I have not read the details of the bill, but as a small business owner I am instinctively attracted to the idea of going on-line and selling stock in my company. Why should large companies have all the sweetheart opportunities for fraud while we little guys are frozen out? We get no special deals, can't deduct layoffs as departmental closings, can't issue bonds for 1% interest, can't put our companies in portfolios and then pay ourselves for managing them under a ruse of "carried interest", can't get no respect from the local banker cause we're small potatoes, can't afford to hire lawyers to set up off shore accounts, still have to personally guarantee "business loans"---which makes them home equity loans and not business loans, still have to comply with OSHA even though as a percentage of sales its much more burdensome than the same regulatory requirement for a large business---and until now, couldn't afford to sell shares to the public because of all the goddamned regulations which require expensive lawyers to ferret out the details. And now some jerk pundit wants to take away the only fucking perk we've gotten in the last fifty years? The question is not whether I think it's a good law. The question is why do I still call myself a "liberal". You can't make this shit up! 

My initial take was the same as Taibbi's.  During the financial journalism part of my career I covered a lot of scams involving private placement investments in start-up companies with murky financials, operating with little regulation other than the general anti-fraud laws that govern commerce and investing.

The government's solution to this, which the JOBS Act changes somewhat, has been to say that such investments could only be sold to qualified investors or investment vehicles that cater to qualified investors or institutions such as hedge funds, private equity funds and venture capital funds. Presumably, these people have the means to know what they're getting into.

The counter argument to this is that it's not fair.  It means that I can't invest, say, $5,000 in Instagram when it was worth $20 million in exchange for $250,000 when the company was sold to Facebook for $1 billion.  No 50 times return for me, but it's okay for hedge funds and rich people?

Am I really less qualified to invest my $5,000 than somebody who is already a millionaire and is thus considered "qualified?"  How do I ever get to be a millionaire if my investment activities are restricted to the 8% (hopeful) returns that I'll get from the public equity markets in the long run?

Taibbi may well argue that he is protecting me from myself.  I have no way of separating the next Instagram and from the next Instascam.  I may as well buy 5,000 scratch cards if I'm investing by my wits. 

At least, if I'm restricted to the public markets I can rely on filings that the executives have signed off on as true and accurate.  The JOBS Act says that prior to filing a prospectus, corporate executives are not responsible for the veracity of the financial statements that they make.  Taibbi takes big issue with this, and so do I.

But, the counter-argument is that securities, whether in a private or public transaction, are only sold by prospectus, not by marketing presentations or press releases.  So you are expected to receive, read and analyze a prospectus before you plunk down your money.

Another counter is that we're talking small amounts of money, pooled.  Crowdsourcing the investment also means crowdsourcing the due diligence.  Maybe that helps.  But we don't let small investors into hedge funds on the argument that they will be safe swimming with the bigger fish.

I also wonder is a quality company like Instagram will even want crowdsourced money.  Many of the best companies get to choose who their investors are.  They want the big Venture firms and the big hedge funds because they're looking for long-term partners and maybe even some advise.  If the best companies remain on the hunt for the best investors, that leaves the mediocre companies and fraudsters to go after the Kickstarter-type money.  That's what makes me think Taibbi is right, though it's not as cut and dried as he says.

James Kwak:

The so-called JOBS act is a victory of faith over basic logic. The motivating idea seems to be that if we reduce the regulations that govern the process of raising capital, small companies will find it easier to raise money, and that money will translate into jobs. Many people have pointed out some of the problems with the bill: recently, for example, Andrew Ross Sorkin highlighted the potential for companies to take advantage of investors, and Steven Davidoff pointed out that regulation is probably not the reason for the decline in the number of small company IPOs.

There are a couple of more fundamental misunderstanding I want to focus on, however. First, it’s not clear that relaxing regulations will actually make it cheaper for companies to raise money. Sure, eliminating the independent audit requirement will save companies a few bucks. But what really affects the cost of capital is not out-of-pocket fees but the price that investors are willing to pay for equity. The less confidence that investors have in a company’s prospects, the cheaper that company will have to sell its stock. If small companies are allowed to provide less information to investors, that could simply make it more expensive for them to raise money.

Kwak also points out this NY Times quote as absurd:

While soliciting investment funds online has triggered fears of fraudulent schemes, the law’s backers said the greater availability of information through social media sites like Facebook would allow would-be investors to conduct their own background checks, making it difficult for such schemes to succeed.

The problem I see is that background checks will probably switch you over to Facebook Timeline. Yecch.

There are 2 kinds of the people in the world: people who want to give their money away and people who want to take it. We grease the wheels of industry when we make it easier for those people to get together. Problem solved!