The JOBS Act: A Win for Startups, Venture Capital, and the Economy

Posted by | March 15, 2012

In 2002, in the wake of the dot-com era and a number of major corporate and accounting scandals, the Sarbanes-Oxley Act was passed. The federal law set new or enhanced standards for all U.S. public company boards, management, and public accounting firms. At that time, we needed stricter financial governance to rebuild public confidence in the nation’s securities markets.

Ten years later, we find ourselves at the pinnacle of that pendulum swing, with excessive regulation and capital requirements deterring fast-growing, venture-backed companies from going public and accessing capital markets. Until now. A new bill moving through Congress may soon loosen these regulations.

Last week, in a rare act of bipartisanship, the House passed the Jumpstart Our Business Start-ups (JOBS) Act by a margin of 390-23. The bill now moves to the Senate, where it will almost inevitably be modified as differences of opinion are reconciled. But even with compromises, this bill would fundamentally transform the regulatory environment for small and mid-sized startups and could allow more entrepreneurs to scale their companies and hire employees – the idea behind the JOBS acronym and the reason for the bill’s wide-ranging support.

In case you missed the details, here’s the executive summary of the new rules for small businesses that passed in the House. The JOBS Act would:

  • Increase the number of allowable shareholders in a non-public company from 500 to 1000.
  • Allow entrepreneurs to raise money from a pool of smaller investors, i.e. crowdsourcing.
  • Create a category for emerging growth firms (defined as companies with revenue under $1 billion) that receives more lenient regulatory and fee requirements from the SEC.
  • Allow entrepreneurs to advertise for investors.
  • Allow companies to sell up to $50 million in shares without filing SEC paperwork, up from the current limit of $5 million.
  • Increase the number of allowable shareholders in a community bank from 500 to 2000.

“This bill makes it easier for startup businesses to happen again in America,” said House Majority leader Eric Cantor after the bill passed in the House. And to a large extent, that’s true. Supporters of the bill point to regulations like Sarbanes-Oxley or Dodd-Frank, which burden small companies with the costs arising out of a need to prevent the crooked accounting of Enron and others as well as better police the financial shenanigans that triggered the Great Recession.

Critics of the bill argue that these regulations were enacted to prevent downturns like the Great Recession or the dot-com crash that could be caused by anybody. The investors, regulatory experts, and analysts pushing against the bill seek to protect investors from preventable disasters and say that loosened regulations create instability that could ultimately harm the economy more than help it.

As a company that has built a business by partnering with startups and growth stage companies, we see the bill’s appeal. Access to public markets offers significant flexibility to companies in this stage of development, expansion, and commercialization. While a change in regulation may yield some risk, any entrepreneur would tell you that without risk, a business may never get out of the garage.

Small businesses are the cornerstone and engine of our economic growth. This bill gives the startup and small business community more flexibility when considering financing options. That flexibility can have positive trickle-down effects on job creation, and in turn, the economy.

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