Jumping on the JOBS Act
While the SEC’s implementation of the Jumpstart Our Business Startups Act (the “JOBS Act”) may have slowed, the debate over the Act has not. Dan Simon, writing for Forbes, discussed what won’t change once completes the JOBS Act rulemaking process is completed. Among other things, he contends that lifting the general solicitation ban is unlikely to result in a rash of new hedge fund advertisements. The Economist, however, disagrees. It expects both large and small firms to leap at the chance to attract new investors. But it also noted a possible pitfall of advertising: the apparent inverse relationship between big advertising campaigns and actual fund performance.
On a more pragmatic note, Usha Rodrigues of the University of Georgia School of Law discussed in the Vanderbilt Law Review what needs to happen after the general solicitation ban is lifted. Although advertising will be allowed, only accredited investors are supposed be able to purchase the newly advertised exempt securities. Rodrigues examines how the SEC should set the parameters for implementing that accreditation requirement.
Like the Economist, DealBook also found an inverse relationship. This one, though, involves the JOBS Act’s initial public offering provisions. Those provisions were meant to foster a small company’s growth by making it easier for it to raise new capital through an IPO. But since the Act’s passage, DealBook found fewer, not more, small IPOs have come to market.
And while the SEC has yet to promulgate the JOBS Act rules, it has not been altogether silent. In April it brought what could be termed its first JOBS Act enforcement action. It alleged that Daniel F. Peterson and his company USA Real Estate Fund 1 promised investors that they could reap spectacular returns from an upcoming offering in a “secured” product backed by prominent financial firms. Peterson repeatedly told investors that the JOBS Act would enable him to raise billions of dollars by advertising the offering to the general public, and produce big profits for early investors. He also promised to invest the proceeds of the offering in exclusively American businesses. In reality, the SEC alleges, Peterson simply helped himself, using investor money for personal expenses. (See SEC v. USA Real Estate Fund 1, Lit.Rel.No. 22685. While this enforcement action is certainly a warning to those contemplating fraud, BusinessWeek notes the SEC may be trying to send a second message as well: that the legislation it opposed is susceptible to abuse and that’s why it must take its time implementing it.