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April 6, 2012

Investor’s due dillegence is more important than ever.

In an effort to help entrepreneurs raise capital Congress passed the Jobs Act, (Jumpstart Our Business Startups) with bi-parisan support..  The law applies to businesses that have under $1 billion in revenue, that have been public for less than 5 years and have less than prescribed capitalization.
The law exempts these business from a variety of accounting and disclosure rules.  Investors that are considering investing in such businesses may want to spend additional time looking into such businesses.  For example, these businesses are not required to have their internal controls audited.  An analysis performed for The Wall Street Journal suggests that since 2004 there have been “…104 companies that had issues with there anti-error, anti-fraud  procedures… would have been exempt from auditors scrutiny of those procedures if the JOBS Act  been in effect at the time.” 
Anyone considering an investment in such a company should request information about their operations.  If they do not have audited statements or an internal audit of their internal controls additional information should be requested.  The business background of the operating personnel, professional advisors, bankers, etc should be undertaken. 
There have been many lessons learned from the Bernie Madoff escapades.  One is that you can not rely on how well known a person is or how likeable they are.  

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