Happy 5th Birthday, JOBS Act! — Celebrate By Expanding Deregulation
After the recent failure of the Republican-sponsored “repeal and replace” health care bill, it’s hard to imagine members of this Congress coming to consensus even within one political party, let alone across the aisle. Yet, this week marks the anniversary of one major bipartisan achievement that is still yielding benefits.
Five years ago, a GOP-controlled House, a Democrat-controlled Senate, and a Democratic president came together to lighten the regulatory burden on America’s upstart job creators. The Jumpstart Our Business Startups (JOBS) Act — 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) — lifted and relaxed longstanding and recent regulatory barriers that hindered entrepreneurs’ access to capital and investors’ access to wealth creation from startup and emerging growth companies.
Much more needs to be done, but 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 from 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 laws that imposed mandates on public 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.
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. The company was recently honored with the Virginia Values Veterans award by Virginia Democratic Governor Terry McAuliffe.
The JOBS Act’s Title II largely repealed the decades-old ban on advertising of private stock not subject to most SEC rules. While this stock is still only available to accredited investors—those with more than $1 million in assets other than their primary residence or who make more than $200,000 a year —entrepreneurs can now cast a wide net for these investors through general advertising. A whole new form of investment-based crowdfunding has sprung up as websites like OurCrowd.com now match accredited investors with entrepreneurs.
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 gutting of 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 Title II and Regulation A+.
On this anniversary of the JOBS Act, members of Congress should commemorate the occasion by coming together again to build on the JOBS Act’s gains for investors and entrepreneurs.
Originally posted to Forbes.