On Thursday, April 5, 2012, President Obama will sign into law the Jumpstart our Business Startups (JOBS) Act. The new legislation eases the financial disclosure burden of startup companies that wish to raise capital through public offerings of stock. Opponents warn of the dangers that could arise from a lack of financial disclosure. What’s more, the law may do little to create jobs.
Lowering requirements for raising capital
When a company needs to raise capital it can borrow (debt), seek funding from investors by selling stock (equity), or it can do a combination of both strategies. When it comes to issuing stock, however, the requirements can be onerous, especially for cash-strapped small companies. Current regulations require that companies register with the Securities and Exchange Commission (SEC) when they want to issue an initial public offering (IPO) and when their private investor base reaches certain thresholds.
That’s all about to change this week when the president signs into law the Jumpstart our Business Startups (JOBS) Act. The new law will decrease the compliance and reporting requirements for business startups. It is expected that the result will be more business development and job creation.
Emerging growth companies
Maria R. Gonzales reported on the new law in her March 29, 2012 article for U.S. Fed News Service titled, “Rep. Cuellar Votes For Bipartisan Jobs Bill.”
According to Gonzales, the law targets companies with less than $1billion in revenues and defines them as “emerging growth companies,” a new category of issuers of IPOs. “Studies have found that a large part of small-business growth and job creation occurs after the company becomes publicly traded, which this measure allows to happen easier with appropriate reporting requirements,” Gonzales added.
Items in the law
With an acronym like JOBS, you would think that the primary workings of the law would involve funding, developing, or outright creating jobs. No, the JOBS Act is actually concerned with making it easier for companies to raise capital before they have to register with the SEC and then comply with that institution’s reporting and disclosure requirements.
The JOBS Act will allow small companies to:
- Run advertisements to attract new investors
- Sell up to $50 million in IPO shares before having to register with the SEC
- Wait until they have 1,000 shareholders instead of the current requirement of 500, before registering with the SEC
- Engage in “crowdfunding,” a practice of pooling investor money from a wide network of people; usually conducted over the Internet
The world economy is still straining to recover from the debt debacle that was the 2008 financial meltdown. Is it possible that the JOBS Act will open the floodgates to a similar meltdown in equity funding? Many think that it might, including consumer advocate Ralph Nader who went so far as to ask President Obama to veto the legislation. Pete Kasperowicz outlined Nader’s objections to the law in his March 29, 2012 post for The Hill titled, “Nader asks Obama to veto JOBS act.”
Nader pointed out that the legislation does nothing for jobs, focusing instead on helping companies with upwards to $1 billion in revenues, which he maintains, “are not small businesses.” Moreover, by loosening reporting standards, investors and consumers are placed at risk.
“Nader also argued that companies will likely use accounting gimmicks to help keep their apparent size below the thresholds under the bill, and said language meant to make it easier to invest in small companies could end up burning small investors,” Kasperowicz said.
But will the JOBS Act create jobs?
Everyone seems to assume that more business startups will mean more jobs created. No one has produced any evidence to back up that assumption. Zachary A. Goldfarb tracked reaction to the Act in his March 26, 2012 article for The Washington Post titled, “Jobs Act: White House, Democrats at odds over Obama-backed pro-business bill.” Goldfarb noted that while Republicans refer to the Act as a “jobs bill,” Democrats, on the other hand, refer to it as an “IPO” bill.
As for creating jobs, Goldfarb quoted AFL-CIO President Richard Trumka who said that the bill “will do nothing to create good jobs and stabilize the U.S. economy. Instead, it will deregulate Wall Street—voiding investor protections put in place after Enron and the 2008 financial crisis.”