I have had a range of reactions when reading Matt Taibbi’s pieces in Rolling Stone. Most of the time, I vehemently shake my head, but quite a few times I have found myself nodding in agreement, as in his exposé of the American International Group rescue as a backdoor bailout for Goldman Sachs.
But upon reading “Why Obama’s JOBS Act Couldn’t Suck Worse,” Taibbi’s tired and clichéd screed against the Jumpstart Our Business Startups (JOBS) Act — legislation signed into law by President Obama last week to modestly ease regulatory barriers preventing entrepreneurs from accessing capital – my reaction was entirely new. I simply shrugged my shoulders and said to myself about Taibbi, “What an old fart!”
Now it’s true that the 42-year-old Taibbi is only a year older than this humble blogger. But as the expression goes, age is a state of mind. And in penning his column, Taibbi shows his state of mind to be that of a grumpy old man when it comes to entrepreneurship, innovation, and even the Internet in general.
What else is one to make of his statements like this one chastising the law for “giving official sanction to the internet-based fundraising activity known as ‘crowdfunding.’” Yet what Taibbi sees as a foreign and shady concept has gained widespread currency by young artists and musicians raising funds for their projects through sites like Kickstarter.com.
Taibbi may want consult the music section of his own magazine (yes, Rolling Stone still does occasionally run features on music) for this article explaining how online “crowdsource funding” allows “artists dreaming of pressing up a debut album” to “petition … friends and family — plus random strangers — for money to get creative projects off the ground.”
Alyssa Rosenberg, culture blogger for ThinkProgress.com — the blog of the usually lockstep liberal Center for American Progress — penned a very fine post on why the next logical step should be equity crowdfunding in which fans share in the profits of the artists they fund. She concluded that if fans “start acting as investors, maybe they should be treated that way.”
But as I have explained, until the JOBS Act created a specific exemption, that type of equity crowdfunding was most likely illegal under federal securities laws. And Taibbi wants to keep it that way. In an amazing burst of financial elitism, Taibbi implies that no company should be able to access funds from the investing public until it turns a profit.
And like social conservatives on cultural issues, Taibbi yearns for the mythical “good old days” of the 1950s. He writes, “In the old days, in the fifties and sixties for instance, you would never take a company public that wasn’t profitable at the time of the IPO, or didn’t have a multi-year track record of solid revenues.” In reading that statement, one is surprised that Taibbi didn’t add — à la Dana Carvey’s ”grumpy old man” on Saturday Night Live — “and we liked it!”
Upon further dissection, the statement isn’t even true about the 1950s, or any decade until the enactment of the overly expensive and overly prescriptive Sarbanes-Oxley Act of 2002. It was never the intent of securities laws of the 1930s to foment “safe” investments with minimum levels of sales or profitability; just adequate disclosure of known factors and risks. Xerox, which went public in the 1930s, struggled with meager revenues for decades until its revolutionary photocopier debuted in 1959, causing sales, profits, and its stock price to skyrocket over the next decade.
Taibbi’s “multi-year track record” standard would also have barred Amazon.com from going public when it did, as well as the iconic progressive ice cream maker Ben & Jerry’s. Amazon did not turn a profit until more than four years after it went public in 1997. As for Ben and Jerry’s, it raised capital for its first factory through an in-state offering for Vermont investors that was exempt from SEC registration rules.
Ironically, it was it a policy of the Reagan administration they despised that granted Ben & Jerry’s this regulatory relief, and this policy would be taken away by the Clinton SEC headed by Arthur Levitt, a fierce critic of the JOBS Act. But it was Sarbox that was signed by that supposed “deregulator” George W. Bush in response to the Enron implosion that made it cost-prohibitive for smaller entrepreneurs to raise capital by going public.
As President Obama’s Council on Jobs and Competitiveness concluded this fall, “Well-intentioned regulations aimed at protecting the public from the misrepresentations of a small number of large companies have unintentionally placed significant burdens on the large number of smaller companies.” As evidence for this marked decrease in smaller firms going public, the council noted that “the share of IPOs that were smaller [in market valuation] than $50 million fell from 80 percent in the 1990s to 20 percent in the 2000s.”
Through his myopia, which may stem from too much time covering the scandals of Wall Street and not seeing real startups at work, Taibbi states, “There’s just no benefit that the JOBS Act brings to an honest startup company.” In other words, anyone complaining about the cost of regulation is, in his mind, dishonest.
Taibbi seems to overlook that there is no “honesty discount” or “honesty rebate” from the more than $1 million in annual costs, according to this paper from University of Toronto and University of Minnesota researchers, that Sarbox imposes on even the smallest quadrant of public companies. And this is just the cost of one section of the law — the “internal control” mandates that have frequently forced companies to document trivial minutiae of little relevance to shareholders, such as possession of office keys and number of letters in an employee passwords.
And, hey, if Taibbi really wanted to go after “fat cats” in this regard, he’d aim his target at the big accounting firms that make hand over fist over what are often useless busywork audits, rather than the small companies and their shareholders that are their victims.
In addition to fostering entrepreneurship and job growth, the great virtue of the JOBS Act is more investor freedom. Fraud will still be vigorously prosecuted under federal and state law, but investors will be more able to choose the level of risk they wish to assume.
Investors will be more able to vote through the marketplace on whether laws like Sarbanes-Oxley and Dodd-Frank are serving them well, or are simply burdening the firms they own with costs that reduce shareholder return. Policy makers should expand upon this concept by extending the JOBS Act’s five-year delay from some financial regulations to allowing investors and entrepreneurs to permanently opt out of most provisions of Sarbanes-Oxley and Dodd-Frank.
If Taibbi would give up his blind devotion to the gospel of regulation, he would see that the JOBS Act actually upsets the Wall Street apple cart. As Timothy P. Carney, a muckraker who hates cronyism every bit as much as Taibbi but is guided by the wisdom of free-market principles, recently wrote, the measure actually helps ordinary Americans bypass big banks, investment brokerages, and large investors.
In fact, Carney rightly characterized the Senate’s weakening of the crowdfunding relief from the House bill as a concession to established financial intermediaries.
May we hope that Grumpy Old Tabbi will stop being blinded by the vampire squid of big government that has reached across his frequently otherwise clear eyes.