Despite concerns raised by some Democrats, the Senate today cleared legislation designed to make it easier for small businesses to raise capital.
“We will rue the day that we rammed this through the House and Senate,” Senate Majority Whip Dick Durbin (D-Ill.) said of the bill, adding that it rolls back stock disclosure requirements and holds the seeds of future fraud.
“We are about to embark upon the most sweeping deregulatory effort and assault on investor protection in decades,” Sen. Carl Levin (D-Mich.) said.
“If we pass this bill, it will allow vast new opportunities for fraud and abuse in capital markets,” Levin continued. “Rather than growing our economy, we are courting the next accounting scandal, the next stock bubble, the next financial crisis”
The bill passed 73-26 and now goes to the House, which is expected to accept an amendment offered by Sen. Jeff Merkley (D-Ore.) that would require crowdfunding portals, including the Internet, to provide investor protection, including investor education materials on the risks associated with small issuers and illiquidity. The Merkley amendment, approved 64-35, was co-sponsored by Sens. Michael Bennet (D-Colo.) and Scott Brown (R-Mass.)
Durbin and Levin were two of several Democrats who sought to have a raft of consumer protections included in the bill, but their efforts were defeated Tuesday when the Senate voted against a their proposal 55-44. Sixty votes were needed to approve the amendment.
Levin said he thought President Barack Obama’s endorsement of the bill — formally known as the Jumpstart Our Business Startups Act, and approved by the House 390-23 earlier this month — came too soon.
“I think they acted prematurely and it had a impact, which was a negative impact,” Levin said.
Senate Democrats tried to draft their own version of the measure, but decided to take up the House bill after the overwhelming House vote, the White House endorsement and intense criticism from House and Senate Republicans.
The Senate rejected by voice vote today an amendment from Sen. Jack Reed (D-R.I.) that would have counted “beneficial shareholders” as part of the shareholders of record of a company. The move to hold a voice vote, rather than a recorded vote, reflected the likelihood that Senate Democrats did not have the votes needed to pass the proposal and leaders did not want to put their Members on the record on a failing vote.
The bill raises the shareholder of record trigger for mandatory registration with the Securities and Exchange Commission from 500 under current law to 2,000. Many companies have a relatively small number of formal shareholders of record, such as massive brokerage houses, which hold shares of a company for multiple individual beneficial owners.
Supporters of the Reed amendment argued that without it, the bill preserves a loophole that companies could potentially exploit to attract an unlimited number of investors without going public.
“It can be gamed,” Durbin warned.
Opponents of the measure, including the U.S. Chamber of Commerce, argued against that the change because it changes how businesses are currently structured.
“First, by requiring changes to this definition, companies and their owners may be forced to accept ownership or control structures that are not in the best interests of a business,” the Chamber said in a letter. “Second, Senator Reed has stated that SEC should be given the ability to clarify important points, yet the reason why the underlying legislation is necessary in the first place has been the inability of SEC to update investment requirements and keep them current. Third, this mandate would drive up costs for all involved in capital formation, with the costs ultimately being borne by investors. ... The Chamber strongly opposes this amendment and may consider including votes on, or in relation to, this amendment in our How They Voted scorecard.”
The JOBS Act passed primarily on the strength of GOP support — 46 Republicans voted for the measure along with 27 Democrats. All 26 who opposed the bill are Members of the Democratic Conference.