It's hard to believe that Democrats, who brought you the Dodd-Frank financial regulation act and the Consumer Financial Protection Bureau, are solidly backing a bill that would weaken or obliterate many regulations designed to safeguard investors.

The bill, HR3606, sailed through the House Thursday with 222 Republicans and 168 Democrats voting for it. Only 23 members, all Democrats, voted against it. President Obama has endorsed the bill. The Senate is fast-tracking its own version, which could come to the floor Monday night.

Under the guise of creating jobs, the House bill would make it easier for companies to raise money from the public without fulfilling some - or in certain cases virtually all - of the obligations designed to protect investors in public companies. However, there is no requirement or guarantee that companies would use any of the money to hire a single person.

Democrats 'suckered'

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"My guess is the Republicans cannot believe they have suckered the Democrats into taking up their idea that deregulation is the way to promote job growth. It flies in the face of what the Democrats were arguing just a couple years ago. It completely undermines what they are trying to do to shore up our system of financial regulation," says Barbara Roper, director of investor protection for the Consumer Federation of America.

She is not the only investor advocate fuming about the bill. "It's an ill-advised, fundamental restructuring of the securities laws," says Mercer Bullard, president of Fund Democracy.

Columbia Law School Professor John Coffee has nicknamed the bill's crowd-funding provision, which would let private companies raise money from mom-and-pop investors over the Internet, the "boiler room legalization act."

AARP, Americans for Financial Reform, the North American Securities Administrators Association and the Council of Institutional Investors have strongly opposed all or some parts of the bill.

Arthur Levitt, chairman of the Securities and Exchange Commission under President Bill Clinton, told me, "The bill is a disgrace."

It is actually a collection of six bills, four of which have already passed the House with strong bipartisan support. They originally had words such as "access to capital" or "capital formation" in their names, but when they merged into one bill on Feb. 28, it was called the Jumpstart Our Business Startup Act, which has the politically popular acronym Jobs.

Pelosi's support

House Minority Leader Nancy Pelosi, D-San Francisco, called it a "meager" job-creation effort. She dubbed it "Jobs bill-lite." But she voted for it, because "on balance, it helps small startups access the capital they need to grow and create jobs, and Democrats were able to improve the bill," says Pelosi spokesman Drew Hammill. "We made several efforts to strengthen it with additional investor protections, some of them successful."

The idea behind the bill is that federal regulations, especially under Sarbanes-Oxley, have made it too hard and expensive for companies to go public, contributing to a big drop in initial public offerings in recent years. One provision, known as the IPO on-ramp, would let small and midsize companies go public without having to comply with some of those rules for up to five years.

But another provision would go the opposite direction: It would let companies stay private longer by dramatically increasing the number of shareholders a company can have before it has to file financial statements with the SEC.

"It's completely bipolar," Roper says.

Boosting IPOs

The National Venture Capital Association supports the whole bill. "It encourages capital formation for small companies," says Kate Mitchell, a managing director at Scale Venture Partners, and former chairman of the association. "The (IPO) numbers are way down. You have to be a huge company to go public."

But Levitt says it is a "false notion that the health of an economy can be measured by the number of new listings."

Investor advocates hope they can persuade the Senate to add some protections in its version of the bill. Here's a summary of what the House bill would do:

-- Let companies use media advertising and direct mail to solicit accredited investors for private (unregulated) offerings. Today, the SEC prohibits the "public solicitation" of investors in private offerings, which can only be sold to accredited investors.

To be an accredited investor, an individual or married couple must have at least $1 million in net worth (excluding a primary residence) or $200,000 in income ($300,000 if married) the past two years.

In today's media-saturated world, it's hard to keep private placements a secret. Last year, Goldman Sachs excluded U.S. investors from a private Facebook offering after the deal showed up in major newspapers. Although Goldman never said so, many believe it excluded U.S. investors because it feared the publicity may have violated the public-solicitation prohibition.

Bullard agrees this is a problem. Congress "should figure out how to facilitate advertising to accredited investors," he says. But this bill "facilitates advertising to unaccredited investors." This "can only lead to more fraud with no upside."

-- Let companies raise up to $2 million over the Internet from an unlimited number of investors, accredited or not, without going public. An individual could not put more than $10,000 or 10 percent of his or her annual income into any single crowd-funded investment, but could put that much into 10 different ones, thereby putting his or her entire income at risk in these unregulated securities.

The bill would prevent state securities regulators from imposing registration or disclosure requirements on these companies.

Supporters of crowd funding - Obama is a big one - "bring a religious fervor" to the concept, Roper says. "They don't think about how a con artist can use that system and with the click of a mouse be out there to millions of people. With the old boiler room, you were limited by the how fast your high-pressure sales force can dial the phone."

Roper hopes the Senate will put a cumulative limit on crowd-sourced investments or take other steps to protect small investors.

For companies looking to raise money, attorney Justin Hovey, a lawyer with Pillsbury Winthrop Shaw Pittman LLC who helps startups, would recommend crowd-funding as a last resort. "Administratively, it is no small task to take small amounts of money from a large number of investors." Dealing with a large shareholder base is a big distraction "from operating your business."

-- Create a new category of "emerging growth companies" that could go public and be exempt from some SEC rules for five years or until they exceed the size limits, whichever comes first.

Such companies must have less than $1 billion in revenue and less than $700 million in publicly traded shares. Hovey says most companies going public, with the exception of Facebook, would qualify.

These companies would have to provide only two years of audited financial statements instead of the usual three. And they would not have to have an outside audit of their internal controls, a controversial requirement under Sarbanes-Oxley. They also could avoid the Dodd-Frank requirement to have nonbinding shareholder votes on executive compensation and golden parachutes.

Hovey calls it a "significant relaxation of regulatory rules ... that a lot of companies will appreciate."

Mitchell says it would "free up 30 to 50 percent of the expense of going public."

This provision also weakens restrictions on analyst research put in place after it turned out that some analysts were publicly touting companies for whom their firms did investment banking, while privately disparaging them.

-- Raise the number of shareholders a company can have before it has to register with the SEC and file financial statements from 500 to 1,000 (or 2,000 for banks) and exclude from this number shareholders who get their stock from employee compensation plans.

-- Raise the limit on public stock offerings exempt from SEC registration under regulation A (a simpler, lower-cost option for small offerings) to $50 million from $5 million and pre-empt state regulation of Reg A offerings sold on a national exchange or to accredited investors, according to an analysis by Ernst & Young.