In a world where changes in legislation regarding finance can take at least three years to come to fruition, the Jumpstart our business startups (Jobs) Act has blindsided US banks. Discussed at a conference in October, written by February and passed in April, the legislation has come as a surprise, and its contents are a source of consternation.
Bankers say the Jobs Act’s rules that enable crowdfunding are tantamount to encouraging fraud. They argue that there are going to be cases of fraud or, at least, some large disappointments for investors in crowd-funded start-up businesses. The typical investor will be unaware that in the case of venture capital, the aim is to get one solid investment for every 10 initiated. And ensuring that the money invested is being spent appropriately will be difficult.
The rules affecting the IPO market are less likely to lead to fraud, but bankers argue that they encourage research to be biased, leading to lower standards. Being able to publish research pre-IPO might well indeed encourage analysts to write favourably about companies in order to win the IPO business.
These concerns are valid, but something about the way banks and such people as former New York state governor Eliot Spitzer have come out condemning the Act seems a little like whining. One complaint is simply that the banks don’t feel they were formally asked for their opinions about the legislation. Lawyers say bankers were told about it but they didn’t believe it would be passed. And the loudest complaint when bankers have stopped talking about lower standards is that the banks might now make less money. They admit that they will have to do more research for no more money, that helping smaller companies go public is a waste of time because the sales and trading commissions are too small, and that competition for IPOs will increase.
It’s a disappointing reaction from the banks, which might have used the Jobs Act as a stepping stone to gain public support instead of reinforcing the suspicion that hovers over them: that they care only about large clients that make them money, which is precisely the reason the legislation was introduced in the first place.
It seems the banks are moving further and further towards being the gatekeepers of only the largest companies, while a whole new industry of financial service providers will have to emerge to cater to small and medium-sized businesses.
If that is what banks want, so be it. But one wonders why, instead of moaning, they might have wished they had developed more useful inputs to support new and small businesses.