Two Cheers for the JOBS Act
Posted Apr 23, 2012 by Michael Shuman
For nearly a century local investing has been essentially illegal, and Wall Street has monopolized all the investment options for the average investor. Thanks to the JOBS Act that President Barack Obama recently signed into law, local investing in job-creating small businesses is now legal.
Unfortunately, there has been a tremendous amount of misinformation spread about this Act, much of it by liberals I usually admire. They should be the people most eagerly embracing this bill for what it does -- giving people a chance to revive Main Street economies across America.
Jim Hightower, for example, condemns the bill for "deregulating Wall Street." In fact, the bill spells the end of Wall Street as we know it. It allows the 99% of us who are not wealthy ("unaccredited investors") to put our money in the local businesses we love by removing what were once impossibly difficult and expensive legal hurdles. Those barriers were so targeted against small business and small investors that they resulted in almost none of our long-term savings -- now totaling $30 trillion -- being invested into the local half of our economy. The JOBS Act ends this misallocation of capital for good.
To me it's ironic, and disappointing, that folks like Hightower, Robert Kuttner, and Eliot Spitzer were committed to the status quo and to maintaining Wall Street's monopoly on capital. How could such great thinkers get this issue so wrong? Here are my top five reasons:
First, the critics misunderstand who promoted this bill. Kuttner, for example, blames Obama for being "always eager to curry favor with Wall Street donors..." Wall Street lobbyists played, at most a peripheral role, it was small business owners and "makers" like Woody Neiss and Paul Spinrad who led the charge. Innovative thinkers in the White House, like Doug Rand at the Office of Science and Technology Policy, played a pivotal role in shaping the president's views about entrepreneurship. Non-Wall Street insiders like IndieGogo, a crowdfunding web site, and the nonprofit Sustainable Economies Law Center, pushed hard as well.
Second, the critics, who are justifiably skeptical of wholesale deregulation, don't like to concede that any form of regulation has been a failure. But any honest assessment of the history of securities law would observe that we essentially regulated local finance out of existence while permitting Bernie Madoffs to operate freely. For decades, the SEC has held annual meetings where small business owners have urged reforms -- modest deregulations that could open up capital to small companies, such as allowing small-dollar, local investments to be exempted from securities filings. The SEC never implemented any of those suggestions -- even a recommendation that $100 investments be exempted.
Third, the critics have tremendously exagerrated the dangers of fraud. The casual reader of the liberal critiques might conclude that the sale of fraudulent securities is now legal, and that "boiler room" operations will be set up to bilk grandma of her life savings. Yet state and federal laws against securities fraud remain in effect. In fact, the JOBS Act adds a number of new provisions for preventing fraud, by requiring that crowdfunding offerings only be made through registered intermediaries.
Why, moreover, should anyone be banned from spending, investing, or donating a couple of hundred dollars any damn way they please? Every American, irrespective of income, is allowed to lose their life's fortune on lotteries and casinos. Why not allow more reasonable risk tasking on building community economies? If grandma is not wealthy, the JOBS act limits her risk in any one business to the lesser of $2,000 or 5% her assets.
Fourth, the critics do not appreciate that there are other approaches to preventing fraud. E- bay has all but eliminated fraud through consumer and business evaluations of one another. So have other crowdfunding sites in the United Kingdom. In other words, the SEC's premise -- that the only way to prevent fraud is by banning unaccredited investors from making their own judgments -- is flat out wrong.
Perhaps the critics' most appalling misunderstanding is the fraudulence of the status quo. Every day the SEC allows investment advisers on AM radio to hawk the stock market, promising 10-20% annual returns, when in fact the returns -- once inflation and compounding are taken out -- are closer to 3%. These misrepresentations have convinced Americans that putting 100% of their savings into Fortune 500 companies is safer and provides a better return than investing in local business. In reality, the stock market is becoming an increasingly dangerous and unregulated casino where trades are done by computers that cause flash crashes when they malfunction. The JOBS Act will allow local businesses to begin to compete for a fair market share of investment dollars and provide returns that are equal to, if not slightly greater than, the true returns provided by Wall Street.
I agree, the bill is imperfect. I'm not thrilled with the deregulations of larger companies. And the bill legalizes all kinds of crowdfunding, local and nonlocal. But we can make it better. We should start educating the public about the importance of favoring local investment over abstract ones hundreds or thousands of miles away. Knowing the business in which one invests -- knowing the products, the entrepreneur, the workforce, etc. -- is the best way to prevent fraud.
It's worth adding that after the bill was signed, 25 of the people who were most instrumental in passing the bill -- none from Wall Street, by the way -- got together to discuss ways we could create internal checks and balances on the marketplace, to improve quality control and help identify hucksters. I hope similar groups form in every community to create an honor roll of local businesses they know and trust -- perhaps businesses that embrace open-book accounting -- and that they then encourage residents to prioritize their crowdfunding.
Like it or not, Wall Street's stranglehold on investment is over. We now have a new legal landscape that we can play a pivotal role in shaping. Everyone who cares about the vitality of Main Street needs to step up, not out.
Michael Shuman is the author of Local Dollars, Local Sense: How to Shift Your Money from Wall Street to Main Street and Achieve Real Prosperity (Chelsea Green Publishing, 2012) . He is a fellow of the Post Carbon Institute. He attended the Rose Garden bill signing ceremony.
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