UPDATE: Bubbleriders and the Problem with the JOBS Act and Equity Crowdfunding

UPDATE: President Obama signed the JOBS Act, a piece of legislation championed by lobbyists like Kate Mitchell according to the Wall Street Journal:

“An outgoing chairman of the National Venture Capital Association and a Democratic campaign donor, Ms. Mitchell accepted an invitation to join a panel discussion at the Treasury Department in March 2011. Secretary Tim Geithner had called the public meeting in part to examine the causes of the IPO decline and to explore solutions….Unofficially dubbed the “Mitchell Commission” but never enjoying official status, her group of entrepreneurs, investors, academics and accountants set to work with little public fanfare [or transparency]. Outside of government, they could move quickly, and were supported by big names like former AOL CEO Steve Case and a Who’s Who of company founders from Silicon Valley—a place where both parties like to raise money. Twitter founder Biz Stone and Pay Pal founder Max Levchin were among those supporting reform.”

Matt Tiabbi summed it up in Rolling Stone:

In fact, one could say this law is not just a sweeping piece of deregulation that will have an increase in securities fraud as an accidental, ancillary consequence. No, this law actually appears to have been specifically written to encourage fraud in the stock markets.

Well…it is an election year, ain’t it?

Andrew Orlowski’s take is trenchant as usual:

What crowd-funding really does is take the “find a bigger idiot” principle and add internet-scale economics to it. You no longer needed to know just a few, big idiots – as long as you can find a larger number of smaller idiots, you could make it up with volume.

Remember heyidiot.com from 1999?  They’re back!

Are you mystified by how priceline.com, a tiny, money-losing outfit that sells airline tickets and hotel reservations, can have a bigger market value than Delta Air Lines, a real company that has 70,000 employees? Then visit HeyIdiot.com. The site, which calls itself a “cash portal,” sells one product — shares in HeyIdiot.com: “You can buy as much stock as you want with the only rule being that each new purchase must be executed at a successively higher price.” A funny idea — made even more amusing by the fact that two of the site’s creators are prominent Silicon Valley CEOs: Oracle’s Larry Ellison and Network Computer’s Mitchell Kertzman. [Larry Ellison is the guy with the beard facing Obama in the picture above.]

The JOBS Act is the codification of heyidiot.com and Lessig’s “hybrid culture” tells you how to get free labor so you don’t have to share the bubbles in your little tub with anyone.  See Flickr, Myspace, YouTube, Instagram–shall I go on?

See also excellent coverage by Andrew Orlowski at The Register and Matt Tiabbi in Rolling Stone.  Also worth a read is Matt Tiabbi’s 2010 article “The Great American Bubble Machine” and Eric Janszen’s 2008 article “The Next Bubble” in Harper’s.

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The U.S. Congress passed the JOBS (Jumpstart our Business Startups) Act, and President Obama is expected to sign it.  The JOBS Act gives the SEC 270 days to draft regulations to implement crowd-funding of startups. SEC Chairwoman Mary Schapiro has stated that 18 months is a more likely target for the SEC to promulgate regulations (which is where the action will be).

The JOBS Act would allow equity investment over the Internet, which is difficult due to the disclosure requirements under U.S. securities laws (as a crowdsourced equity investment would be, or be sufficiently like, selling stock).  The New York Times opposed these provisions of the bill (“They Have Very Short Memories“):

House Republicans, Senate Democrats and President Obama have found something they can all support: a terrible package of bills that would undo essential investor protections, reduce market transparency and distort the efficient allocation of capital….[The legislation] would permit “crowd funding” — raising money from small investors through the Internet — without requiring those companies to provide meaningful disclosure and without adequate oversight by the Securities and Exchange Commission. John Coffee Jr., a securities law expert, has dubbed that the “Boiler Room Legalization Act.”

If the Dot Bomb Bubble is any indicator, I’m inclined to agree with the New York Times that the first place that reduced oversight would be abused is Silicon Valley.

As attractive as the opportunities of the JOBS Act may be for crowd sourced film making, you can also expect the EFF crowd to lead the charge on crowd funding for the next Grooveshark, or ten or 20.