President Obama signed into law on Thursday the Jumpstart Our Business Startups Act, also known as the JOBS Act, which lowers the regulatory and auditing barriers for companies to seek funding and enter the capital markets.
Congress passed the bill late last month with strong bipartisan support, despite opposition from several investor groups and accounting organizations warning that the bill would weaken auditing safeguards and investor protections (see Congress Passes JOBS Act for Small Business).
"I've always said that the true engine of job creation in this country is the private sector, not the government," Obama said in a speech in the White House Rose Garden to mark the signing of the bill. "Our job is to help our companies grow and hire. That's why I've cut taxes for small businesses over 17 times. That's why every day I'm fighting to make sure America is the best place on Earth to do business."
The bill packaged together several bills that had made progress in several congressional committees in the past year, but not been enacted into law until now. It was introduced by House Majority Leader Eric Cantor, R-Va., who praised the bill when it was signed into law.
“Today, I was proud to join my colleagues and members of the business community as the President signed the bipartisan JOBS Act into law,” he said in a statement. “This bipartisan package will spur job creation by removing outdated regulations and increasing access to capital so that small businesses and startups can grow and create jobs. The bipartisan JOBS Act is the culmination of hard work by both parties in Congress, the White House and the business community, especially Steve Case. And, it shows we can set aside our differences and work together on areas of common ground to grow the economy and get people back to work."
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.
Under the bill, there also would be no requirement to comply with new or revised financial accounting standards for public companies from the Financial Accounting Standards Board until the standards were also applicable to private companies.
Other provisions of the bill would make it easier for financial analysts for the financial firms that underwrite initial public offerings to issue reports on the companies.
Brokers and dealers would be able to arrange for communications between securities analysts and potential investors in an emerging growth company that was planning to go public and securities analysts would be able to participate in communications with the management of an emerging growth company alongside people associated with the brokers or dealers working for the company.
Another provision would allow companies to work out disagreements with regulators such as the Securities and Exchange Commission outside public view before they go public. That provision might have allowed companies like Groupon to hide their accounting issues before going public.
The bill would also weaken Dodd-Frank Act provisions giving shareholders a say on executive compensation. There would be no requirement for a shareholder “say on pay” for emerging growth companies.
Despite these drawbacks, there was praise for the bill being signed into law from some quarters. Slava Rubin, the CEO of the global crowdfunding site Indiegogo.com, represented the crowdfunding industry at the White House for the signing of the bill and was invited to participate in a private roundtable discussion before the bill signing as well. He called the signing of the bill “an incredible day for America.”
“This country was built on entrepreneurship and now every American will have an equal opportunity to stimulate tomorrow's new companies and job growth," he added.