By: Italia Almeida
Legislation entitled Jump Start Our Business Startups Act (JOBS) passed the House of Representatives on Tuesday, March 27 with a majority vote . The JOBS Act loosens some of the restrictions of 2002’s Sarbanes-Oxley law and other strict regulations implemented in the wake of Enron and Worldcom scandals. The newly signed bill is also meant to ease the rules and regulations of initial public offerings in American markets.
The move from congress comes at an opportune time since the average number of companies with less than fifty million in annual sales that listed publicly dropped from 165 steadily each year between 1980 and 2000 to 33 between the years 2001 and 2011. The basic idea behind JOBS is for small caps to have an easier time raising capital and reducing compliance costs that can be a heavy burden on these types of companies.
The bill is not without controversy, as many critics, including some lawmakers and SEC employees, claim the rolling back on investor protections could increase perpetuations of financial fraud, and that the bill is unlikely to create any new jobs since its focus is on corporate governance and disclosures in IPOs. Other critics have expressed concern that a loosening of restrictions could lead to a number premature companies entering the market, leading to a bubble burst such as the dotcoms of the 1990s.
Unsurprisingly however, the deregulation is viewed as a good move according to most on Wall Street who disagree these concerns are likely to happen. According to Mark L. Lehmann of JMP Securities, it won’t be a bust, but rather “more high-quality companies accessing the market sooner.” Others on wall street contend that removing costly restrictions for many companies to go public means an overall gain for those companies, potentially resulting in job creation.
There is little doubt JOBS will make the markets more attractive to small firms, and create a more fluid system to raising equity for small cap companies. The bill has many major component such as one section that allows firms to “crowdfund” meaning firms can issue thousands of small shares of stock to thousands of investors. There are also far less regulatory compliance rules for companies under one billion in revenue, and it relaxes rules to make it easier for private companies to raise capital without going public, for example the limitation on number of owners has been expanded from 500 to 2,000.
All of these may see a more liquid access to equity for firms, but it is certainly a deregulation that may be at the expense of removing some investor protections. Instead of the JOBS Act the government may have been able to tackle the same problem by fixing the asymmetrical tax code that favors debt over equity, but during this recession it is unlikely that Congress was going to vote against any bill that had the word “jobs” in it.