Views on improving the integrity of global capital markets
08 August 2012

HAZMAT ALERT! Beware of JOBS Act Offerings

Kurt Schacht, JD, CFA

There, I said it. If you thought the Facebook IPO was an experience to forget, consider this warning: If you see a new stock offering coming from the U.S. JOBS Act, consider it carefully. If it were me, I’d run like the wind. Here is why.

We have previously commented on the great disservice done to investors and markets generally by this ill-conceived piece of election year pandering. Now we’re bracing for more potential damage. The JOBS Act — aimed at reducing regulatory burdens for smaller companies — is still subject to implementation via SEC rules which are currently in process. Aside from the fact that the disclosure requirements of issuers availing themselves of JOBS Act-endorsed shortcuts are already laughable in their deficiency, some of the same law firms bent on passage of the Act in the first place are now out to further weaken the requirements

Here is just a flavor of the things these law firms want omitted from any prospectus trying to sell these miscellaneous ventures, known as “emerging growth companies” (EGCs), to the public. Just as a reminder, these are things that are generally required disclosures of any typical company seeking public capital.

  1. EGCs would not have to disclose anything about backlogs for their products or services. (We cannot tell if this is because they don’t have a product or just no backlogs?)
  2. EGCs would not have to disclose any market-related risks for their businesses, such as interest-rate, foreign-exchange, or commodity-price risks.   
  3. EGCs would not have to tell potential investors anything about how much they will be diluted. This is “not meaningful to investors,” the letter states.
  4. EGCs would not have to tell potential investors about any recent sales of unregistered securities, that is information about their earlier rounds of financing or material contracts to the firm. (We could only think of about 10 reasons why investors would want that specific disclosure).
  5. Finally, EGCs would not have to disclose how they plan to use the proceeds of the offering.

You get the picture — hazardous material these offerings. The lawyers take the view that adequate disclosure is all too expensive, of little or no relevance to IPO investors, or can be found by scrounging around in subsequent financial and other types of filings from the company, once public.  

As an attorney myself, I am very familiar with that old adage, “We are lawyers, and we are just here to help.”

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About the Author(s)
Kurt Schacht, JD, CFA

Kurt Schacht, JD, CFA, is the Senior Head, Advocacy Advisor, Capital Markets Policy at CFA Institute, where he oversees advocacy efforts and the development, maintenance, and promotion of the highest ethical standards of practice for the global investment management industry.

5 thoughts on “HAZMAT ALERT! Beware of JOBS Act Offerings”

  1. Omar Taheri says:

    Why do law firms want no disclosure of how these EGC’s will be spending their proceeds after offering ? What is their added benefit ? It makes it that much tougher to value a company.

  2. rob stancliffe says:

    Bingo! I think thats the point. harder to value, more likely to overpay

  3. Keith Summers says:

    Although the JOBS Act disclosure requirements are substantially reduced vs. those for other public companies, they are mitigated in that investors are capped at investing more than 2% of their income to a maximum of $10K.

    As Charterholders, we don’t endorse two-tier regulation, but when the upfront costs of attracting risk capital (attorney’s fees etc) start in the six-figure range, we need to ask ourselves where companies needing only a few million dollars (or less) should go.

    Not everyone has rich relatives to underwrite their start-ups.

    1. Barbara Roper says:

      @Keith Summers — Unfortunately, the $10k limit you refer to applies only to crowdfunding investments — just one small part of the JOBS Act. There is no limit on the amount investors can invest in emerging growth companies. And, since Congress cast such a wide net when defining emerging growth company, the vast majority of companies that go public will fall into that category. It is essential that investors push back against the kind of further reduction in disclosures that Kurt describes so well.

  4. Stan Breon says:

    OK. Why would you invest in an offering that did not disclose? Most reputable sponsors will self disclose, making their offerings more desirable (marketable) relative to non-disclosers. Any false statements in this regard are still prosecutable.

    This legislation is long overdue. Quality offerings will rise, lesser ones will fail. Let’s all remind ourselves how well the copious diclosures long required have protected investors.

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