Friday, November 15, 2013

JOBS Act Update

 JOBS Act Update

In recent weeks I’ve written about some of the ill-conceived notions coming out of the Jumpstart Our Business Startups (JOBS) Act, including an IPO offering investors a financial share in athletes and the SEC’s proposed rules implementing crowdfunding.  See, “An NFL Running Back Demonstrates the True Dimension of the JOBS Act” (October 23, 2013).  There are a couple of updates on these stories.
 
Investment Gone Awry #1 (1999)
NFL Update: A company called Fantex had filed an IPO with the SEC to offer a tracking stock giving investors an interest in the economics of Arian Foster, a running back for the Houston Texans.  Before the offering could be completed, Mr. Foster injured his back and had to undergo surgery.  Fantex had to pull the offering.[1]  However, the company isn’t deterred by Mr. Foster’s setback.  They’ve signed an agreement with Vernon Davis, a tight end for the San Francisco 49ers, and are expected to file to make Mr. Davis the first publicly traded athlete.  I’m glad to see the JOBS Act being used so productively.

Crowdfunding Update: The Wall Street Journal ran a story the other day[2] suggesting that in addition to being a new source for raising capital, crowdfunding may be a good way to detect fraud.  The story is built off of an anecdote about a small company that just pulled its proposed financing from Kickstarter due to allegations of fraud.  Kickstarter is a popular crowdfunding website.  GPX Technologies, a small Canadian company, was trying to raise money for Luci, a device designed to induce lucid dreams.  GPX promised investors the finished product.  The company had raised about C$363,000 when one of the investors detected that there were some major problems with the offering.  According to The Wall Street Journal, the investor reduced his investment to $1 in order to be able to continue to bombard the company with questions and warn other investors.  Eventually GPX withdrew the offering and returned the money to the investors.

I laud the investor, Amine Barnat, for making his concerns known to other investors.  However, I don’t think that this anecdote tells us much about whether crowdfunding investors are more likely to detect or report potential fraud than other investors.  In my experience, skeptical investors tend to withdraw from the due diligence process rather than alerting others.  Before crowdfunding investors could, if they chose to, interact privately to share concerns about potential fraud or illegality without confronting the company.  With crowdfunding, any concerns are expressed on a website available to all interested parties to see.   It’s one thing to tell a company that it has a bad idea, it’s quite another to directly accuse a company of committing fraud.   Thus, I’m not expecting potential investors will be much of a deterrent to crowdfunding fraud.   All I’ve been able to conclude is that Mr. Barnat is someone I’d like to have as a fellow investor.



[1] http://dealbook.nytimes.com/2013/11/12/injury-interrupts-athletes-season-and-his-i-p-o/?_r=0
[2] http://blogs.wsj.com/digits/2013/11/12/kickstarter-project-canceled-amid-fraud-accusations

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