

Let's ride this bull - jroes
http://37signals.com/svn/posts/3160-lets-ride-this-bull

======
joeag
The quote:

Matt Taibbi from Rolling Stones reports:

Ostensibly, the law makes it easier for startup companies (particularly tech
companies, whose lobbyists were a driving force behind passage of this law)
attract capital by, among other things, exempting them from independent
accounting requirements for up to five years after they first begin selling
shares in the stock market.

Is just wrong. You still need audited financials to be a public company
(current, plus 2 years prior to IPO instead of 3). I believe what changed is
some of the Sarbox rules related to rotating auditors, etc. See
<http://www.orrick.com/fileupload/4624.htm> for one leading law firm's
analysis of the JOBS act.

(I am not affiliated with the firm)

There is certainly room to relax some of the regulations put on small public
co's by Sarbox. That's part of the reason companies are listing on foreign
exchanges, and let's be honest, you dont' see "fraud running amuck" on the
London Stock Exchange do you?

I like 37 Signals approach to building products and many of their business
philosophies but they seem to have a need to relentlessly attack any other way
of creating a company or doing business. Not quite sure why.

~~~
mapgrep
Do you have anything other than "I believe what changed" - a memory you are
uncertain of - to dispute the article? The doc you link does not mention
auditors at all.

And for what it's worth, this NY Times article would seem to support the
original Rolling Stone assertion:

"Under the JOBS bill, companies with up to $1 billion in annual revenue would
be free to ignore — for their first five years as a public company —
regulations that were put into place after the end of the dot-com bubble and
the collapse of Enron. Among them are requirements to hire an independent
outside auditor to attest to a company’s internal financial controls..."
[http://www.nytimes.com/2012/03/23/business/senate-passes-
sta...](http://www.nytimes.com/2012/03/23/business/senate-passes-start-ups-
bill-with-amendments.html)

~~~
joeag
The link does in fact mention auditing but you have to go to the "Jobs Act
Alert" linked on that page. I wanted to cite to the "Jobs Act Alert" link, but
it's a PDF, so I thought it was easier to cite to html page containing the
link.

Your citation to the NY Times only governs "a company's internal financial
controls" - not it's financials or independent accounting requirements (which
is essentially audited financials).

My original criticism of the Rolling Stone assertion as reproduced by quote in
the 37Signals blog post was and is that companies are exempt from independent
accounting requirements. That's supported in the information I cited.

~~~
mapgrep
What Rolling Stone wrote is that the JOBS act would "exempt them from
independent accounting requirements for up to five years."

What the magazine was referring to is that auditors would no longer have to
attest to a company's financial controls for financial reporting (mentioned in
the Orrick PDF you intended to link
<http://www.orrick.com/fileupload/4619.pdf>).

This means, for example, they would not bother to make sure revenue is being
booked correctly, as explained here
[http://online.wsj.com/article/SB1000142405270230407200457732...](http://online.wsj.com/article/SB10001424052702304072004577325883892874036.html)

When Groupon recently had to restate (and slash) previously-reported revenue,
this was due to weak internal controls, the same sorts of controls the JOBS
act would exempt from being audited.
[http://online.wsj.com/article/SB1000142405270230402350457731...](http://online.wsj.com/article/SB10001424052702304023504577317932455874856.html)

So you really need an independent audit not just of the numbers but of the
controls behind the numbers if your goal is to make sure investors get
accurate financial information about a company.

Thus audits of financial controls are a key part of independent accounting.

The only change I'd make to Rolling Stone's original piece would be to revise
to "exempt them from CERTAIN KEY independent accounting requirements for up to
five years." But that's for clarity, not technical accuracy.

Taibbi is communicating an accurate idea - the JOBS act seriously weakens
independent oversight of accounting for affected companies.

------
cft
I am a founder of a bootstrapped company, that has been profitable for a
couple of years. The profits have been reinvested, and the company is growing.
We never planned to take money. So far, we mainly see the negative sides of
this bubble: it's harder to hire quality people, services (lawyers, bandwidth,
etc) are becoming expensive or harder to get. How can we take advantage of
this boom? How long will it last, or at least, what will be the mechanism for
its deflation, because it's only limited to tech sector so far, unlike '99.

~~~
anon808
why do you want to take advantage of this bubble? why do you want to take
advantage of anything other than your own abilities?

~~~
zackzackzack
Because he is an opportunist and likes money? I take advantage of everything I
legally and ethically can. I expect everyone else to do the same when it comes
to business.

~~~
anon808
and why would anyone want to do business with you knowing your goal is to take
advantage of anything you can for your own end? . . . why wouldn't your
business partners always be watching their backs. not an efficient way to
interact with people, and an impossible way to create. creative endevours
require trust, trust isn't compatible with opportunism.

------
motti_s
I don't think we're in a bubble. How can the author compare the IPO of
Facebook, a company with a billion users and billion dollar in revenue, to
those IPOs of the late 90s of companies with no revenue and no viable plan to
have any in the foreseeable future? In fact most IPOs since LinkedIn started
the trend are of mature companies. That's not what happened in the bubble
days.

It's true that more companies are being created and seed valuations are going
up. But the selection process still occurs at the series A stage and crappy
companies usually still can't pass that hurdle.

As for the JOBS act: if I'm not mistaken investment is capped at (the lowest
of) $10K or 10% of the annual salary. I believe you even have to go through a
course before you can invest though the JOBS act. Conversely, in the stock
market you can invest as much as you want, without any training, and lose
everything overnight.

The fact is that economy fluctuates. Whenever there's an upswing people scream
bubble. It's a result of the traumatic effect of previous bubbles. But the
irony is that real bubbles sneak on you. Hardly anyone sees them coming. So
keep screaming bubble, it makes me feel safe.

~~~
moocow01
"But the irony is that real bubbles sneak on you. Hardly anyone sees them
coming. So keep screaming bubble, it makes me feel safe."

I think there is a bubble and I can accept the rest of your viewpoint, but
this part is not true. Most people who have a well developed understanding of
an industry and basic financial sense easily recognize bubbles and have always
done so in the past. The people who it sneaks up on are those who listen to
the media and listen to their friends who listen to the media. Bubbles
typically start out of real economic growth. The problem is that they outgrow
market indicators when you get too many lemmings playing the telephone game
and ignoring fundamentals. From what I see around the bay area there seem to
be a lot of indicators of this social dynamic playing out. There is lots of
money chasing other money to nowhere but Ill agree its not as bad as it was in
2000.

~~~
motti_s
_"Most people who have a well developed understanding of an industry and basic
financial sense easily recognize bubbles and have always done so in the
past."_

I try to listen to what people I trust from the industry say about the
existence of a bubble. Pretty much all of them say that there is none. For
example Ben Horowitz (of Andreesen Horowitz) consistently argues that there is
absolutely no bubble (and he was around for the real bubble occurred). See
5:10 - <http://www.youtube.com/watch?v=9xzcJnqcTP4>

I think that often when markets become hot, people automatically think of a
bubble, but that's not necessarily true. The internet has grown from 50
million users to over 2 billion and smartphones were non-existent in the 90s.
So perhaps higher valuations for tech companies are justified due to higher
potential.

But you could be right, only time will tell.

~~~
spitfire
Ben Horowitz is an investor. You wouldn't think he has a vested interest in
this, would you?

~~~
motti_s
The overheated market causes high valuation, which some argue, hurts
investors. By saying bubble and discouraging unsophisticated investors from
bidding, he probably stands to gain, not lose.

Everyone has a vested interest in what they deal with (or they're amateurs,
hence I don't need their opinion). That doesn't mean they never say the truth.

------
sks
Well I agree that there are many signals pointing towards a bubble (as david
points out in his post). I don't think it will be as bad as the late 90s.
Memories of the last tech bubble and the recent recession will hopefully
dampen the rise and the subsequent fall this time.

~~~
quanticle
I don't know about that. Individual actors may have long memories, but
financial markets as a whole often have the collective memory of a goldfish.
During the height of the bubble, there are always people who are proclaiming,
"No, this time its different," and "We learned our lesson from last time." And
they're right! The actors in the market did learn their lesson from last time.
It's just that they make entirely new mistakes that lead to the same end
result.

~~~
joeag
I agree there will always be bubbles - it's human nature in the form of greed.
The height and crash are determined by how much liquidity and credit are
available. So for that reason this time around there may be less heights and
therefore less "crash" because there are a lot less people that can borrow on
their home equity line or margin account to speculate on IPO's, etc.

~~~
sks
I agree with both of you that there will always be bubbles but recently
bubbles have moved from one industry to another. e.g., savings and loans ->
tech -> housing etc. I am just arguing that maybe the tech bubble on 2010s
wont be as bad as the 1990s given the memory about recent history of this
sector and the big bubble of 2010s may come from a different sector.

I have to agree it seems that many signals are pointing towards a big tech
bubble, though personally I will wait to see the tech IPOs following the hype
of Facebook IPO to call a definite big bubble.

~~~
randomdata
What I find interesting is that people started talking about the agriculture
boom around the same time they started talking about the tech boom. Do we have
any precedence for multi-industry concurrent booms and busts?

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methoddk
_Enter our trusted troubadour of bullshit, TechCrunch:_

Hands down the funniest thing I've read in a while.

------
richcollins
_Now isn’t that swell. Enable people with an extreme financial incentive to
spin the truth, or outright lie about the numbers, a 5-year get-out-of-jail
cover_

Removing independent accounting requirements isn't the same thing as making
fraud legal.

------
franciswolke
I will see you there.

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carguy1983
For the comedy impaired, riding the 'bull' in this case is a double entendre.

