Monday, March 19, 2012

I'm skeptical of the 2012 JOBS Act. And here's why

If you're on twitter, you may have seen a lot of tweets from people supporting the JOBS Act. The act is actually an acronym for Jumpstart Our Business Startups and isn't a jobs act in the traditional sense where companies are encouraged to hire people through deductions, etc.

Among a host of things it aims to accomplish, the JOBS Act is looking to make it easier for small companies to get funding and go public. Here's a good article about the Act as it relates to Silicon Valley Investing:

JOBS Act to rewrite rules of Silicon Valley investing

In general, I like what the JOBS Act is trying to do. Afterall, supporting startups through novel means of funding should result in a more equitable way of getting innovation out to more people. And this isn't just about technology startups; it could certainly help with many types of small businesses.

The part I'm not too keen on is the transparency requirements for companies which are looking to get funded. Essentially, the reporting requirements that companies have to abide by right now can be pushed out for up to five years. Those requirements were put in as part of Sarbanes-Oxely (eg, after Enron) to help ensure that investors and shareholders know what the company they've invested in is really up to.

Here's a transcript of an NPR report on this matter of transparency:
Unintended Consequences Emerge In JOBS Act

My concern is really around the information that companies need to provide to investors. While I like the open-ness that many parts of this Act allow for (especially around what incubators are allowed to publish about companies they invest in), I just don't see enough reason for lifting reporting requirements on "emerging" public companies.

All it takes is one instance of an emerging company hiding its books in creative ways. Investors will be the ones who are taken for a ride all in the hopes of hitting it big with small companies. It's one thing if you're funding a Kickstarter campaign for a new iPhone tripod with $25 of your own money. It's a wholly different situation if you're funding a company that says they're the next great thing in social networking and you hand over thousands of dollars to get in early.

Incubators, VC's, and Angel Investors take risks, but they're educated risks and they're privy to a lot of information about the ideas and the risks they're getting into. The changes coming due to the JOBS Act may make it easier for the average joe to invest in tech startups, but I think it's with the consequence of inadequate transparency about what those startups are doing behind the scenes. Sure opening up investing to more people will bring more money into the startup world, but will those new investors have any way of really finding out what they're getting into? Additionally, I see this as a fast-lane to another tech bubble if average investors just pile their money into any tech startup with just an inkling of an idea.

It's hard to make it big in tech startups. It's hard to invest in the right startups and actually make money. I don't think we should make it easier to invest in such startups unless we also continue to require enough information about the companies that will help us decide if they're "right".

What do you think about the changes that the JOBS Act has in store for Silicon Valley?

UPDATE: I've added one more great article about the problems with the JOBS Act. This piece goes a lot farther in opposition than me, but it demonstrates very well what we would be losing if this act is passed:
A Colossal Mistake of Historic Proportions: The “JOBS” bill


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