The JOBS Act passed this past year was touted as legislation that would promote jobs by lowering the bar and investor disclosure standards for new companies with less than $1 billion dollars in assets who are seeking to raise less than $700 million in a public offering.
According to a report at the start of the month in The New York Times, the Feds are bringing their first of likely many fraud cases under the lax standards of the JOBS Act which the Times dubbed the "Jumpstart Our Bilking of Suckers Act."
So, is the Act simply a license to steal and likely to create few new jobs-except in white collar prisons?
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Indeed, it seems inevitable that the political pressure to "create" jobs in our severely hampered economy is likely to lead to more anti-investor-disclosure legislation like this.
As Floyd Norris of the Times aptly described the JOBS Act: "The idea was that numerous new companies would get financing, and in that way promote job growth. Critics warned that some provisions might simply make it a lot easier to commit securities fraud."
According to Norris, these small start-up businesses can market themselves to the public as an "emerging growth company," even though there may be little or no indication of growth at all. Such language and promises of growth are tantalizing to investors, and scam artists know this. That's why the JOBS Act is practically a roadmap to fraud, not jobs.
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"In its prospectus, a penny stock named Caribbean Pacific Marketing proudly described itself as an ‘emerging growth company' when it began to sell shares to the public this summer," Norris noted. "To someone uninitiated to the Orwellian nature of recent legislation, that phrase might have seemed downright deceptive. As the prospectus made clear, it was not a growth company; it was barely even a company at all. It hoped to start a business with the proceeds from the offering."
That's the type of business plan that fits almost every flim-flam artists dream.
In this case, Caribbean Pacific claims to sell the finest all-natural skin care products money could buy. Earlier this year the so-called "company raised $30,000 by selling worthless, penny stock to company insiders, who intended to flip those shares so insiders could cash out. Everything was supposed to be kosher and above board."
But then in October, the Justice Department-oops!-declared it wasn't.
At the center of the investigation is a disbarred lawyer with a history of manipulating penny stocks such as Caribbean Pacific. Such alleged malfeasance of penny stocks was exactly what state securities regulators and plaintiff's attorneys warned about when Congress passed the JOBS Act in the spring.
Should we call the JOBS Act the Flim-Flam Act instead? It's still too early, we believe, to make that call decisively.
But it won't take many more instances of companies such as Caribbean Pacific Marketing coming to light to convince us that the JOBS Act creates a massive amount of risk for the American investor. And Congress is supposed to work night and day to lower that risk, not raise it.
Disclosure: Zamansky & Associates are securities attorneys representing investors in federal and state litigation and arbitration against financial institutions.