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JOBS Act Likely to Increase Investment Fraud

Samuels Yoelin Kantor LLP


A federal law signed by President Obama earlier this year is almost certain to lead to new kinds of investment fraud. Banks Law Office issues this Investment Alert to urge individual and institutional investors to be aware of these changes, and to safeguard themselves against the risks they bring.

The principle behind the JOBS Act (Jump-Start Our Business Start-Ups), signed on April 5, 2012, is that small businesses, as the “true engine” of job creation, are more likely to create jobs if they have easier access to capital. This approach to economic stimulus gained so much bipartisan support that it passed both houses of Congress in record time.

The single most attractive new source of small-business capital will be online crowdfunding. In the last year crowdfunding sites, such as Kickstarter, Indiegogo, and a wave of their imitators, have proven a new and surprisingly effective source of money for political campaigns, philanthropists, independent film projects, etc. Sellers of securities also see crowdfunding as a very attractive source of capital. They want access to it.

The JOBS bill delivers that to them, by loosening the Securities and Exchange Act, Regulation D, section 506, to allow online advertising of unregistered securities. Regulation D’s restrictions on public advertising of unregistered securities have been effectively removed. Unfortunately those restrictions, now vanished, protected investors from a whole array of problems such as unregistered dealers, lack of disclosure, misrepresentations of risk, and other violations, exposing the investors to potential harm.

Among many other critics, former New York Attorney General Eliot Spitzer urged President Obama to veto the bill in April. Spitzer called it the “Let’s bring fraud back to Wall Street Act.” Rulemaking is still under way at the Securities & Exchange Commission and within FINRA to deal with the many regulatory implications of the JOBS Act. Many significant details are still to be worked out in the coming months. In the meantime, small businesses have been warned by state regulators not to start using the internet to raise capital.

Banks Law Office attorney Darlene Pasieczny says, “Even after these rules are fully developed and in effect, the Act is going to open the door for new varieties of investment fraud. Wall Street fraudsters will inevitably take advantage of this lack of regulation. Main Street investors will be the casualties. Don’t invest online. Offline, proceed with caution, use common sense, refuse to be rushed when making important decisions, and be aware that the rules of this game are changing.”

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