Views on the integrity of global capital markets
07 June 2012

U.S. JOBS Act sans Jobs

Jim Allen, CFA

Here is an interesting article in Tuesday’s Online WSJ (subscription required) talking about the first entrants into the new JOBS Act machine. Turns out that “more than a dozen” of the companies that are itching to take advantage of the Act’s reduced reporting and governance requirements have no employees — nor any operations, for that matter. In fact, the description provided by reporter Emily Chasan is similar to the classic penny-stock scheme: the shell company.

As we warned in a letter to Congress and in a blog post earlier this spring, the threats to small investors from the Act’s provisions in many cases outweighed any benefits it would provide to small companies. By describing themselves as emerging-growth companies, issuers become strong temptations for certain classes of investors earning next to nothing on their traditional fixed-income investment vehicles.

The article included this quote from former NASDAQ Vice Chairman David Weild about the applicants so far: “Congress was interested in making it easier for entrepreneurs that were going to raise capital and build companies and employ people. I don’t think anybody was thinking this was going to be applied to reverse mergers and the like.”  

The best laid plans of mice and men ….

No doubt, there are examples of such firms that have performed well for their investors, but the fact that a number of the early entrants are shell entities doesn’t bode well for investors. Instead of buying into a company’s promising new technology, its novel business plan, or its unique strategy of applying existing technologies in original ways, investors in these companies will be investing in the “investment decisions” of the company’s principals, hoping that the acquisitions they make aren’t mechanisms to help insiders dump money-losing duds on unsuspecting investors.

Kudos for Ms. Chasan and the Wall Street Journal for keeping their eye on this ball.

About the Author(s)
Jim Allen, CFA

Jim Allen, CFA, is head of Americas capital markets policy at CFA Institute. The capital markets group develops and promotes capital markets positions, policies, and standards.

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