WASHINGTON -- President Barack Obama will sign the JOBS Act into law Thursday, clinching a rare and hard-fought bipartisan victory for his presidency. But to secure the legislative win, he had to pick sides in a simmering feud between interest groups aligned with the Democratic Party. One side of the fight -- the tech industry and venture capital allies -- is all smiles. But the other side -- organized labor -- is seething.
The flashpoint for this Democratic Party conflict -- the JOBS Act -- is the brainchild of Obama's Council on Jobs and Competitiveness, a 27-member group that the president stacked with 19 corporate chairmen and CEOs in an effort, say labor leaders and others, to curry favor with America’s executive class.
But for all of the maneuvering, the JOBS Act is unlikely to deliver much in the way of job growth, according to economists and consumer advocates, who warn that the bill opens the door to a new wave of conflicts of interest and possible financial fraud on Wall Street.
Tech companies and their venture capital backers, angered by a bipartisan push for Internet anti-piracy legislation known as SOPA, are key beneficiaries of the JOBS Act -- a fact not lost on Democratic leaders. Rapid-fire public stock offerings and free-wheeling funding are the lifeblood of the Silicon Valley landscape, and the JOBS Act promises to make it easier for financiers and their clients in the technology industry to raise money for their companies' operations.
"What happened coming out of the SOPA fight is, people in Washington and Congress really sat up and took notice and said, 'There is actually work to be done here. This is not just kids in T-shirts running around Palo Alto on skateboards. This really is a community looking to create the next wave of businesses that will jumpstart the American economy,'" says Michael McGeary, a strategist with the venture capital firm Hattery, based in San Francisco. "And Congress is very opportunistic this way. They saw there was this community that was very engaged ... And we would like to say thank you to them."
The JOBS Act, say McGreary and other venture capitalists who work regularly with Silicon Valley, goes a long way toward sweetening the bitterness brewed by the SOPA scuffle.
But in deciding to back the JOBS Act, Democrats were forced to choose between two allies -- labor and the tech industry. Democrats stuck with Silicon Valley, secure in the belief that union loyalty isn't going anywhere. It's yet another political battle pitting nominal allies against one another because large sums of money are at stake.
Meanwhile, the White House and congressional Republicans tout the JOBS Act as a shot in the arm for small companies that have bright prospects. Fast-growing start-ups are engines of job growth and the bill is intended to make it easier for these companies to raise capital.
In practice, however, the bill will be a greater boon for venture capitalists, large tech companies and Wall Street banks. This cadre quickly got the president’s backing for the JOBS Act, despite vocal opposition from consumer advocates, federal regulators and the largest U.S. coalition of labor unions, who warned of increased risk of financial fraud.
"I am concerned that we lack a clear understanding of the impact the legislation ... will have on investor protection," Securities and Exchange Commission Chairman Mary Schapiro wrote in a March 13 letter to the Senate Banking Committee, saying the bill could cause "real and significant damage."
Even some of the bill's supporters say it goes too far.
"It wasn't worth throwing the baby out with the bathwater, but we don't honestly know where this will lead," McGeary says.
WEAKENED FRAUD PREVENTION
While Obama and, to a lesser extent, House Majority Leader Eric Cantor (R-Va.) are eager for a bipartisan photo-op, no JOBS Act supporters are trumpeting the number of jobs the legislation will create -- a notable PR omission in an era when lawmakers rarely hesitate to tout rosy employment projections.
House Minority Leader Nancy Pelosi ridiculed the bill during a briefing prior to a House vote last month. "It's so meager," Pelosi said. "Trumpet -- tun ta ta ta -- here comes the little king!"
Other Democrats who voted for the bill acknowledge reservations. "I don't see it as a great jobs bill," Rep. Carolyn Maloney (D-N.Y.) said Sunday on MSNBC's "Up with Chris Hayes." "I don't see it creating a lot of jobs."
Small business groups, too, are divided. The National Federation of Independent Businesses, the largest and most partisan-Republican small business group, is not taking a position. The less partisan National Small Business Association supports the bill, but the more progressive Main Street Alliance and American Sustainable Business Council continue to oppose major portions, and worked to kill the bill after the House passed its version in mid-March.
The JOBS Act -- short for Jumpstart Our Business Start-Ups Act -- was birthed in late-January by Obama's Council on Jobs and Competitiveness, a group whose membership provides some insight into the administration's loyalties and priorities.
Of the two slots Obama awarded to labor unions on the 27-seat council, one was filled by AFL-CIO President Richard Trumka. The 19 corporate executives included the heads of GE, Intel, Citigroup, Xerox, Boeing and American Express. Investment managers, lawyers and academics make up the remainder.
The jobs council recommended lowering the corporate tax rate and easing federal regulations across the board -- sweeping proposals with little chance of being enacted during an election year. But one of its suggestions had political potential: making it easier for growing private companies to sell stock to the public, a process known as an initial public offering. By attracting more funding, the council surmised, these enterprises could expand their operations and hire more workers.
"The average annual number of smaller-firm IPOs (of less than $50 million) has been one-tenth in the 2000s what it was in the 1990s," the jobs council stated. "Removing regulatory barriers to small IPOs … needs to become a priority."
Trumka publicly criticized the jobs council's report. He refused to sign off on it and boycotted a January meeting with Obama presenting the recommendations.
Trumka's outrage, however, did little to slow the jobs council's political momentum. In January, one week after the report was published, Obama stumped for its proposals during his State of the Union address.
"Most new jobs are created in start-ups and small businesses," Obama said. "So let's pass an agenda that helps them succeed. Tear down regulations that prevent aspiring entrepreneurs from getting the financing to grow."
Union leaders heard a clear message from the administration: We'll give you a seat at the table, but that's about it.
Organized labor has been losing this battle for three decades. While unions remain the backbone of the Democratic Party’s voter turnout operations and its on-the-ground campaign organization, they are increasingly marginalized on Capitol Hill. Adding insult to injury, labor is losing the battle for fraud-prevention laws to the very sectors who perpetrated those wrongs only a decade ago.
The JOBS Act weakens rules adopted in the aftermath of the 1990s tech bubble designed to combat Wall Street abuses involving tech startups.
"If the president's jobs council actually believes what it is saying here, then it is very scary," says economist Dean Baker, co-director of the Center for Economic and Policy Research. "We did have a lot IPOs at the end of the '90s. We had 20-year-olds, who didn't have a clue about anything, who were marketing dot.nonsense, and raising hundreds of millions of dollars from gullible investors."
After the tech bubble burst, Wall Street banks that organized IPOs for small firms were barred from promoting those stocks with bogus research. The JOBS Act repeals that ban, re-opening the door to conflicts of interest that have plagued Wall Street for decades.
"The bill would benefit Wall Street, at the expense of Main Street, by overriding protections that currently require a separation between research analysts and investment bankers who work in the same firm," SEC Commissioner Luis Aguilar said in a March 16 speech.
The legislation also lifts requirements that only "accredited investors" be allowed to buy stakes in new companies, granting the general public a new ability to make small investments over the Internet, a process known as "crowdfunding."
Companies with $1 billion or less in annual revenue will not be required to have a professional accounting firm audit finances for five years after first selling stock to the public. That requirement was adopted after the Enron and WorldCom scandals. The cost of hiring these accountants, small companies say, discourages them from expanding their operations by going public. Firms worth less than $75 million are already exempt from the rule.
These provisions were all popular among Republicans. After the State of the Union address, Cantor quickly cobbled together several existing GOP bills dealing with the jobs council's recommendations and began pressing for House passage.
'DISAPPOINTED -- AND ANGRY'
While the JOBS Act angered labor leaders, it presented an opportunity for Democrats to repair ties with another core constituency: Silicon Valley.
Tech companies and venture capitalists were deeply offended by the bipartisan push this winter to pass the Stop Online Piracy Act, or SOPA -- which they warned would create significant functional problems for the Internet and stifle free speech. The bill failed, but not before exposing a significant rift between Silicon Valley and Washington.
Lifting the requirements on "accredited investors" and enabling crowdfunding was particularly attractive to progressive small business groups within and beyond Silicon Valley looking for financing arrangements outside the traditional Wall Street power center. Before the JOBS Act, only investors with significant net worth were eligible to take part in sometime-lucrative IPOs that allow people to get in at the ground floor of the next Facebook. The American Sustainable Business Council had been pushing for crowdfunding since 2010 as a tool to help small enterprises get started by pooling small investments from many retailers.
But without proper oversight, crowdfunding could simply become a license for fraud, according to financial reform advocates. The whole point of restricting stock sales to "accredited investors," after all, is to prevent scammers from ripping off uninformed consumers by selling them bogus or worthless stock.
In testimony before the Senate Banking Committee, Columbia University Law School Professor John Coffee warned that the bill "seems likely to invite a significant amount of fraud" without substantial revisions to the crowdfunding language.
Even small business advocates and many venture capitalists were alarmed when Majority Leader Cantor and the House GOP began pushing a version of the JOBS Act that would have permitted unlimited investment in companies without any federal oversight, provided the transactions were conducted online.
"We think that the House version has gone overboard," said Frank Knapp, president and CEO of the South Carolina Small Business Chamber of Commerce, speaking the day after the House bill passed. "The same greed and fraud that gave us the Great Recession is going to come to Main Street if the House version of crowdfunding goes through."
Privately, Obama administration officials say that the unlimited investment provision would have broken their support for the bill. But publicly, the White House communicated a strong message of support, prompting a quick vote in the House. The Obama administration's statement blindsided unions and business groups who were critical of its provisions and created uproar in the Senate.
An aide to Senate Majority Leader Harry Reid (D-Nev.), who requested anonymity because of the sensitive nature of the negotiations, told HuffPost his boss called the White House to complain, saying the aggressive White House support had hampered Reid's ability to improve the bill, putting him in a bind with Democrats who didn't like the legislation and forcing him to choose between his loyalty to Obama and the commitments he had already made to interest groups. The administration's statement almost blew up the bill.
Trumka personally called senators to blast the bill, bypassing the standard lobbying channels to emphasize the intensity of his objections. "We'd believed it would slow down in the Senate," senior AFL-CIO lobbyist Bill Samuel told HuffPost. "That plan changed almost overnight because the White House endorsed it and the House held this big vote."
Liberal stalwarts like Sen. Dick Durbin (D-Ill.) and professed moderates like Sen. Mary Landrieu (D-La.) took to the Senate floor to criticize the bill, even as Reid rallied Democrats to get behind Obama.
Major institutional investors jumped into the fray. The California Public Employees' Retirement System, which manages a $235 billion pension fund, sent a letter urging Reid and Senate Minority Leader Mitch McConnell to ramp up fraud protections, voicing a concern for its own bottom line much as did the AFL-CIO.
And while McGeary still supports the bill, he says that he and other venture capitalists would have preferred stronger anti-fraud measures in the crowdfunding section, and thinks the exemption from independent accounting is too broad. The deregulation in the House version caused his firm to consider withdrawing support, but ultimately decided to stay on board.
Bigger players never wavered. On March 15, the National Venture Capital Association, the Silicon Valley Leadership Group and TechNet -- an umbrella lobbying organization representing major tech firms including Google, Apple and Yahoo -- joined the U.S. Chamber of Commerce and a handful of CEOs in a letter urging Congress to pass the House version.
Sens. Jeff Merkley (D-Ore.), Michael Bennet (D-Colo.) and Scott Brown (R-Mass.) responded to the fraud warnings with an amendment that greatly strengthened the investor protections surrounding crowdfunding. As a result of the amendment, raising money over the Internet can only be conducted through a third-party platform regulated by the Securities and Exchange Commission. Companies must also make basic financial disclosures to investors before seeking money.
And whatever their public stance on the Cantor version of the JOBS Act, the White House worked the Senate to consider both the Merkley-Bennet-Brown amendment and another, stronger investor protection amendment offered by Sens. Jack Reed (D-R.I.) and Carl Levin (D-Mich.). The Reed-Levin amendment secured 54 votes, 6 short of the number necessary to overcome a filibuster.
"We worked closely with key Democratic senators for some time on stronger investor protections for the capital formation provision we supported and would have preferred the Senate Democratic alternatives," Gene Sperling, Director of the White House National Economic Council, told HuffPost. "Fortunately, we were at least able to get 100 percent of Merkley-Bennett provisions for crowd-funding."
But the AFL-CIO felt that the process had been rigged against them. Reid, who pushed for passage on behalf of the White House, agreed to a 60-vote threshold to pass amendments, rather than a simple 51-vote majority. Nevertheless, with the gloss of investor protection applied, the bill passed the Senate by an overwhelming, bipartisan majority on March 22.
For consumer groups, the amendment was like putting lipstick on a pig.
"It is almost unbelievable that the Senate would rush passage of measures that will undermine transparency and accountability in the capital markets, and expose our families to a new round of fraud and abuse," said Lisa Donner, executive director of Americans for Financial Reform, a coalition of consumer groups and Wall Street watchdogs that organized in the wake of the financial crisis. "But that is what they have done."
Labor was furious.
"We are disappointed -- and angry -- that despite warnings from current and former financial markets regulators, law professors, institutional investors and consumer advocates, 73 senators voted for the cynically named 'JOBS Act,'" Trumka said.
"This is a vote against investors in the real economy and for Wall Street speculators. When the next bubble bursts, Americans will know who to blame."
Clarification: A previous version of this story referenced Michael McGeary as a partner with Hattery. He is a strategist.
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Posted: 04/ 5/2012 9:52 am Updated: 04/ 5/2012 11:39 am