The Jumpstart Our Business Startups Act (the “JOBS Act” or “the Act”) was signed into law in the spring of 2012, amidst the ongoing fallout from the 2008 financial crisis as well as a hotly-contested presidential election.  Having received uncharacteristic bi-partisan support, the JOBS Act’s explicit goal is “To increase American job creation and economic growth by improving access to the public capital markets for emerging growth companies”.  In order to accomplish this goal, the Act seeks to reduce the perceived regulatory burden that U.S. securities laws place on companies, mostly firms in the early stages of existence.  This lessened burden focuses primarily on the amount and timing of required disclosure firms owe investors and potential investors.

In my paper, Where are the Jobs in the JOBS Act? An examination of the Uneasy Connection Between Securities Disclosure and Job Creation, I explore what role job creation has played in the realm of securities law disclosure reform, and what role it could potentially play in the future.  Relatively little attention has been paid to the justification that job creation is a valid moniker under which to make major reforms to securities disclosure laws.  While the JOBS Act may be a product of its time (low unemployment, political pressure and reaction against perceived overregulation) I hope to enrich a needed debate about the goals of disclosure and how, if at all, they overlap with macroeconomic concepts such as job creation.

To better understand the relevancy between job creation and securities disclosure in the JOBS Act, I researched two primary sources.  First, securities disclosure, at least at the federal level, has existed since the passage of the Securities Act of 1933 (the “Securities Act”).  Therefore, the historical trail of disclosure law reforms provides an illuminating baseline for such reforms’ justifications.  Past reforms, unsurprisingly tend to break down between investor protection and capital formation efforts.  Investor protection reforms, such as the Securities Act’s mandatory disclosure framework, have not historically taken job creation into account.  More interesting is that capital formation reforms have not necessarily done so either.  For example, in its Regulation D rule release, the Securities and Exchange Committee (“SEC”) did not describe job creation as a driving force behind this now ubiquitous safe harbor from Section 4(a)(2) of the Securities Act.  In fact, SEC research has shown that the most active issuers relying on Regulation D are private investment funds, entities whose operations are less concerned with job creation and more concerned with investment returns.  More than anything, this finding demonstrates that capital formation is something larger than job creation and that capital formation disclosure reforms have, like their investor protection counterparts, not considered job creation as a primary justification.

The second piece in understanding the normative baseline for disclosure law reform is that of disclosure theory itself.  Focusing on a sample of disclosure scholarship from Professors Merritt Fox, Michael Guttentag and Roberta Romano, it became evident that while scholars differ on the proper methods and frameworks of disclosure, this debate is still largely confined to disclosure’s benefits and burdens on the private actors involved (e.g., issuers, their business competitors, and investors).

Given this normative baseline, that historical disclosure reforms and their theoretical underpinnings are silent on the topic of job creation, one should rightfully question the real connection between The JOBS Act and its stated goal – jobs.  The cynical, yet likely realistic view on the JOBS Act might highlight a number of truths hiding in plain sight.  First, since the passage of Dodd-Frank in 2010 and Sarbanes-Oxley in 2002, there has been a steady call to scale back what have been viewed as overreaching regulatory reforms.  Second, the JOBS Act is a victory for the venture capital community, a powerful political ally, especially Title I (the IPO on ramp) and Title V (which increases the shareholder threshold for mandatory ’34 Act registration from 500 to 2,000 persons).  In addition, given the stubbornly low national unemployment rate, job creation served as a convenient political backdrop to achieve reforms years in the making.

While the JOBS Act could simply be written off as a politically expedient effort to pander to special interest groups, there are real consequences to reforming disclosure law under the imprimatur of job creation.  First, while “burdensome” disclosures may appear to be a nuisance, it is a well-accepted principle that disclosure tends to lower the cost of capital.  Investors with less information may rightfully discount the value of the potential investment given its riskier stature.  Second, while job creation is a worthy goal, infusing vastly more companies with investor capital may create a bubble effect.  Getting cash into the hands of every company does not necessarily bode well for creating sustainable companies and the jobs that would ostensibly follow.  Finally, it simply cannot be said that capital formation is the same thing as job creation.  In other words, operating companies (and more likely, private funds) will be able to take advantage of many of the JOBS Act’s provisions without creating a single job.

What role then, if any, should job creation play in the reformation of securities law disclosure?  While job creation has not historically played a central role in disclosure law, I do not necessarily advocate that it be banished writ large from the conversation on making reforms that reflect current reality.  Instead, I argue that three steps should be taken before moving forward with disclosure reforms rooted in job creation.  First, some empirical evidence regarding the connection between job creation and disclosure should be presented and analyzed.  The only empirical evidence that was presented on the connection between a JOBS Act reform and job creation is in Title I, where a study attempted to demonstrate that initial public offerings are the American economy’s largest job creation events.  Should a colorable connection between job creation and disclosure reform be shown, a cost/benefit analysis should be undertaken to determine whether the interests of reform outweigh the disclosure status quo.  Finally, should reform be the way forward, the particular reform should be limited to the precise disclosure issue that is seen to be a burden on job creation.  Given these steps, chances are Title I of the JOBS Act would have been the only Title in the Act.

Securities disclosure law is not detached from the larger economic issues that all members of society must confront.  While the JOBS Act’s connection to real job creation is tenuous, we should think critically about why we reform our disclosure regime and what it will mean for each constituent part of our capital markets.  My hope is that my paper can contribute to just such a dialogue.

The full article is available here.