Congress approved legislation Tuesday intended to spur investment in small businesses and help them access the capital markets, despite criticisms that it would weaken audit safeguards and investor protections.
The Jumpstart Our Business Startups Act received strong bipartisan support and backing from the Obama administration as a way to improve job creation at small businesses. The measure passed the House for the second time on Tuesday, this time by a vote of 380-41. After the House passed the legislation earlier this month, the Senate took it up and approved an amendment intended to add some protections for investors in so-called “crowdfunding” ventures. The Senate then passed the JOBS Act last week by a vote of 73-26 and sent it back to the House (see Senate Passes JOBS Act for Small Business). The bill will now go to President Obama for his signature.
“Today, the House voted to send the bipartisan JOBS Act to the President’s desk for his signature and deliver real results for our nation’s small business owners, entrepreneurs and innovators,” said House Majority Leader Eric Cantor, R-Va., who had introduced the package. “Both parties in Congress, the President and entrepreneurs like Steve Case came together on this bill that will increase capital formation and pave the way for more small-scale businesses to go public and create jobs. The bipartisan JOBS Act represents an increasingly rare legislative victory in Washington where both sides seized the opportunity to work together, improved the bill and passed it with strong bipartisan support. We should build on this momentum going forward, and use the opportunity provided by the Small Business Tax Cut in April, so we can continue to help small businesses and job creators in this country to grow and hire.”
The legislation unites a variety of bills that had made progress in Congress in the past, but until now had not been signed into law (see Congress Cooperates on Small Business Jobs Bills). Among them, the bill aims to reduce the costs of going public by giving companies a temporary reprieve from certain Securities and Exchange Commission regulations, phasing in the regulations over five years to allow smaller companies to go public sooner. The bill would also create a new category of issuers called emerging growth companies, which would retain that status for five years or until they exceed $1 billion in annual gross revenue or become large accelerated filers. Another provision would remove an SEC regulatory ban preventing small businesses from using advertisements to solicit investors. The bill also removes SEC restrictions on “crowdfunding” so entrepreneurs can raise equity capital from a large pool of small investors who may or may not be considered “accredited” by the SEC. Companies would be able to pool up to $1 million from investors without registering with the SEC, or up to $2 million if the company provides the SEC with audited financial statements.
Another provision makes it easier for small businesses to go public by increasing the offering threshold for companies exempted from SEC registration from $5 million to $50 million. Another provision removes barriers to capital formation for small companies by raising the shareholder registration requirement threshold from 500 to 1,000 shareholders.
Despite the bipartisan support, the bill provoked warnings from SEC chair Mary Schapiro that it would weaken key investor protections and make it easier for fraudsters to dupe investors. The Consumer Federation of America and the AFL-CIO have also warned about the weakening of investor protections. Some Democratic senators tried to amend the bill to raise the exemption levels. Critics have pointed out that the $1 billion revenue threshold for emerging growth companies would encompass the vast majority of companies that have gone public, not just small businesses.
The Center for Audit Quality, the American Institute of CPAs and the Council of Institutional Investors have also warned about the weakening of Sarbanes-Oxley rules for audits of internal controls by exempting the new category of emerging growth companies from the audits for five years (see Small Business Bill Would Weaken Audit Protections). Under the Dodd-Frank Act of 2010, only companies with a public float of less than $75 million were exempted from Sarbanes-Oxley audits of their internal controls. In the JOBS Act, the market capitalization level would rise to $700 million. Emerging growth companies would be exempt from the internal control audits for five years, or until they reached that $700 million market cap. Instead of three years of audited financial information, emerging growth companies could go public with only two.
“Sadly, many people in official Washington seem prepared to jettison the interests of investors without reason as would occur in the proposed JOBS legislation, which as currently written would unnecessarily savage important barriers against fraud and manipulation of markets,” said former SEC chairman Richard Breeden at a Public Company Accounting Oversight Board meeting last week (see PCAOB Hears Pros and Cons of Audit Firm Rotation).