In April 2012, the Jumpstart Our Business Startups Act, better known as the JOBS Act, was signed into law, receiving bipartisan support. The JOBS Act is aimed at reducing securities regulations for emerging growth companies to help these companies have access to the capital markets. In theory, the Act seems to have a laudable goal: allowing smaller companies that need capital to reach the markets without being subject to certain communication restrictions and reporting requirements. I say “in theory” because it is important to note that the definition of an emerging growth company is quite expansive, only requiring that the issuer that have “total annual gross revenues of less than $1,000,000,000.” ((Jumpstart Our Business Startups Act, Pub. L. No. 112, § 106, 126 Stat. 306, 307 (2012).)). Is the $1 billion ceiling too high? Does this Act help larger companies skirt the SEC rules and regulations designed to protect the average retail investor?
This type of criticism arose in the early days of the Act’s implementation because of the first corporation that took advantage of the emerging growth company concept. That corporation was Manchester United. ((Richard Blackden, Manchester United IPO Critcised Over Use of JOBS Act, The Telegraph (Aug. 1, 2012), http://www.telegraph.co.uk/finance/newsbysector/retailandconsumer/9445363/Manchester-United-IPO-critcised-over-use-of-JOBS-Act.html.)) I believe it is safe to assume that quite a large percentage of the population is at least aware of the Manchester United Soccer Team. Founded in 1878, the club has recently regained the number one spot on the list of soccer clubs with the highest revenue, bringing in £515.3 million for the 2015-16 season. ((Ed Aarons, Manchester United’s Record Revenue Unseats Real Madrid at Top of Rich List, The Guardian (Jan. 18, 2017), https://www.theguardian.com/football/2017/jan/19/manchester-united-record-revenue-deloitte-football-money-league-rich-list-real-madrid.)). The increase in revenue was mainly due to the club’s better performance on the field and an increase in commercial sponsorships. ((Id.)). This has led to questions and criticism as to whether a well-established, multi-million dollar company should qualify as an emerging growth company; such an establishment hardly seems to fall within the intended scope of the Act.
Critics have claimed that this will lead to less investor protection and more fraud. With the JOBS Act, Manchester United, for example, does not need to “file quarterly reports, report material events, file proxy statements, or disclose extensive compensation information, all of which American companies must do.” ((Steven Perlberg, Manchester United Shows How The JOBS Act Opens The Door To Fraud, Think Progress (Jul. 11, 2012), https://thinkprogress.org/manchester-united-shows-how-the-jobs-act-opens-the-door-to-fraud-6c4b76641df2#.wz6bqof81.)) Some critics, such as the former SEC chief accountant Lynn Turner, came out against the JOBS Act, claiming that it “won’t create jobs, but it will simplify fraud.” ((Travis Waldron, Former SEC Official Slams House JOBS Act: ‘It Won’t Create Jobs, But It Will Simplify Fraud’, Think Progress (Mar. 15, 2012), https://thinkprogress.org/former-sec-official-slams-house-jobs-act-it-wont-create-jobs-but-it-will-simplify-fraud-e5ff8c483e9b#.w7gwx7hrl.)). Also, a survey taken after the bill was signed into law showed that a majority of bankers believe that the Act may open the door to accounting scandals. ((Olivia Oran, JOBS Act Will Increase Likelihood Of Accounting Scandals, Majority of Bankers Say, Huffington Post (Jul. 10, 2012), http://www.huffingtonpost.com/2012/07/10/jobs-act-accounting-scandals_n_1662222.html?utm_hp_ref=business.))
These critiques do carry some weight. The goal of the SEC is to protect investors, particularly those retail investors that may not have the necessary expertise to protect themselves. For this reason, Congress and the SEC put in place extensive regulation for large offerings to ensure that potential investors have access to a great deal of information and to reduce the risk of investors buying securities of a company that may appear to be financially stable while that company’s financial documents imply otherwise. Even though these have been the goals of the SEC since it was established, the JOBS Act seems to contradict those basic principles. Granted, there are numerous examples of real-world small businesses that have benefited from the JOBS Act. Take a look at Phin and Phebe’s Ice Cream. What started out as an operation based out of an apartment in Brooklyn with an initial investment of $150,000 from a small group of investors turned into a business that had accounts with Whole Foods and that was receiving impressive funding rounds from the marketplace. ((Jeremy Quittner, Why the Most Significant Part of the JOBS Act Has Yet to Catch On, Fortune (Sep. 19, 2016), http://fortune.com/2016/09/19/fixing-the-jobs-act/.)) Phin and Phebe’s Ice Cream is not the only company with this story. In fact, “more than 6,000 U.S. companies like Phin and Phebe’s have raised a total of nearly $1.4 billion in investor cash” because of the JOBS Act, especially because of the provisions allowing for crowdfunding. ((Id.)) For these smaller companies, the JOBS Act has lifted expensive and prohibitive regulations, therefore allowing these companies to access the markets and grow their business. Small businesses have been touted as the driving force behind the growth of America’s economy and efforts to allow for the growth of small businesses should be lauded. However, one may question the $1 billion ceiling the JOBS Act sets forth. Lowering the $1 billion limit should maintain the benefits the Act provides small businesses and also curb the potential for fraud and abuse. One final question for Man U: should a company with revenues in the hundreds of millions be entitled to fewer regulations in the capital market? If the ultimate goal is the protection of your everyday investor, I am hesitant to respond in the affirmative.