March 17, 2012 – 12:06 p.m.
Political Economy: Calling P.T. Barnum
By John Cranford, CQ Columnist
It’s not a crime to take advantage of a sucker. That’s one (admittedly uncharitable) way to explain the rush by Congress to relax the regulatory burden on smaller companies that seek to raise capital by selling securities to the public.
Democrats and Republicans alike in the House and Senate, not to mention the president himself, who was instrumental in developing this idea and adding to its momentum, have done more than hitch themselves to the wagon that is the small-business regulation bill. They’ve grabbed the reins and shouted, “Giddyap.” It’s been a race to the finish line that seems not unlike an NFL squad hurrying to snap the ball before the opposing team demands a review of the previous play.
Until a week ago or so, there had been a few voices — but only a few, mostly old-line investor advocates — complaining about problems with this proposal. Now the critics are coming out of the woodwork.
In particular, these objectors have raised serious concerns that Congress might expose unsophisticated investors to the entreaties of unethical Internet pitches, or that questionable enterprises might be able to attract tens of millions of dollars while providing investors with no certified information about the company.
Republicans, naturally, favor the pending bill as a principled stand against more than a minimum level of regulation. Many GOP lawmakers have long complained about the 2002 Sarbanes-Oxley corporate accounting law, for instance, which would be whittled away by the measure.
But the betting line is that the handful of Senate Democrats who have lately raised a stink, and who say they want to amend the House-passed version of the bill to shave off some of its rough edges, are way too late with their complaints.
Only 23 House members — all Democrats — voted against the bill on March 8. Among the “yea” votes were card-carrying liberals
Many critics say they were caught unprepared for the bill’s speedy trip through the House and onto the Senate floor. But the individual components of the measure had all passed the House once before, last fall. And as long ago as last summer, the White House was selling the notion of helping startups avoid the cost and hassle of registering with the Securities and Exchange Commission to make an initial stock offering.
So why did the critics mostly wait until now? SEC Chairwoman
Jobs, Jobs, Jobs
The rush to enact these rules changes is puzzling so soon after the monkey business that led to the enactment of Sarbanes-Oxley a decade ago and the financial meltdown in the more recent past from which the economy continues to suffer.
The plain truth, of course, is that this bill has been thoroughly inoculated with the claim that it will lead to job growth, even though the prospects for a significant increase in payrolls from these regulatory changes is very low and the potential for securities market mischief is higher.
Former SEC chief accountant Lynn E. Turner told the Senate Banking Committee as much earlier this month. There’s no evidence that the bill is needed to boost capital formation, said Turner, who testified, “I do not believe it will add jobs, but it may certainly result in investor losses.”
Political Economy: Calling P.T. Barnum
The notion is that the economy will broadly benefit if smaller companies can extend their reach into the pool of potential capital — without the level of disclosure required today. But that’s not very different from the arguments in favor of securitized mortgages and other risk-spreading devices, and that worked out so well.
If IPOs are few and venture capitalists are sitting on their cash, it may be because smart investors remain risk-averse in this fragile economy. So it may be right to want to push the well-heeled believers in raw capitalism to walk closer to the edge. Instead, Congress seems inclined to let folks who may be less well-informed — and may have more to lose — gamble on the next best thing, through minimally supervised “crowdfunding” over the Internet. Why not let a startup company grow to $1 billion in leverage over five years without being required to meet minimal accounting rules?
Congress routinely buys the argument that securities regulations are too costly and too constricting, and as a result the rules do seem to swing like a pendulum. When the next Enron or Countrywide strikes, though, the public may have a few questions.