Will JOBS Act Enable More Securities Fraud? the Recently Passed JOBS Act Eliminates Regulatory Requirements in Initial Public Offerings and Loosens Other Reporting Obligations of Public Companies. These Changes Will Weaken a Number of Investor Protections and Could Provide Opportunities for Greater Securities Fraud

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Early in April, President Obama signed the Jumpstart Our Business Startups (JOBS) Act that had passed Congress with bipartisan support. Many of the Act's provisions free smaller companies to raise public capital without having to comply with some of the regulatory requirements of federal and state securities laws. Other provisions lessen the regulatory burden for existing companies. The U.S. Securities & Exchange Commission (SEC) has requested public comment on several aspects of the law, and the Financial Industry Regulatory Authority (FINRA), Wall Street's self-regulatory body, will likely be required to issue implementing rules.

A number of critics have objected to the rollback of "major" securities regulations and parts of the Sarbanes-Oxley Act of 2002 (SOX). According to Eliot Spitzer, the former New York attorney general, "It shouldn't be called the JOBS Act, it should be called the Bring Fraud Back to Wall Street Act." Spitzer and other observers believe that companies will undoubtedly take advantage of the changes in the laws to return to the old unethical behaviors that are no longer legally prohibited and pursue their own self-interests at the expense of investors.

The portion of the Act that has received the most attention deals with simplifying the process for a company's initial public offering (IPO). Known as the "IPO on-ramp," it says that any company that fits the definition of an emerging growth company (EGC) can take advantage of significant reductions in the cost and time necessary to become a public company. A company can remain an EGC until (1) its revenue exceeds $1 billion, (2) it has issued more than $1 billion in debt securities, (3) five years have elapsed since its IPO, or (4) it's deemed to be a "large accelerated filer."

The Society of Corporate Secretaries & Governance Professionals published a memo on its website that details some of the benefits and exceptions that the JOBS Act provides to an EGC that aren't normally available for companies in the IPO process (www.governanceprofessionals.org/society/Jumpstart_Our_Business_Startups_Act.asp). They include:

1. An EGC can have a confidential SEC review of its draft IPO registration statement. This is intended to protect companies prior to the road show. If the company decides not to go forward, its draft statement is never made public.

2. It has to provide only two years of audited financial statements rather than three.

3. The EGC is allowed to communicate with accredited investors or qualified institutional buyers so it or its investment banker can "test the waters" and sell the deal before a registration statement is filed.

4. Analysts can publish reports on the company before, during, or after the IPO--even if the analyst's firm is participating in the offering (Title V of Sarbanes-Oxley, Analyst Conflicts of Interest, dealt specifically with changing the conduct of securities analysts whose recommendations for a securities purchase were based mainly on the fact that the analyst's employer was being compensated for marketing those very same securities products to the public, setting up an obvious conflict of interest).

There are other provisions in the Act related to investing. A section on "crowdfunding" enables startups and small businesses to raise up to $1 million annually over the Internet without any registration of the shares with regulators for public trading. There's also a limit on how much an unaccredited investor can invest annually. (An "accredited" investor is someone with net worth of at least $1 million, excluding their home, and is presumed to be an informed and sophisticated investor who doesn't need the protections inherent in the regulations in the IPO process). This portion of the law doesn't go into effect until 270 days after its enactment and requires the SEC to publish rules.

In other areas, the Act expands from $5 million to $50 million the permitted size of "mini" public offerings that are exempted as a private placement from regulatory requirements under SEC Regulation A. …