Ostensibly, the law makes it easier for startup companies (particularly tech companies, whose lobbyists were a driving force behind passage of this law) attract capital by, among other things, exempting them from independent accounting requirements for up to five years after they first begin selling shares in the stock market.
Is just wrong. You still need audited financials to be a public company (current, plus 2 years prior to IPO instead of 3). I believe what changed is some of the Sarbox rules related to rotating auditors, etc.
See
http://www.orrick.com/fileupload/4624.htm
for one leading law firm's analysis of the JOBS act.
(I am not affiliated with the firm)
There is certainly room to relax some of the regulations put on small public co's by Sarbox. That's part of the reason companies are listing on foreign exchanges, and let's be honest, you dont' see "fraud running amuck" on the London Stock Exchange do you?
I like 37 Signals approach to building products and many of their business philosophies but they seem to have a need to relentlessly attack any other way of creating a company or doing business. Not quite sure why.
Do you have anything other than "I believe what changed" - a memory you are uncertain of - to dispute the article? The doc you link does not mention auditors at all.
And for what it's worth, this NY Times article would seem to support the original Rolling Stone assertion:
"Under the JOBS bill, companies with up to $1 billion in annual revenue would be free to ignore — for their first five years as a public company — regulations that were put into place after the end of the dot-com bubble and the collapse of Enron. Among them are requirements to hire an independent outside auditor to attest to a company’s internal financial controls..."
http://www.nytimes.com/2012/03/23/business/senate-passes-sta...
The link does in fact mention auditing but you have to go to the "Jobs Act Alert" linked on that page. I wanted to cite to the "Jobs Act Alert" link, but it's a PDF, so I thought it was easier to cite to html page containing the link.
Your citation to the NY Times only governs "a company's internal financial controls" - not it's financials or independent accounting requirements (which is essentially audited financials).
My original criticism of the Rolling Stone assertion as reproduced by quote in the 37Signals blog post was and is that companies are exempt from independent accounting requirements. That's supported in the information I cited.
What Rolling Stone wrote is that the JOBS act would "exempt them from independent accounting requirements for up to five years."
What the magazine was referring to is that auditors would no longer have to attest to a company's financial controls for financial reporting (mentioned in the Orrick PDF you intended to link http://www.orrick.com/fileupload/4619.pdf).
When Groupon recently had to restate (and slash) previously-reported revenue, this was due to weak internal controls, the same sorts of controls the JOBS act would exempt from being audited. http://online.wsj.com/article/SB1000142405270230402350457731...
So you really need an independent audit not just of the numbers but of the controls behind the numbers if your goal is to make sure investors get accurate financial information about a company.
Thus audits of financial controls are a key part of independent accounting.
The only change I'd make to Rolling Stone's original piece would be to revise to "exempt them from CERTAIN KEY independent accounting requirements for up to five years." But that's for clarity, not technical accuracy.
Taibbi is communicating an accurate idea - the JOBS act seriously weakens independent oversight of accounting for affected companies.
I am a founder of a bootstrapped company, that has been profitable for a couple of years. The profits have been reinvested, and the company is growing. We never planned to take money. So far, we mainly see the negative sides of this bubble: it's harder to hire quality people, services (lawyers, bandwidth, etc) are becoming expensive or harder to get. How can we take advantage of this boom? How long will it last, or at least, what will be the mechanism for its deflation, because it's only limited to tech sector so far, unlike '99.
>If you just want stability build up a little cash hoard so you can grow during the crash and pickup talent cheaply.
This is why I am interested in the timescales involved: how long will it last, and why will the bubble deflate? This input is highly desirable to make the correct decision.
I don't think it's possible to say for certain, because there are too many factors involved. Here's my mostly uneducated opinion on it though: we're seeing huge valuations and investor commitment in startups while at the same time seeing big co's throwing lots of money at each-other in lawsuits of various kinds. I think these are two symptoms of the same problem: that the consumer market is still stagnant, and will be for a while. Well, that coupled with commodities speculation and other unstable markets.
From an investor standpoint, I think startups are where the smart money is, if you have enough cash to play the game. So, of course capital is going to gather there, and it's going to keep doing it as long as it's the best place to put a few million dollars if you want to make a few million more.
So how long will it last? I think it'll last a while -- until the consumer markets start to improve and other investment strategies become stable again, and there are enough Groupons to seriously hurt the perception of the startup investment strategy.
There's no sign so far of real improvement elsewhere, and right now only the crazy people are the ones saying that startups look like a bubble. So, I'm guessing this will go on for at least a year or two.
Purely from a business standpoint, if you can get access to any of this capital, and if you're willing to play the game and give up some amount of control over your business, then you'd be foolish not to take the money. If nothing else, it might give you a tremendous edge over your competitors.
However, there are no free rides. The capital could come with a big risk: that when the market finally corrects again, your business has been spending beyond its revenues for a couple of years and the adjustment is so painful that it kills your business.
I think this really comes down to how you think; if you think in terms of, "what do I want to be doing in three years", then you should probably take the money and get rich and have a good time, and if the business collapses afterward, who cares? But, if you think in terms of, "what do I want to be doing in thirty years", and if your business is important to you -- then maybe still take some money, but be more conservative about it and make sure you can survive once everybody decides that startups are a bad investment again.
But I really don't know what I'm talking about, and I bet a bunch of folks are about to turn up and tell me so. :-)
I don't see a crash until the next recession. Of course, the crash could cause the next recession (consumer confidence and all) but we're likely on the way up for a while.
I agree - the problem with the bubble is that it makes all relatively sane business people seem insane. It now seems insane to create a profitable business that lives within its means...
If you want to build a sustainable business you should keep up the discipline of living within your means and grow slowly through the bubble.
If you want to make money rite now (and lots of it) ride with the bubble. The answer depends on what your objectives were when you started your business.
Because he is an opportunist and likes money? I take advantage of everything I legally and ethically can. I expect everyone else to do the same when it comes to business.
and why would anyone want to do business with you knowing your goal is to take advantage of anything you can for your own end? . . . why wouldn't your business partners always be watching their backs. not an efficient way to interact with people, and an impossible way to create. creative endevours require trust, trust isn't compatible with opportunism.
I think he is using it properly, the boom is negatively impacting his business (Lemons) so he is trying to see if there is a way to take advantage of this (Lemonade)...
But that response was in reference to the comment asking him why he would want to take advantage of a bubble rather than rely on his own talents. To that comment, his response makes little sense.
I don't think we're in a bubble. How can the author compare the IPO of Facebook, a company with a billion users and billion dollar in revenue, to those IPOs of the late 90s of companies with no revenue and no viable plan to have any in the foreseeable future? In fact most IPOs since LinkedIn started the trend are of mature companies. That's not what happened in the bubble days.
It's true that more companies are being created and seed valuations are going up. But the selection process still occurs at the series A stage and crappy companies usually still can't pass that hurdle.
As for the JOBS act: if I'm not mistaken investment is capped at (the lowest of) $10K or 10% of the annual salary. I believe you even have to go through a course before you can invest though the JOBS act. Conversely, in the stock market you can invest as much as you want, without any training, and lose everything overnight.
The fact is that economy fluctuates. Whenever there's an upswing people scream bubble. It's a result of the traumatic effect of previous bubbles. But the irony is that real bubbles sneak on you. Hardly anyone sees them coming. So keep screaming bubble, it makes me feel safe.
"But the irony is that real bubbles sneak on you. Hardly anyone sees them coming. So keep screaming bubble, it makes me feel safe."
I think there is a bubble and I can accept the rest of your viewpoint, but this part is not true. Most people who have a well developed understanding of an industry and basic financial sense easily recognize bubbles and have always done so in the past. The people who it sneaks up on are those who listen to the media and listen to their friends who listen to the media. Bubbles typically start out of real economic growth. The problem is that they outgrow market indicators when you get too many lemmings playing the telephone game and ignoring fundamentals. From what I see around the bay area there seem to be a lot of indicators of this social dynamic playing out. There is lots of money chasing other money to nowhere but Ill agree its not as bad as it was in 2000.
"Most people who have a well developed understanding of an industry and basic financial sense easily recognize bubbles and have always done so in the past."
I try to listen to what people I trust from the industry say about the existence of a bubble. Pretty much all of them say that there is none. For example Ben Horowitz (of Andreesen Horowitz) consistently argues that there is absolutely no bubble (and he was around for the real bubble occurred). See 5:10 - http://www.youtube.com/watch?v=9xzcJnqcTP4
I think that often when markets become hot, people automatically think of a bubble, but that's not necessarily true. The internet has grown from 50 million users to over 2 billion and smartphones were non-existent in the 90s. So perhaps higher valuations for tech companies are justified due to higher potential.
The overheated market causes high valuation, which some argue, hurts investors. By saying bubble and discouraging unsophisticated investors from bidding, he probably stands to gain, not lose.
Everyone has a vested interest in what they deal with (or they're amateurs, hence I don't need their opinion). That doesn't mean they never say the truth.
Bubbles are not about believing in the wrong trends, they are about believing the trend will materialize too fast.
E.g. dot com boom: Basic premise was right, "software will eat the world", only the speed at which it would happen is overestimated.
This is what makes growth investing so difficult: Quite easy to predict solar or electric cars will take off, very hard to predict which company in the cambrian explosion will win.
Overall history has proven over and again that in aggregate, value investing beats growth investing for exactly this reason.
I believe the critic is more about the fact Facebook buying a company with no business plan, let alone revenue, for $ 1b, and how that reflects on the industry.
Well I agree that there are many signals pointing towards a bubble (as david points out in his post). I don't think it will be as bad as the late 90s. Memories of the last tech bubble and the recent recession will hopefully dampen the rise and the subsequent fall this time.
I don't know about that. Individual actors may have long memories, but financial markets as a whole often have the collective memory of a goldfish. During the height of the bubble, there are always people who are proclaiming, "No, this time its different," and "We learned our lesson from last time." And they're right! The actors in the market did learn their lesson from last time. It's just that they make entirely new mistakes that lead to the same end result.
I agree there will always be bubbles - it's human nature in the form of greed. The height and crash are determined by how much liquidity and credit are available. So for that reason this time around there may be less heights and therefore less "crash" because there are a lot less people that can borrow on their home equity line or margin account to speculate on IPO's, etc.
I agree with both of you that there will always be bubbles but recently bubbles have moved from one industry to another. e.g., savings and loans -> tech -> housing etc. I am just arguing that maybe the tech bubble on 2010s wont be as bad as the 1990s given the memory about recent history of this sector and the big bubble of 2010s may come from a different sector.
I have to agree it seems that many signals are pointing towards a big tech bubble, though personally I will wait to see the tech IPOs following the hype of Facebook IPO to call a definite big bubble.
What I find interesting is that people started talking about the agriculture boom around the same time they started talking about the tech boom. Do we have any precedence for multi-industry concurrent booms and busts?
Now isn’t that swell. Enable people with an extreme financial incentive to spin the truth, or outright lie about the numbers, a 5-year get-out-of-jail cover
Removing independent accounting requirements isn't the same thing as making fraud legal.
Matt Taibbi from Rolling Stones reports:
Ostensibly, the law makes it easier for startup companies (particularly tech companies, whose lobbyists were a driving force behind passage of this law) attract capital by, among other things, exempting them from independent accounting requirements for up to five years after they first begin selling shares in the stock market.
Is just wrong. You still need audited financials to be a public company (current, plus 2 years prior to IPO instead of 3). I believe what changed is some of the Sarbox rules related to rotating auditors, etc. See http://www.orrick.com/fileupload/4624.htm for one leading law firm's analysis of the JOBS act.
(I am not affiliated with the firm)
There is certainly room to relax some of the regulations put on small public co's by Sarbox. That's part of the reason companies are listing on foreign exchanges, and let's be honest, you dont' see "fraud running amuck" on the London Stock Exchange do you?
I like 37 Signals approach to building products and many of their business philosophies but they seem to have a need to relentlessly attack any other way of creating a company or doing business. Not quite sure why.