Jumpstart Our Business Startups Act 2.0


startupBy Jeffrey Arsenault of Old Greenwich, Connecticut

This month of April marked the two year anniversary of the JOBS Act signed by President Obama back in April 5, 2012. It was enacted to encourage the funding of small businesses by reducing securities regulations as part of an effort to create jobs and strengthen the economy. And now it seems that the U.S. House Republicans are set on creating a JOBS Act bill version 2.0.

On April 9, 2014 Sarah N. Lynch of Reuters reported that “[l]awmakers in the U.S. House of Representatives are drafting measures to further ease regulatory obstacles for small companies…House Republicans hope to merge many of the proposals into a larger ‘JOBS Act 2.0’ bill, a follow on to the 2012 Jumpstart Our Business Startups Act.” However, critics of the move warn that it will only serve to reduce the already weakened protection that investors have.


According to Lynch, there are certain measures in the original 2012 bill, “such as a provisions allowing ‘emerging growth companies’ with less than $1 billion in annual revenue to file confidential draft IPO documents with the SEC” that went into effect automatically. However, other parts of the bill, “such as permitting companies to raise small amounts of money over the internet through crowdfunding platforms, have not yet taken effect because the SEC is still working to adopt final rules.” These delays, reported Lynch, have “frustrated many in Congress, and helped inspire a push for additional reforms to further reduce regulatory costs for small businesses.”


New Jersey Republican Scott Garrett, who chaired the hearing on April 9, said: “America’s start-ups and small businesses continue to encounter difficulties accessing U.S. capital markets to finance their operations… [t]he costs to these companies of going and staying public remains unacceptably high.”


“House Republican lawmakers…released a wave of seven JOBS Act 2.0 bills that seek to reduce state and federal regulatory costs for initial public offerings and smaller public companies,” wrote Ronald Orol of The Deal Pipeline. “However, Democrats expressed outrage over most of the bills at a hearing of the House Financial Services Committee, especially noting a loss of transparency and oversight.” He quotes Carolyn Maloney, D-N.Y., the second-highest-ranking Democrat on the panel who said: “I am concerned that we are in danger of tipping the scales too far in favor of the issuing companies and away from the investors…”


Massachusetts Democrat Stephen Lynch agrees, saying: “I am concerned the bills before the committee do not strike fully the right balance and may end up doing serious damage to investor protection… what we are talking about here is a zero-sum game. Reducing regulatory requirements… means that investors will have less information on which to base investment decisions.”


According to Lynch, some of the legislative proposals considered on April 9 were more likely to have bipartisan support than others. She pointed out that “[o]ne measure with support from Democrats and Republicans would correct what some say was an unintended error in the 2010 Dodd-Frank law by exempting advisers who provide investment advice to both venture capital funds and small business investment companies from SEC registration. Currently, an adviser to one of these types of firms is already exempt, but advisers who provide services to both kinds of firms are not.” New York Democrat Carolyn Maloney has expressed her opinion on today’s current rules, saying that they made little sense.


Other measures however had a more polarizing effect and divided lawmakers and outside experts. “The most divisive bill discussed Wednesday involves a plan to lower the threshold so that smaller public companies can be deemed well-known seasoned issuers’,” wrote Lynch. “This category affords companies certain regulatory benefits. One such benefit permits them to qualify for automatic shelf registration, a more relaxed and less costly process that allows companies to immediately raise a certain amount of money from securities deals and avoid an SEC review of the offering documents before the sale.”


According to Lynch, Columbia University professor of law, John Coffee, referred to this measure as “the ‘most radically deregulatory’ plan of the seven being discussed.” He estimated that it could, Lynch reported, “effectively block the SEC from reviewing the offerings of roughly two-thirds of publicly-listed companies.” Coffee has this to say on the matter: “It is a fairly radical step to deny the SEC’s staff any opportunity for a pre-offering review…It both invites misbehavior if an issuer knows it will not be subject to prior review and encourages costly litigation if errors are discovered later.” However, not everyone is in agreement with the professor. The vice president at the U.S. Chamber of Commerce’s Center for Capital Market Competitiveness, Tom Quaadman, took an opposing view. Lynch reported that, according to Quaadman, “only companies with a solid compliance record are generally eligible for special treatment as a well-known seasoned issuer. This would give businesses more flexibility to meet their capital raising needs.”


About the author:


Jeffrey Arsenault, Principal and Founder, Old Greenwich Capital Partners, LLC.


Mr. Arsenault has earned a reputation as an outstanding fund of funds manager, with a track record of superior risk-adjusted absolute returns. He founded Old Greenwich Capital Partners (“OGCP”) in 2005 to provide a unique access to an exclusive roster of outstanding managers. Mr. Arsenault leverages an extensive network of industry contacts developed over his 25 years of investment experience in the industry. His career history includes being a partner at Paradigm Capital, 13 years in Institutional Sales at Merrill Lynch, and various roles at CIBC World Markets and Gordon Capital. Jeffrey graduated from Boston University and remains highly involved in BostonUniversity’s Advisory Councils. In addition, he is a board member of the Stepping Stones Museum for Children.


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