Steven Rattner: You Could Lose a lot of Money Because of the JOBS Act

Wednesday, 06 Mar 2013 08:18 AM

By Michael Kling

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The Jumpstart Our Business Startups (JOBS) Act will help you lose a ton of money, warns a long-time Wall Street financier in an article for The New York Times.

The JOBS Act allows non-accredited investors to invest in start-up companies and permits companies raising start-up funding to advertise to the public.

“Its enticing acronym notwithstanding, the JOBS Act has little to do with employment; it’s a hodgepodge of provisions that together constitute the greatest loosening of securities regulation in modern history,” writes Steven Rattner, chairman of Willett Advisors, the investment arm for New York Mayor Michael Bloomberg’s personal and philanthropic assets.

Editor's Note: How You Lost $85,000 During the Last Decade. See the Numbers.

The Act legalizes crowd funding, or raising capital from small investors over the Internet. Rattner, a former Treasury official under President Barack Obama who oversaw the government rescue of the Detroit auto giants General Motors and Chrysler, calls that the most troubling part of the law.

Using websites like Kickstarter, investors would be able to take financial stakes in small start-ups with no track records. Picking winning start-ups is difficult even for experts, Rattner explains, adding that most venture funds lose money.

“For individuals, it’s pure folly. Buy a lottery ticket instead. Your chance of winning is likely to be higher.”

The law also permits private equity and hedge funds to advertise. Until now, only accredited investors, those with incomes over $200,000 a year or a net worth of $1 million, could invest in those firms. The law’s supporters say amounts that can be lost will be limited, but people earning $40,000 can risk $2,000 a year.

Because, the top funds can already raise capital without advertising, most advertising, he predicts, will be done by firms that sophisticated institutional investors would avoid.

“No wonder that the Securities and Exchange Commission, whose former chairwoman Mary Schapiro opposed the legislation,” he writes, “has been taking its time writing the regulations to implement these provisions.”

The law also makes it easier for small companies to go public, allowing them to file less financial information than larger companies do. Many companies, including “dodgy” Chinese businesses have taken advantage of that part of the law, Rattner says.

Although the Sarbanes-Oxley law was too restrictive, the JOBS Act goes too far, he maintains.

“The largest number of jobs likely to be created by the JOBS Act will be for lawyers needed to clean up the mess that it will create,” he predicts.

Gary Emmanuel, a securities attorney with Sichenzia Ross Friedman Ference LLP, criticized the JOBS Act for other reasons. Crowding funding under the Act won’t work, he writes in an article for Huffington Post.

Companies cannot raise more than $1 million over 12 months — not enough for many start-ups, Emmanuel says. Managing records of hundreds, or even thousands, of small investors will be challenging.

Plus, companies will have to meet costly compliance requirements, he notes. They’ll be at risk of being sued by investors who believe they were misled, and may suffer a stigma that will hamper raising funding from venture capital firms.

Editor's Note:
How You Lost $85,000 During the Last Decade. See the Numbers.

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