There were rare warm fuzzies in the House of Representatives last week when Democrats and Republicans overwhelmingly passed GOP-backed legislation called the Jumpstart Our Business Startups (JOBS) Act. But critics of the bill weren't feeling it, and warn the bill favors business over investors.
The bill would help companies, with $1 billion or less in annual sales, go public quicker with fewer costs by reducing regulations, some of which were put in place in the aftermath of the bursting dot-com bubble.
The JOBS Act is now in the Senate, where it's also expected to pass (though it did meet with some headwinds yesterday). President Barack Obama supported the House version of the bill, and he has signaled he would sign the final legislation.
The measure is intended to spur IPOs of companies that have refrained from going public because of the significant upfront and annual costs involved, says David Allen, an attorney with K&L Gates LLP's Irvine, Calif. office. Allen represents issuers and underwriters in public offerings and private capital raising.
The IPO process is taking longer because of market conditions brought about during the recession, he says. "Deals are harder to sell," he told Investor Uprising. This legislation might push some companies into attempting an IPO. "There is a backlog of companies that could go public under the right conditions," he said. "The goal is to make the IPO alternative more attractive."
Some of the highlights of the House version of the JOBS Act:
- Creates a new category of "emerging growth companies" -- $1 billion or less in annual sales in the most recent year -- that are exempt from certain Securities and Exchange Commission (SEC) regulations and parts of the Sarbanes-Oxley Act of 2002 for up to five years following the IPO;
- Reduces expenses by allowing companies to supply two years instead of three years of audited financial statements before they register for IPOs;
- Allows businesses to "crowd-fund" to raise a large pool of money from small investors who may or may not be accredited by the SEC;
- Removes the SEC ban that prevents business from advertising to solicit investors;
- Increases the number of companies that are exempt from SEC registration by raising the offerings threshold from $5 million to $50 million;
- Raises the shareholder threshold required to register with the SEC from 500 to 1,000 shareholders; and
- Increases the number of shareholders allowed to invest in a community bank from 500 to 2,000.
Some lawmakers say helping small companies get access to capital without all the usual costs will jumpstart, if you will, the number of IPOs and boost job creation.
Whether the measure will increase the number of IPOs or jobs is debatable. "I don't think there's a silver bullet that will bring back the IPO market," Allen says. "But this is probably a positive step in terms of Congress looking at costs of additional regulation and trying to balance the benefit that you receive. With some exceptions, the IPO market is going to follow the broader economy. If the economy recovers, the IPO market will come back."
The other question: Are fewer regulations good for investors? According to a number of highly placed sources, the answer is "No."
Jack Herstein, president of the North American Securities Administrators Association, warned in a statement that the JOBS Act "sacrifices essential investor protections without offering any prospects for meaningful, sustainable job growth."
And Lynn E. Turner, a former SEC chief accountant, told Bloomberg last week that the legislation "won't create jobs, but it will simplify fraud. This would be better known as the bucket-shop and penny-stock fraud reauthorization act of 2012."
Lawmakers are trying to reduce the expenses of complying with certain regulations, which is understandable, said Kathleen Shelton Smith, principal of Renaissance Capital, an IPO investment advisor. "But we have to be careful how we do it," she says. "The way this bill is written, it takes away a lot of investor protections."
Smith, who testified in front of the US Senate Committee on Banking, Housing, and Urban Affairs, says investors make better decisions with more information, not less. "Why make it harder for investors to study these companies by taking away information?"
One of her biggest beefs with the bill is the definition of an emerging company, defined as one that makes $1 billion or less in annual sales. The definition should be narrowed, she says. "In its current form, with its current definition of less than a billion, it's basically reforming the entire IPO market," she explained.
Smith recommends defining an emerging company as one that's seeking to raise up to $50 million. If lawmakers want to reform and lower IPO costs, then they should do it for the small companies, not the entire market, she suggests.
The bill in its present form could make investors wary, Smith said, adding, "The more information you have, the better able you are to determine price or whether you want to be involved in something. Capital is allocated most efficiently when information is broadly available. It's an end run around good regulation and good laws that help investors."
The bill, at the time of this writing, was in the Senate, sans the warm fuzzies that surrounded it in the House. Democrats were promising quicker passage of the bill only if Republicans dropped their opposition to judicial nominees.