March 27, 2012
In a victory for business advocates, the House passed a bill which would enhance small companies’ ability to raise capital from investors in their early years and temper some of their regulatory costs.
The bill, called the Jumpstart Our Business Startups, or JOBS Act, would create a new category of “emerging growth” businesses subject to fewer and less stringent disclosure regulations than current law requires. It also allows those businesses to solicit up to $1 million in investment from the public online or elsewhere without first registering with the Securities and Exchange Commission.
Since its inception, President Obama has staunchly supported the measure in what political experts view as an effort to redeem himself to the business community following a fierce backlash to his health law and the Dodd-Frank financial overhaul.
The House, Senate, and White House have each coalesced around the final product in a rare display of bipartisanship, with Republicans hailing it as a job creation initiative, and Democrats and the White House labeling it as a boon to the type of technology start-ups Obama has touted in speeches nationwide.
The legislation exempts businesses with less than $1 billion in revenue from fulfilling certain accounting, disclosure, and auditing criteria before going public, undoing rules included in the 2002 Sarbanes-Oxley law passed in the wake of the 2001 Enron scandal. Those companies would only need to disclose two years of audited financial statements, as opposed to the three years current law requires. After filing an Initial Public Offering, they would also be exempt from Dodd-Frank requirements that provide shareholders with nonbinding votes on executive compensation, and a law requiring them to obtain outside auditing services following their first annual financial statement.
Other influential changes include letting companies offer up to $50 million in stock to the public and obtain up to 2,000 shareholders without registering with the Securities and Exchange Commission, up from the current thresholds of $5 million in stock and 500 shareholders.
New rules also allow private firms to “crowd fund,” or raise up to $1 million in investments from the general public—a practice that is currently forbidden under a 1933 law. To safeguard investors, the bill sets caps on the amount individuals can invest in an “emerging growth” company stock at two percent of annual income for individuals earning up to $40,000 per year, five percent for those earning up to $100,000, and 10 percent for those with incomes over $100,000.
The bill has members of the business community cheering, calling it a first step in helping small firms gin up enough capital to go public, and subsequently create jobs. “This could mean millions of jobs created over the next decade,” said John Berlau, Senior Fellow for Finance and Access to Capital at the Competitive Enterprise Institute. “It's flat-out regulatory relief targeted at the firms most likely to charge forward and create jobs.” The Chamber of Commerce similarly lauded the bill as a step toward helping entrepreneurs and small businesses grow. “This bill will create jobs and spur growth—everybody wins,” said Tom Quaadman, Vice President of the U.S. Chamber of Commerce’s Center for Capital Markets Competitiveness.
However, some financial analysts are less convinced of the bill’s merits from a jobs and economic growth standpoint. “I don’t see evidence that there are a lot of small companies that offer good investment opportunities that banks and venture capitalists aren’t already funding,” said Jay Ritter, a finance professor at the University of Florida and an IPO expert. “The crowd funding is partly going to be the companies that venture capitalists have turned down. It’s not as if there’s a free lunch, where if there are more IPOs there will be more jobs. IPOs of bad companies eat up capital that could have been used more productively.”
Other critics argue that the intense deregulation focus of the soon-to-be-law could unleash "get rich quick" scam artists looking for cash. “There are people in Florida who take stocks and run them up and down, and impoverish people in the process,” said Yves Smith, head of Aurora Advisers, a New York corporate finance consulting firm. “This bill is going to lead to an explosion in that sort of activity.”
Smith says the end result of the legislation will be to entangle investors in unprofitable ventures. “If your friends and immediate contacts won’t invest in your idea, and you have to go to anonymous people to raise money, doesn’t that say there’s something wrong?” she said. “I’ve done a lot of international deals. Good deals get done domestically and bad deals get peddled to foreigners. This is a different version of the same premise.”