President Obama signed legislation on Thursday that aims to make it easier for small companies to raise money, both by easing some rules for making an initial public offering and by turning online fundraising platforms, such as Kickstarter, into small-scale investment portals.
The Jumpstart Our Small Business Start-ups Act, known as the Jobs Act, moved through both chambers on bipartisan votes and made surprising allies of the White House and House Republicans. But while lawmakers and start-up advocates have trumpeted the legislation as a job-creation measure, critics say that the bill could leave investors vulnerable to fraud— both by creating a new opportunity for Internet scammers, and by rolling back some regulations on stock exchanges that date back to the 1930s.
“For business owners who want to take their companies to the next level, this bill will make it easier for you to go public,” Obama said. “For start-ups and small businesses, this bill is a potential game changer. For the first time, ordinary Americans will be able to go online and invest in entrepreneurs that they believe in.”
“A lot’s changed in 80 years, and its time our laws did as well,” Obama said, speaking from the Rose Garden.
The bill includes all three capital-formation priorities that the president sent to Congress in January this year, according to the White House.
A lot of buzz has surrounded one provision of the bill, which will give very small businesses a brand-new way to raise capital by allowing them to solicit a lot of small investments through "crowd funding," primarily through online platforms.
Both sides of the aisle voiced their support.
“The Jobs Act – a key part of the Republican jobs plan – is good news for entrepreneurs and aspiring small businesspeople struggling to overcome government barriers to job creation,” House Speaker John Boehner, R-Ohio, said in a statement on Thursday.
The new legislation will transform what crowd-funding platforms do, said Spencer Taylor, chief of business development and cofounder of Launcht. “It’s moving from the philanthropy side of the brain to the investment side of the brain,” Taylor said, by allowing online platforms like those that Launcht creates to shift from a donation-based to an equity-based model.
“When the president signs this bill, it’s going to be like the U.S. just bought Alaska,” Taylor said. “It’s a whole new financial space to fill.” The law would allow businesses to offer up to $1 million in small investments without having to go public in the traditional sense.
Critics warn that the crowd-funding provision will leave people vulnerable to Internet scammers, and that the federal government isn’t well positioned to police the new financial tool. “The states are in a much better position to regulate this kind of capital formation,” said Pennsylvania Securities Commissioner Steve Irwin. The Securities and Exchange Commission, Irwin said, does not have the resources to police a surge in companies offering small investments online.
An online attempt to raise money to buy Pabst Brewing ran afoul of the SEC last year because the two men who took to the Internet to solicit investments didn’t register their intention to sell shares with the SEC first, the Deal reported at the time. Michael Migliozzi II and Brian William Flatow gathered pledges of $200 million from 5 million people, promising them shares and beer, before the SEC shut them down; because they were gathering online pledges, not cash, people who joined the effort didn’t actually lose any money.
Launcht and other crowd-funding advocates worked with the office of Sen. Jeff Merkley, D-Ore., to add additional protections. The final bill caps the amount of money a business can raise through crowd-funding and the amount an individual can invest, depending on his or her income, among other changes. But then Merkley ended up voting against the final Jobs Act bill, saying in a statement that although the crowd-funding provision was much improved, he couldn’t support the full package.
The Jobs Act will also affect much larger companies and traditional market trading by lifting some financial-disclosure and regulatory requirements for initial public offerings. The concern here is that the legislation rolls back consumer protections put in place to ensure that investors don’t lose millions by investing in companies that go public while on an unsound financial footing.
The National Venture Capital Association has been fighting to loosen IPO regulations for a decade, according to Emily Mendell, vice president of communications at the National Venture Capital Association. “We are very, very satisfied with what did end up in the bill,” Mendell said.
The Jobs Act creates a new category of "emerging-growth companies," defined as companies with less than $1 billion in annual revenue. Under the new legislation, emerging-growth companies will be exempt from certain auditing and accounting requirements for five years after they start issuing stock, or until their annual gross revenue tops $1 billion.
“The bulk of the companies that will benefit from this provision are not small companies,” said Barbara Roper, director of investor protection at the Consumer Federation of America. “One billion dollars in revenue is not a small company.”
The Jobs Act also gives emerging-growth companies more leeway to communicate privately with investors and the SEC before making an offering, and allows investment banks to publish preoffering research on emerging-growth companies, even if the bank publishing the research also plans to underwrite the securities.
The bill “should in fact be called the ‘Return Fraud to Wall Street in One Easy Step Act,’ ” former New York Attorney General Eliot Spitzer wrote for Slate last month. “The bill will undo some of the most important reforms placed on Wall Street in a generation.” The Jobs Act, Spitzer wrote, undoes consumer protections put in place to stop investment banks from touting worthless stocks — a practice that lost investors millions during the dot-com bubble.
IPOs have declined in recent years because the economy has been lousy, not because of excessive regulation, Roper argued. “The way to get small IPOs going is to get the economy going,” she said. Decreasing regulation could actually hurt capital markets, she said: Because the stocks issued under the new rules won’t be as well vetted, they may be viewed as riskier and so become more expensive.
Other experts say that changes in market structure are to blame for declining IPOs. “One reason is decimalization — pricing stocks in cents rather than fractions — that took profits out of trading that had previously given brokers an incentive to list small companies,” Steven M. Davidoff, professor at the Michael E. Moritz College of Law at the Ohio State University, wrote for The New York Times’ Dealbook on Tuesday.
The Jobs Act also includes a provision that will make it easier for businesses to raise capital through private, rather than public trading: It lifts the maximum number of shareholders a company can have before registering with the SEC from 500 to 2,000. And the bill lifts a ban on marketing private funds, meaning that advertisements from hedge funds could soon be coming to a billboard near you.
Obama said that his administration will work to make sure the bill is implemented while keeping investors protected.
“The SEC is going to play an important role in implementing this bill, Obama said. I’ve directed my admin to keep a close eye on this law as it goes into effect and provide me with regular updates.”
The JOBS Act "leaves in place the core post-dot-com bust investor protections," White House Press Secretary Jay Carney said Thursday.
- President Obama