Access to capital is one of the biggest issues facing small business today. The JOBS (Jumpstart Our Business Startups) Act, which was overwhelmingly passed in the House Thursday, is a package of 6 bills intended to create more access to capital for entrepreneurs and small business owners. But does it accomplish what it intended?
In this case, I think that the overall Act is quite positive and while not every aspect will directly impact small business, it is a great move in the right direction. Below are my thoughts on each of the Act's components and their effect on small business.
The Best for Small Business:
TITLE II- ACCESS TO CAPITAL FOR JOB CREATORS
This legislation removes regulation prohibiting small businesses who are offering securities under Regulation D (which provides certain exemptions from having to register the securities with the SEC during capital raising) from using advertisements to solicit investors. This is particularly meaningful because the definition of an advertisement under the Reg D exemption was very broad and encompassed almost all forms of communication. This is a fantastic step in the right direction and given the social world we live in, where information is spread through constant connection, it is a no-brainer in my opinion. I believe that this component could be made even stronger by reducing some of the filing and paperwork associated with Reg D offerings.
TITLE III- ENTREPRENEUR ACCESS TO CAPITAL
This allows entrepreneurs to "crowdfund" by raising equity from groups of non-accredited investors. Since Americans can buy lottery tickets and gold-plated toilets if they choose, I always felt it was unfair to not let them invest their money as they see fit. However, it does have a probably prudent measure of placing some limits on the amount raised ($1 million without having to register with the SEC or double that if audited financials are provided). On the other hand, it does limit the amount any investor can contribute to $10,000 or 10% of income, the former of which I find too stringent. But this title does provide a strong win for small business, especially in the information-enabled world we currently live in.
TITLE VI- CAPITAL EXPANSION
This increases the number of shareholders that can invest in a community bank without having to comply with extra regulation. Anytime cumbersome paperwork is avoided, I think there is a win. Plus, with more capital available for community banks, there should be some trickle down into the local small business economy. While this isn't the strongest small business legislation of the bunch, there should be some positive effects that make their way down to Main Street.
The Rest:
TITLE V- PRIVATE COMPANY FLEXIBILITY AND GROWTH
This increases the number of shareholders a company can have (to 1,000 from 500) before being forced to register as a public company. This theoretically reduces regulation, but 500 shareholders is a whole lot of shareholders, much more than most mid-size businesses have, let alone a small business (and frankly, 500 shareholders would be quite complex to manage). This is an unnecessary regulation in my opinion that I believe that won't have much effect in general.
TITLE I- REOPENING AMERICAN CAPITAL MARKETS TO EMERGING GROWTH COMPANIES
This is intended to reduce the cost of going public by creating a new class of companies with revenue under $1 billion as "Emerging Growth Companies", which phases in SEC regulations over time. While I think less SEC regulation is a good thing, as it is expensive, onerous and difficult to comply with and this title will positively impact many middle-market businesses, it is an irrelevant measure for well over 90% of all small businesses in this country. Most small businesses don't have enough revenue (let alone systems and financial controls) to become public companies. There is more on that below. Plus, I think it would be stronger to entirely repeal Sarbanes-Oxley (but that still wouldn't affect the small business community).
TITLE IV- SMALL COMPANY CAPITAL FORMATION
I find this to be the most useless of the 6 bills that comprise the JOBS Act for small business. It is meant to make it easier for businesses to go public by increasing the threshold for SEC registration exemptions from $5 million to $50 million worth of securities sold within a 12-month period. Here's the problem with this: being an effective public company means having enough stock (float) in the market for the market to be able to trade it efficiently. It also requires having research coverage and traders who make a market in the stock. Stocks that "trade by appointment" are not meant to be public, so encouraging smaller businesses to pursue this route is not a good business decision. Moreover, again the greater majority of businesses aren't anywhere near organized enough or large enough to even think about going public.
Overall, steps to increase access to capital and decrease regulations are both welcome measures; however, once again, there is a predisposition for regulators to miss the point when it comes to what a small business is and what would truly help it. You can read the overview of and learn more about the JOBS Act here or get into all of the nitty-gritty here.