Most growing businesses need to raise capital periodically in order to hire new workers, purchase new equipment, develop new technologies, or build new plants. Ideally, a company can choose from a wide range of capital sources and types — public securities or private placements; debt, equity, or hybrid — depending on its circumstances. Unfortunately, today’s regulatory environment has dramatically raised the cost of public issuance and unnecessarily restricted private ones. This combination impedes access to capital and costs our economy growth and jobs.
Congress has a rare opportunity both to lower the cost of issuing public securities and to expand opportunities to raise capital privately. The JOBS Act, which passed the House of Representatives with a large bipartisan majority, would do both. This week the Senate should pass it and send it to President Obama who has promised to sign it into law.
My state of Pennsylvania is home to many rapidly growing companies. Some of these companies want to go public but cannot afford the SEC’s compliance regime. Since the enactment of Sarbanes-Oxley, the cost of going public has increased while the number of IPOs has correspondingly declined. This is particularly disturbing since 90 percent of job creation occurs after companies go public.
Saladax Biomedical from Bethlehem, Pa., saves and improves lives by developing cutting-edge diagnostic tools for oncology and Alzheimer’s patients. While it would like to go public, the expensive and lengthy process hasn’t been worth the price.
The “On-Ramp” legislation included in the JOBS Act would reduce the cost of an initial public offering by phasing in some of the costliest securities regulations, including aspects of Sarbanes-Oxley, for companies with less than $1 billion in sales and $750 million in market float. Passing the JOBS Act would facilitate Saladax’s access to new capital and, in turn, its ability to expand, hire new workers, and even develop life-saving tests and treatments.
Other companies want to stay private while they grow, but the current, archaic shareholder limitation prevents them from raising the necessary capital from additional shareholders.
In Pennsylvania, the popular grocery and fuel station Wawa is one such company. Wawa would like to raise capital to continue to grow while remaining private to preserve its 100-year-old character. A private placement of stock could meet their needs but might push the company over the 500 shareholder threshold that triggers public-company regulations. This restriction limits the growth options for Wawa and others.
The JOBS Act would alleviate this outdated burden on growing companies. By raising the shareholder limit to 2,000, small- and medium-sized businesses will have greater access to privately raised capital, and greater opportunities for growth.
Despite the overwhelming bipartisan support for the JOBS Act, some senators and the Securities and Exchange Commission chairman want to weaken this package dramatically in the name of investor protection. Among other things, they have suggested limiting the companies that can benefit from, and the amount of regulatory relief provided in, the “On-Ramp” legislation. They have also called for a much lower shareholder limit for private companies than that of the JOBS Act.
Their efforts to water down the JOBS Act are not justified
The JOBS Act seeks to help a relatively small universe of growing companies. The “On-Ramp” section to facilitate IPOs, for example, would apply to no more than 15 percent of all public companies and only 3 percent of total market capitalization. Nor does the On-Ramp Bill permanently exempt anyone from even the most onerous SEC regulations. It merely gives small- and medium-sized companies up to five years to grow into the most expensive regulations.
Second, the bill’s opponents implicitly assume that investors are helpless, and must depend on regulators to force issuing companies to provide essential information. This is not true. Investors can decide which disclosures they want to require. For example, the “On-Ramp” bill allows growing companies to forgo expensive external audits mandated by Sarbanes-Oxley for up to five years, but that doesn’t preclude investors from insisting on those audits if they think the information is important. Investors can manifest their disclosure and auditing preferences by allocating more capital to companies that provide optimal information.
Third, the SEC has been studying the possibility of raising the private company shareholder limit for years. In 2009 the SEC’s Advisory Committee on Small and Emerging Companies recommended that the threshold be increased to as many as 2,000 shareholders with employees exempted. The JOBS Act merely does what the SEC has failed to do all these years.
Finally, these recommendations strike at the heart of what the JOBS Act aims to do: Create jobs. If we weaken the proposed reforms, they will not spur the growth and job creation that is the purpose of this important legislation.
We dodged a bullet yesterday when Democrats tried to pass a substitute amendment that watered down the JOBS Act dramatically, falling short of the 60 votes they needed. But instead of moving straight to an up or down vote on final passage, Majority Leader Harry Reid shut down the Senate floor to reassess his options. There is still a possibility the Democrats will offer another amendment aimed at weakening the JOBS Act — one that only requires a simple majority.
The JOBS Act represents a rare and precious opportunity for Congress to come together and encourage job creation in a bipartisan way. One would think that would be reason enough to put politics aside.