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Commentary

JOBS Act Good for Startups, Bad for Investors

We think the new, less stringent disclosure requirements will make it even more difficult for investors to make informed decisions.

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On April 5, President Obama signed the Jumpstart Our Business Startups (JOBS) Act, a bipartisan bill that is intended to help small companies raise capital more easily. The bill also eases the regulatory burden for "emerging growth businesses," defined as those with less than $1 billion in annual revenue (this applies to more than 90% of U.S. companies), that wish to have their shares trade on a public exchange. Although this is arguably a positive development for startups, we take issue with two elements of the bill: less disclosure required for firms wishing to go public, and the easing of rules which currently separate research analysts from investment bankers.

Why We Take Issue With the Act
We think less stringent disclosure requirements will make it even more difficult for investors to make informed decisions and could lead to material misrepresentations or outright fraud. For instance, qualified companies will now only have to provide investors with two years of audited financial results before they go public, instead of three previously. In our view, this move will limit an investor's ability to ascertain underlying growth trends, normalized profitability, and performance across economic cycles. Furthermore, an issuing firm won't have to publicly share its registration statements (Form S-1) until 21 days before the date on which the issuer conducts its road show, which typically kicks off seven to 10 days prior to the IPO. As such, investors will only have about a month versus the typical three to four months to scour the documents.

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James Krapfel does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.