Tomorrow, the Senate is expected to pass the Jumpstart Our Business Startups (JOBS) Act. The bill achieved cloture today by 76 votes, all but assuring final passage. True to its acronym, by removing burdensome and outdated regulatory barriers to capital formation, the JOBS Act will likely result in the private sector creating millions of addition jobs over the next decade.
As I testified last month before a House Energy and Commerce Hearing hearing on “Where the Jobs Are,” data from the respected Kauffman Foundation that have been embraced by the president’s Council on Jobs and Competitiveness show that “over the last three decades, young firms less than five years old have created 40 million new jobs, accounting for all net new jobs during that period.” But “according to the Treasury Department’s IPO Task Force the long-term decline in IPOs over the last decade may have cost the economy as many as 22 million jobs not created during that period.”
The JOBS Act, in many different ways, lifts the barriers that stunt the growth of these firms that are responsible for the bulk of new job growth. For tiny startups, it removes longstanding rules that prohibit raising capital through crowdfunding, the pooling of resources through online social networks. Currently, sites such as Kickstarter are limited to a donation model for fundraising, but any offer of profit-sharing could subject the entrepreneur to millions of dollars of Securities and Exchange Commission (SEC) red tape. Under the Securities Exchange Act of 1934, any firm with 500 or more shareholders becomes subject to many of the same costly reporting rules faced by publicly-traded companies. These include the Sarbanes-Oxley Act of 2002, which costs companies an average of $2.3 million in compliance costs every year, according to the SEC.
The JOBS Act lifts this threshold to up to 2,000 for many firms, benefiting both online entrepreneurs using there social networks and closely-held businesses that wish to expand. In the latter category are Northeast supermarket chain Wegmans and convenience store Wawa, both of which testified that the bill would help them expand and create new jobs. For "emerging growth" firms, the companies that could upset the apple cart and be the next Apple, the bill creates an "on-ramp" process in which the most onerous provisions of being public -- from the "internal control" mandates of Sarbanes-Oxley's Section 404 to the proxy mandates of Dodd-Frank -- are delayed until the fifth anniversary of their IPO.
Finally, the bill lifts the ban on truthful advertising and communication regarding alternative investments such as venture capital and hedge funds, a ban that has raised concerns about free speech as well as economic growth. These investment vehicles will still not be able recruit ordinary investors, but they can open up a dialogue with the general public that will result in more openness and transparency in financial markets. (The Competitive Enterprise Institute has filed an amicus brief in a First Amendment case challenging that advertising and solicitation ban.)
The JOBS Act will create jobs, but it will do so much more. It will democratize investing away from the current Wall Street-centric model, unleashing the power of crowdfunding and online communication to bring emerging entrepreneurs together with the investors who wish to back them. Fraud will still be vigorously prosecuted under federal and state law, but investors will be more able to choose the level of risk they wish to assume. They will be more able to vote through the marketplace on whether laws like Sarbanes-Oxley and Dodd-Frank are serving them well, or are simply burdening the firms they own with costs that reduce shareholder return. Policy makers should take note of these choices, rather than condemning them, and explore further relief from and repeal of provisions of Sarbanes-Oxley, Dodd-Frank, and other arcane rules.
Many people deserve credit for this no-cost stimulus that, in the words of CEI Vice President Wayne Crews, remove the regulatory rocks that keep the entrepreneurial blades of grass from growing. The genesis for much of the bill's provisions regarding crowdfunding and investor communication came from the House Oversight and Government Reform Committee chaired by Rep. Darrell Issa (R-Calif.), which sought consensus ideas early last year on lifting regulatory barriers. CEI had submitted to the committee information regarding outdated rules in securities and other policy areas. And the Obama administration certainly deserves credit for pointed critiques of the Bush-era Sarbanes-Oxley in its Jobs Council report, and for its backing of the House bill.
Still, it was disappointing to see the Obama administration embrace 11th-hour calls from Senate Democrats for more "safeguards" after after even liberals such as Reps. Barney Frank (D-Mass.) and Maxine Waters (D-Calif.) found the House bill's safeguards adequate to secure their votes. It was also disappointing to see every Senate Democrat, and Sen. Scott Brown (R-Mass), vote for an amendment yesterday that would have gutted much of the House bill's regulatory relief.
But in less than 24 hours, almost 30 Democrats who had voted for that amendment voted for the House bill. Hopefully, many more initial skeptics will see the wisdom of jump-starting America's entrepreneurs and investors.