEC is protecting hedge funds and the like from under-captialized investors, but has not put in place any rules to make sure the investment companies are legitimate.
There are no new rules and regulations protecting investors from stupid issuers and fraudulent schemers.
In fact, there are fewer rules. The SEC is going to let issuers slide on filing certain critical financial metrics by which companies can be better analyzed and vetted.
In the rush to supposedly create jobs, the lawyers in Washington and the lawless loonies in Congress have conspired to effectively do something they set out to do, create jobs.
S o what if most of the work that's going to be created will be for lawyers, they need jobs too, don't they?
We'll all be thrilled to see jobs being created in the private sector if issuers who are able to advertise are able to raise money to start businesses and hire workers.
And we should all hope that investors make enough money, and start-up companies and struggling companies and investment fund schemers all make enough money and stay employed long enough to pay their legal bills.
If you think the JOBS ACT is going to spawn a slew of legal bills, just think how much money the Big Banks are going to throw at lobbyists to stop the new Glass-Steagall bill. Shah takes a look at it here.
About the Author
Shah Gilani boasts a financial pedigree unlike any other. He ran his first hedge fund in 1982 from his seat on the floor of the Chicago Board of Options Exchange. When options on the Standard & Poor's 100 began trading on March 11, 1983, Shah worked in "the pit" as a market maker.
The work he did laid the foundation for what would later become the VIX - to this day one of the most widely used indicators worldwide. After leaving Chicago to run the futures and options division of the British banking giant Lloyd's TSB, Shah moved up to Roosevelt & Cross Inc., an old-line New York boutique firm. There he originated and ran a packaged fixed-income trading desk, and established that company's "listed" and OTC trading desks.
Shah founded a second hedge fund in 1999, which he ran until 2003.
Shah's vast network of contacts includes the biggest players on Wall Street and in international finance. These contacts give him the real story - when others only get what the investment banks want them to see.
Today, as editor of Hyperdrive Portfolio, Shah presents his legion of subscribers with massive profit opportunities that result from paradigm shifts in the way we work, play, and live.
Shah is a frequent guest on CNBC, Forbes, and MarketWatch, and you can catch him every week on Fox Business's Varney & Co.