First the good news that you’ve already heard about: even though the unemployment rate didn’t dip in February, the economy was strong enough to create 227,000 new jobs, the third month in a row that job creation figures have topped the 200,000 mark.
Now, the not-so-good news that you may be trying to forget about for the time being: economists are ratcheting back their growth forecasts for the first quarter of 2012 (both Goldman Sachs and JP Morgan economists now call for that to hit 1.8 percent and 1.5 percent, respectively, below their previous estimates of 2 percent). And Ben Bernanke has already warned us that lower growth isn’t going to sustain further job creation.
Enter the Jumpstart Our Business Startups Act, the goal of which is to remove what some free market folks think of as barriers to small businesses trying to raise capital that can then be used to hire people. No prizes for guessing that the bill’s acronym – JOBS – was a big part of what won it bipartisan support in the House of Representatives, passing with a mere 23 votes against and 390 in favor. (Almost identical language is part of another bill up for debate in the Senate.)
There is one overdue measure in this bill, a few others that could be helpful but may prove to have problematic unintended consequences, and some other stuff that is minor in the extreme. The most useful and long overdue step is to make it easier for what the bill calls “emerging growth” companies to go public, exempting them from costly accounting provisions of the Sarbanes-Oxley Act.
A company with less than $1 billion of revenues won’t have to comply with the 404(b) section for five years, saving it potentially millions of dollars a year. Making the process of raising public capital even simpler are provisions that will help these fledgling public companies communicate with potential shareholders and allow analysts to report on their finances and outlook much more readily.
Small-Scale IPOs Are Back
Assuming that the comparable Senate bill also is passed, JOBS would be good news for investment bankers and for venture investors, who have been fretting for years about lackluster IPO levels (aside from marquee deals like Zynga and Facebook.) It might also be good news for those companies with a positive track record of profits to show to potential investors, who feel more upbeat about stocks in the wake of the winter rally. It’s not clear, however, that simply being able to access capital more readily from the financial markets at a time when banks remain ultra-conservative about lending, will translate as readily and rapidly into new job creation as the politicians hope.
A handful of other measures aimed at increasing access by smaller companies to fresh sources of capital could be more problematic down the road. Back in 1982, the SEC banned small companies from using advertisements to solicit investments from outsiders. But that was back in the days before the rise in venture capital created a kind of closed loop for startups.
If you’re inside that loop, if you have the right connections, or even if you start your new business in the right geographic locale (like New York City’s Flatiron district), you’ve got an edge over someone with an equally fabulous idea who happens to be in Wisconsin or Idaho. Removing the advertising ban levels the playing field a bit, but also means that investors and regulators will have to be a lot more wary of scam artists or companies that simply aren’t as healthy as they would like potential investors to believe they are.