Obama Leadership Fails in Phony 'JOBS' Act
What has gotten my mind twirling in this direction is a simply atrocious piece of legislation that is grinding its way to passage on Capitol Hill. It's called the Jump-Start Our Business Start-Ups Act, which the president has endorsed.
Like a lot of bad legislation its title is positively Orwellian. Honestly, folks, I just don't know where to begin, this bill is so bad. John Coffee, a prominent securities law professor at Columbia, has called it the "boiler room legalization act." That's because of its unbelievably naïve (at best) "crowd-funding" provision, which I dealt with in this column back in September.
I love being ahead of the curve -- except at a time like this. That's because the White House's early endorsement of "crowd-funding" demonstrated that it was completely clueless on the subject of securities fraud. The "Jump-Start" act, erroneously referred to in the media as a "jobs bill," is actually just an underhanded way of rolling back investor protections.
"Crowd-funding," as I explained in September, is little more than a method of legalizing fraud in the private placement of securities. Though some of its advocates are well-intentioned, they are naïve because of the history of fraud in private placements, which are even more flagrant and prone to abuse than stock fraud because little or no public information is available on them.
"Crowd-funding" would allow private placements to be bought and sold on the Internet, like used Deep Purple CDs. The Jump-Start Act would carve "crowd-funding," and the private placement fraud that is certain to go with it, directly into the statute books.
In theory it sounds lovely -- technology to the rescue of startups! It has a Seattle-ish, high-tech aspect to it. But I firmly believe that reality is likely to be a lot grimmer. In my 2003 book Born to Steal I describe how a typical private-placement scam works. It's very simple. You print up a private placement memorandum, and then you get on the phone with people. No need to file papers with the Securities and Exchange Commission or any other regulatory fol-de-rol. In just a few months, the central character of my book, Louis Pasciuto, had raked in $360,000 from unwary investors he had found through cold-calling.