Magazine article The CPA Journal


Magazine article The CPA Journal


Article excerpt

Let's Not Forget What History Has Shown Us

When The CPA Journal went to press this month, the U.S. Senate was considering a bill that had been overwhelmingly passed by the House (H.R. 3606). This bill, paradoxically named the JOBS (Jumpstart Our Business Startups) Act is anything but jobcreating legislation. In an effort to reduce red tape for "small" businesses seeking to raise capital, H.R. 3606 would exempt businesses with up to $1 billion in annual revenue from many of the reporting, disclosure, and governance rules established after the Enron and WorldCom frauds. But playing fast and loose with investor protections is a sure way to destroy investor confidence. And history has shown us that if investors lose confidence in the integrity of our financial system because of fraud risks, they will demand a higher rate of return and, consequenüy, the cost of capital will increase. A higher cost of capital impedes the growth of the very businesses this bill is seeking to help.

A written statement by SEC Commissioner Luis A. Aguilar on March 16, 2012, aptiy pointed out that "nothing in the bill requires or even incentivizes issuers to use any capital that may be raised to expand their businesses or create jobs in the U.S."

And It Gets Worse

If enacted, HJR. 3606 would eliminate the mies that enforce the separation between research analysts and investment bankers in the same financial institution. This separation requirement was originally established to prevent conflicts of interest such as investment bankers offering prospective clients favorable research coverage in exchange for additional underwriting business.

Another provision of the bill could cause potential investors to be misled by inaccurate research reports that are not subject to the same scrutiny and accountabihty of current offering prospectuses.

A third proposal in the bill, known as "crowdfunding," would permit unlimited offers and sales of securities to "accredited investors." Solicitation and advertising could be conducted over the Internet and could bypass registration requirements under the Securities Act of 1933. Those with fraudulent intentions could act with virtual impunity beyond the reach of law enforcement. As SEC Commissioner Aguilar stated, "this provision of HJR. 3606 would be a boon to boiler room operators, Ponzi schemers, bucket shops, and garden variety fraudsters, by enabling them to cast a wider net and making securities law enforcement much more difficult."

Unless there is proper oversight of the gatekeepers who facilitate these offerings and sales, as well as protections of investor funds and securities - such as requiring a bank custodian or broker-dealer - this is a scandal waiting to happen. …

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