The JOBS Act litmus test: How much risk is too much?

Here’s a litmus test for candidates: Are you more inclined to use the power of government to try to prevent people from suffering harm, or to provide remedies for those who do?

I pose this in the context of a bill President Obama signed Thursday -- HR 3606, the Jumpstart Our Business Startups Act -- to lift some of the regulatory barriers new businesses face when fundraising. The measure drew flak mainly from Senate Democrats, who argued that it would make the public more vulnerable to securities scams.

Opponents seemed particularly concerned about two provisions. One temporarily exempts new public companies with less than $1 billion in revenue from a provision in the Sarbanes-Oxley Act that requires independent audits of a company’s internal financial controls. The other permits businesses to raise up to $1 million by selling shares in their firms (in relatively small chunks) without formally becoming public, exchange-traded companies.

Now back to the litmus test. One approach -- the government-as-harm-preventer model -- requires a regulatory structure that assumes the worst about people, to wit, that they’re all potential victims or victimizers. Under this view, “crowdfunding” is unacceptable because swindlers will sell grandmothers shares in sham ventures, or people will talk their friends and neighbors into sinking money irretrievably into businesses that are doomed to failure.

The other approach -- government as punisher of bad actors -- assumes that people can, in most cases, watch out for themselves and others. Under this view, any problems caused by “crowdfunding” can be addressed by holding the responsible parties accountable and enabling their victims to seek reimbursement.

The two approaches aren’t mutually exclusive, of course. Some potential harms are so severe that even the most hands-off policymaker would want the government to try to prevent them. But what separates sensible policy from Nanny State-ism is when policymakers want the government to shield people from risks they can avoid themselves, or that they deliberately take on.

Does the JOBS Act increase the possibility that people will make bad investments and lose money? Yes, it does. Start-ups are a particularly risky prospect. But the new law doesn’t force anybody to make those investments. Instead, it gives more people the chance to invest at a stage when the potential gains are the greatest, while also giving entrepreneurs more avenues to raise cash.

To me, the JOBS Act appropriately manages risk by limiting the size of the investments people can make and the scale of companies that are exempted from the rigors of Sarbanes-Oxley. If thousands of workers’ retirement savings were at stake, or if large companies with millions of investors were involved, it would make sense for the government to be in harm-prevention mode. That wasn’t the case with the JOBS Act.

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