In a rare show of bipartisan decisiveness, Congress and the president joined forces this spring to pass the JOBS Act. There's a lot of talk about what this bill does and what it will mean for America's small business owners, entrepreneurs and the broader economy.
At its core, the JOBS Act is a collection of provisions designed to help growing companies get the capital they need to thrive. This is a goal all of us should support. As a number of recent studies have shown, young, high growth businesses are the primary drivers of net new job creation in our country. And historically, more than 90 percent of the jobs created by high growth businesses were created after those companies went public.
Yet in recent years, a variety of regulatory, market, and other changes led to a dramatic decline in the number of new initial public offerings, or IPOs. Smaller IPOs have virtually disappeared, and the average amount of time it takes for a company to get to an IPO has grown significantly. This means less job creation, more companies that "exit" by getting sold to (and often absorbed by) a larger company, and a harder, riskier path for entrepreneurs and their employees.
No single piece of legislation can solve the challenges facing our economy, ensure growing companies can access the capital they need, or reverse the forces that led to the decline in IPOs. But the JOBS Act contains an array of solutions that, together, will help growing companies keep growing.
The most novel provision in the JOBS Act is generally referred to as "crowd-funding" -- something Steve Case calls "the democratization of access to investment." In brief, it will let private companies raise capital through either a registered broker or a registered "funding portal" (something that still needs to be defined by the SEC) -- expanding the pool of potential backers from a small circle of wealthy investors to anyone accessible by text, email or a social network. The provision isn't effective until the SEC adopts rules to govern it, and it's far from clear when the SEC will write those rules or what they will say. As a result, there's still a lot of uncertainty about what the future holds on this front.
The JOBS Act also breathes new life into a rarely used vehicle for raising capital, referred to as Regulation A. It creates a new set of rules (commonly referred to as "Regulation A+") that will let companies sell up to $50 million of their equity annually to a broad base of potential investors. If this new path is successful, it could re-invigorate small-cap IPOs and leave more capital in the hands of growing companies to invest in new products, new services, and new jobs.
For companies that want to go for a "traditional" IPO, the JOBS Act makes that path smoother. Companies with less than $1 billion in annual revenues will have five years to ease into a number of accounting and other disclosures. This means they can spend more time and money building their business, and less paying accountants and lawyers to help prepare disclosures that aren't as important to investors. They can also submit their preliminary IPO documents to the SEC confidentially, which means they can get ready for an IPO -- and decide whether they want to proceed -- before they have to disclose sensitive business information. And they will be able to "test the waters" with potential investors, which will help them assess interest and decide how to price and size an offering.
Not every company will elect to turn to crowd-funding, Reg A+ offerings, or IPOs. For those who want to continue to raise capital through private offerings to accredited investors, the JOBS Act adopts a more flexible framework for advertising the offering and soliciting potential investors. This not only will make life easier for companies and funds going through a private placement, it will help investors become aware of more opportunities and help companies and funds find the best investors to fund their growth.
The JOBS Act also eases a set of rules that had forced -- or at least threatened to force -- larger private companies to take on many of the burdens of being a public company. Until the JOBS Act was passed, companies with more than 500 shareholders had to register with the SEC and file public periodic financial reports. The JOBS Act changes this to require SEC registration only if the company has more than 2,000 shareholders or more than 500 "unaccredited investors." This gives companies greater control over whether and when to go public.
Like the crowd-funding provision, many of the JOBS Act's changes will only be usable once the SEC has adopted rules implementing them. In addition, it's too early to say how investors and investment banks will respond to the new rules. As a result, it's too early to tell exactly what the JOBS Act will mean over time.
But the JOBS Act at least has initiated a shift from heavier regulation to smarter regulation -- regulation that strikes a good balance between protecting investors and stimulating a more robust, fluid, and effective capital market. Over time, these changes should help growth companies, their investors, their employees, and the broader economy thrive.
Mary Dent, General Counsel for Silicon Valley Bank and head of the company's government affairs initiatives, hosted an online panel discussion today to discuss how the JOBS Act can help small businesses grow.
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