The Financial Choice Act (FCA) is being advanced by Republicans on the committee, while with the committee’s Democrats are offering dozens of amendments to weaken the bill’s regulatory relief. Despite this opposition, the bill contains many deregulatory proposals that members of both parties have advanced in the past. This includes repeal of the Durbin Amendment debit card price controls from the Dodd-Frank Act of 2010 that makes millions of Americans pay more in bank fees. I discuss the damage of the Dick Durbin’s disastrous Dodd-Frank provision in a new CEI OnPoint, and former CEI board chair Todd Zywicki and the Reason Foundation’s Julian Morris show in their Wall Street Journal op-ed how it hits the poor the hardest.
Some of the bill’s most important provisions for small businesses build on the bipartisan Jumpstart Our Business Startup (JOBS) Act of 2012. Five years ago last month, a GOP-controlled House, a Democrat-controlled Senate, and a Democratic president came together—at least for a brief moment—to lighten the regulatory burden on America’s upstart job creators.
The JOBS Act was signed by President Barack Obama on April 5, 2012 after being pushed by GOP lawmakers such as Reps. Patrick McHenry (R-NC), David Schweikert (R-AZ), Darrell Issa (R-AZ), former Rep. Stephen Fincher (R-TN), and Sen. Pat Toomey (R-PA). It lifted or relaxed both longstanding and recent regulatory barriers that hindered entrepreneurs’ access to capital and investors’ access to wealth creation from startup and emerging growth companies.
Before discussing the FCA’s access-to-capital provisions, it’s worth looking back to see the real gains for America’s small and innovative companies that resulted from this unique bipartisan legislation. The modest deregulation from the JOBS Act has made it easier for innovative firms both to go public and to raise capital while staying private.
The inspiration for the JOBS Act came from the Kansas City-based Kauffman Foundation, which found in 2010 that new businesses accounted for the bulk of U.S. job creation. Kauffman Foundation researcher Tim Kane, now a fellow at the Hoover Institution, found that since the 1970s, businesses less than five years old accounted for 100 percent of net new jobs.
Many Democrats in Congress who supported Sarbanes-Oxley, Dodd-Frank, and other securities laws that imposed mandates on publicly-traded companies came to agree with Republicans that startups and emerging growth companies shouldn’t face the same regulation as Fortune 500 firms.
Title I of the JOBS Act created an “on-ramp” provision for public companies to temporarily escape some of the most cumbersome mandates of Dodd-Frank and Sarbanes-Oxley, such as the latter’s costly audits of broadly defined “internal controls.” Firms launching an IPO under this provision do not have to comply with these mandates until five years after they go public, they reach $1 billion in revenues, or they reach $700 million in market valuation, whichever comes first.
Today, more than 85 percent of initial public offerings utilize this provision. While it ultimately didn’t reverse the decline of IPOs—though it may have slowed it down—the JOBS Act eased the way for some important firms to go public. These include many biotechnology and pharmaceutical firms that are developing life-saving drugs and therapies. According to the Biotechnology Industry Organization, 212 biotech companies have gone public utilizing the JOBS Act’s “on-ramp.” These JOBS Act biotech firms currently have 696 therapies in development, and the Food and Drug Administration has approved 18 new treatments from JOBS Act companies.
Another provision of the JOBS is Regulation A+, often called the “mini-IPO” provision. This allows companies to raise up to $50 million from ordinary investors without the full process of going public and being subject to Sarbanes-Oxley and Dodd-Frank. This helps small business grow into larger firms, both creating more jobs and – in the case of at least one firm – helping more small businesses along the way.
Since it was implemented by the Securities and Exchange Commission (SEC) in 2015, many innovative firms have utilized Reg A+. One such firm is the Reston, Virginia-based StreetShares, which facilitates loans from veterans to other veterans starting and running small businesses. The company was recently honored with the Virginia Values Veterans award by Virginia Democratic Governor Terry McAuliffe.
Unfortunately, the JOBS Act’s Title III, a provision intended to facilitate investment crowdfunding for small investors and small neighborhood firms, has faltered. This is due both to a last-minute amendment to this provision on the bill’s way from House to Senate passage in 2012 and a three-and-a-half year delay by the SEC in implementing it. The provision only allow firms to raise up to $1 million in increments of $2,000 or less from individual investors.
These restrictions, combined with the red tape imposed by the SEC when it finally implemented the rule last year, have meant that for many firms, compliance in many cases costs almost as much as the money they could raise. “It is too much work for very little return,” says attorney Jillian Sidoti, partner in the law firm Trowbridge Sidoti LLP, who has helped her clients raise capital through other JOBS Act provisions, including Regulation A+.
Fortunately, the FCA untangles the red tape of the Title III crowdfunding rules while expanding the successful provisions of the JOBS Act such as Regulation A+. On crowdfunding, it includes of Rep. McHenry’s Fix Crowdfunding Act introduced last year, allowing firms to raise up to $5 million and investors to invest up to $5,000 in one year. It also cuts through other red tape on advertising and marketing these crowdfunding offerings. And Regulation A+ is broadened to allow the “mini-IPOs” to raise up to $75 million every year, plus adjustments for inflation.
In addition to these provisions building on the JOBS Act to further lift barriers to access to capital, the FCA would help small businesses by cutting the massive red tape from Dodd-Frank that strangles the small banks and credit unions that lend to them. As I have written in Forbes, both community banks and credit unions are complaining loudly that the Consumer Financial Protection Bureau, created by Dodd-Frank, is smothering them with red tape with no end in sight. The FCA holds the CFPB accountable by making it subject to Congressional appropriations and making its director removable by the president at will.
To commemorate National Small Business week and the 5th anniversary of the JOBS Act, members of Congress should commemorate the occasions by coming together again to build on the JOBS Act’s gains for investors and entrepreneurs through new legislation such as the Financial Choice Act.
Here is a coalition letter CEI signed supporting many of the FCA’s provisions.