New JOBS Act Rules Damage Job Growth | Commentary
President Barack Obama cares deeply about job growth. Yet one of his key initiatives — the JOBS Act — isn’t creating nearly as many jobs as it should be.
In 2012, Congress passed the Jumpstart Our Business Startups Act, which streamlines the process of funding new business ventures. I personally lobbied for the bill and proudly sat with the president when he signed it into law with broad, bipartisan support. Among other things, the legislation streamlines the application process for certain companies to go public, allows businesses to advertise to more investors and should ultimately enable crowdfunding.
So far, it has dramatically improved the process private firms use to go public. Our country saw the most initial public offerings last year since 2000, with 222 companies going public. And 2014 is keeping pace.
By fueling the expansion of new businesses, the legislation is creating countless new jobs, driving down unemployment.
Congress should be proud of its work. But unfortunately, the JOBS Act has also created some significant problems. In September, a provision kicked in which lifted the 80-year-old ban on “general solicitation” of investors through channels like email newsletters, public speaking engagements, and social media.
Capital is the single most important factor in driving emerging company job expansion. The general solicitation provision was intended to make it easier for individual wealthy investors to support companies in their earliest stages of growth.
Why? Because the Securities and Exchange Commission issued onerous new rules stifling this part of the act. Congress should be outraged.
The rules require companies engaging in general solicitation to provide proof that its investors meet certain qualifications. The accreditation requirements sound great in theory. But in practice, they discourage investment.
The vast majority of individual investors rely on either an income test or a net-worth test to become accredited. Income is reported on W-2s, K-1s and 1040s. Net worth is captured via third-party brokerage statements and credit reports that show liabilities.
Who wants to share their 1040s, brokerage statements and credit reports with college-age startup founders?
When confronted with demands for wide-ranging financial disclosure, many potential investors will simply choose not to bother.
Keith Higgins, who directs the SEC’s corporation finance division, has acknowledged these criticisms, but insists that the rules simply “demand new ways of thinking.”
Not so. Already, the pool of available capital is shrinking. According to TechCrunch analysts, “the number of angel deals in 2013 likely will not reach the 2012 peak.” New jobs and innovative products will simply not be created.
Imagine walking into a dealership to buy a Chevy with cash and having to provide extensive documentation to prove you can afford the car. That’s essentially how the new SEC rules affect investors.
Making matters worse, the SEC has now proposed regulations that would sentence many startups to death for failure to comply — even by honest mistakes — with filing requirements.
The rules would require multiple filings by the issuer — prior to, after and during — for a capital raise using general solicitation. If the issuer misses filing deadlines, or fails to comply with any of the new rules, the company could be banned from raising funds for a full year.
Creating and running a company presents a set of exceedingly difficult administrative challenges. Honest mistakes are inevitable, especially at nascent firms.
Startups are a critical source of jobs in this country. In fact, they’re the only driver of net job growth right now. Kauffman Foundation research shows that between 1977 and 2005, existing firms destroyed about a million net jobs a year. Meanwhile, first-year companies added about 3 million annually.
The president has repeatedly cited job creation as one of his top priorities for the remainder of his term. His Commerce secretary, Penny Pritzker, has echoed that commitment. During a recent visit to Silicon Valley, she drew a directline between innovation and job growth, boldly describing the area as a “dynamic . . . ecosystem that is envied not just across the United States but throughout the world.”
Yet the president’s team has taken the JOBS Act — the most important job stimulus bill in decades — and kneecapped it.
Lawmakers must call on President Obama to direct the SEC to fix its rules so that the JOBS Act can deliver on its promise to maximize job creation.
Joseph L. Schocken is president of Broadmark Capital LLC.