JOBS Act enables Chinese fraud | China Accounting Blog | Paul Gillis

JOBS Act enables Chinese fraud

The U.S. House of Representatives passed a modest collection of legislation collectively called the JOBS (Jumpstart our Business Startups) Act. The House passed the JOBS Act yesterday by a vote of 390-23. It is headed to the Senate where it is expected to be quickly approved.

Included in the JOBS Act is H.R. 3606 Reopening American Capital Markets to Emerging Growth Companies. H.R. 3606 hopes to reduce the costs of going public by providing companies with a temporary reprieve from SEC regulations by phasing in certain regulations over a five-year period. The bill creates a new category of issuers called an “Emerging Growth Company”, which would retain its status for five years or until it exceeds $1 billion in annual gross revenue or becomes a large accelerated filer.  The bill applies to companies that sells shares under a registration statement after December 8, 2011, or in other words, new IPOs.

The bill relaxes the IPO rules by allowing companies to omit certain disclosures and ignore certain reporting rules. Among the rules:

1.                    A company need not present more than two years of audited financial statements and need not present selected financial data for earlier years.

2.                    A company is not required to follow new or revised accounting standards until they are also required for non-listed companies.

3.                    Certain executive compensation disclosures are not required.

4.                    Companies are exempted from obtaining an audit of internal controls as required by Section 404 of Sarbanes Oxley.

5.                    Auditing standards on auditor rotation and any supplemental auditors reports in which the auditor would be required to provide additional information about the audit and the financial statements of the issuer (auditor discussion and analysis) would not be required.

The bill also guts rules aimed at curbing analyst’s conflicts of interest and relaxes rules for private stock and bond offerings, likely introducing “crowdfunding” – soliciting small investments on the Internet. If you like those emails from Nigerian scammers, wait until you see the new round about to come from shady Chinese companies looking for investment – and they will be legal!

The JOBS Act is hoped to stimulate U.S. job growth. Barbara Roper, a director at the Consumer Federation of America, said the IPO provision offered no “realistic promise that it’s going to create jobs”. Certainly that is the case with respect to IPOs of Chinese companies who will get a big windfall from these rules. The last thing we need to be doing with Chinese IPOs is to lower the quality of disclosures and to repeal the requirement for internal control audits.  H.R. 3606 should be amended to exclude IPOs on non-U.S. based companies. I hope the Act does not become known as the Jumpstart Our Bilking of Suckers Act. 

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