How Budget Reconciliation’s IRA Regs Undermine Bipartisan JOBS Act

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In 2012, President Barack Obama signed into law the Jumpstart Our Business Startups (JOBS) Act, a bipartisan bill that reduced regulatory barriers preventing ordinary Americans from investing in the ventures of small entrepreneurs. In remarks at the signing ceremony, Mr. Obama declared that “because of this bill, start-ups and small business will now have access to a big, new pool of potential investors — namely, the American people.”

But now a provision of the $3.5 trillion budget reconciliation bill advanced by Obama’s own party would substantially drain that pool, shrinking funding for startup entrepreneurs and diminishing the opportunity for ordinary investors to grow wealthy with them. Section 138312 of the bill recently voted out of the House Ways and Means Committee along party lines would ban IRAs from holding shares in most companies that don’t trade on major U.S stock exchanges, including those utilizing provisions of the JOBS Act that Obama championed.

Though included as a “pay-for” measure to raise revenue, proponents of the IRA restrictions state their rationale more as a matter of “fairness.” They state their aim is to prevent wealthy folks from getting richer through IRA investments in early-stage “unicorns” unavailable to most investors, as did early-stage investors who put money in Facebook and Yelp through their IRAs before the firms went public.  “The intention of these provisions is to level the playing field for low- and moderate-income investors,” a spokeswoman for the Ways and Means Committee said in a statement.

Proponents have a point that it is unfair that middle-class investors can’t access startup firms with high growth potential, but they overlook the reason why the playing field is tilted: regulations aimed at “protecting” non-wealthy investors. For decades, the Securities and Exchange Commission (SEC) – through its category of “accredited investors” — has exempted firms from the panoply of regulations for publicly-traded companies if their investors meet income and wealth thresholds currently set at $1 million for net worth, excluding the value of a principal residence, or an income of at least $200,000 a year or $300,000 with a spouse.

The rationale has been that wealthy investors can “fend for themselves,” and ordinary investors need the extensive red tape spawned by laws such as Sarbanes-Oxley and Dodd-Frank, even if they don’t want these “protections.” I and other free-market advocates have long argued that start-up investing with less red tape should be opened up to ordinary investors willing to take on risks in order to grow wealth when startups do well. Our advocacy has been successful in achieving the enactment of the JOBS Act and other liberalization.

Yet the reconciliation bill’s provision would undermine much of this progress in lifting the red tape for ordinary investors by preventing them from holding these investments in their IRAs. The Ways and Means Committee did not deny in response to my emailed questions that the bill would also curtail investment choices for middle-class IRA holders. Its specific language would prohibit IRAs from holding “any security” for which the investor must have, under SEC rules, “a specified minimum amount of income or assets, … a specified minimum level of education, or … a specific license or credential.”

Despite the rhetoric from the committee about “leveling the playing field,” the prohibitions related to education and credentials would in fact undercut recent changes to open up the field of “accredited investors” to the non-wealthy. Late last year, at the urging of my organization — the Competitive Enterprise Institute — and other free-market advocates, the SEC added a third category of non-wealthy professionals to the “accredited investor” category that could legally invest in private securities. The SEC voted to allow investors of any income to become “accredited” with the same level of access to private companies if they held credentials as brokers or investment advisers – a first step in opening these investments to the middle class, which the reconciliation bill would now undermine.

Moreover, the bill’s broad prohibition on income and net worth-conditioned investments would likely affect not just company offerings to “accredited investors” but entrepreneurs who utilize the JOBS Act provisions championed by Obama to offer shares of their startups to the middle class. Both the Regulation A+ and Regulation Crowdfunding (Reg CF) provisions of the JOBS Act are open to investors of all income levels but do have income and net worth qualifications for the amount that can be invested in the securities they cover. Reg CF, for example, ties investment in firms to a percentage of an investor’s income or net worth for any amount over $2,200.  

Read the full article at Forbes.