Less than two years after the Dodd Frank Act added hundreds of pages of new rules for securities law and financial regulation more generally, we have new securities regulation of a decidedly deregulatory bent. President Obama signed the JOBS Act (the Jumpstart Our Business Startups Act) on April 5, 2012 and the results will immediately affect those who teach either securities regulation or corporations courses. In a series of posts that follow, Joan Heminway and I will address key aspects of the new legislation including : (1) amendments to Section 12(g) of the Securities Exchange Act of 1934 raising the threshold for this gateway to reporting status from 500 shareholders of record to 2000 shareholders of record or 500 unaccredited shareholders; (2) the “on-ramp” which will free most companies doing an Initial Public Offering from having to comply with a whole series of obligations of reporting companies for up to five years after their public offering; and (3) crowdfunding which seeks to facilitate capital raising by permitting issuers to raise up to $ 1 million without having to comply with the core provisions of the Securities Act of 1933. This post provides a brief introduction and a bit of history underlying the act’s development and passage.
In a period in which the news has brought us numerous examples of Republicans and Democrats not able to agree on legislative policy, it is surprising that securities regulation has been a point of bi-partisan agreement in an election year. The JOBS Act received almost 400 votes in the House and passed the Senate 73-26. What explains such success? In part, it is the opening left by the unpleasantness of the 2011 debt ceiling and budget fiascos; both parties had some incentive to show they could agree on something. Nurturing capital raising was easily subsumed within the label of job creation which remains the more salient tag line for this election cycle. And never underestimate the value of a catchy acronym in the passage of legislation. When six different pieces of legislation, with sometimes long and nondescript names, got bundled within a single bill that could be described as the JOBS Act, prospects of passage improved. It probably also mattered that securities regulation was relatively unimportant to legislators, as compared to the debt ceiling or even changes to transportation or aviation regulations, so that once the bill gained momentum, serious opposition could not gain traction.
The timeline for the bill begins in the aftermath of the passage of Dodd Frank in 2010 and the success of Republicans in elections later that year, but the intellectual origins date back much longer. When Republicans gained control of the House and its committees, they held hearings on a series of deregulatory bills in securities, including crowdfunding, which in some sense reflects the ideas of microfinancing that have grown around the world in recent times. Congressman Darrell Issa, chair of an important committee, and SEC Chair Mary Shapiro exchanged letters in the spring of 2011 with the congressman pushing for a series of deregulatory changes and the SEC’s head setting out a series of possible agency actions. One of the issues the congressman raised related to Facebook which, in the winter of 2010-2011, explored ways to stay longer in its unregulated status before making an IPO. In addition there had been discussions ever since the bursting of the dot.com bubble at the turn of the century that the United States was suffering from a decline in its share of IPOs, an issue that had the attention of New York’s senators. In the fall of 2011 a private task force, with strong Silicon Valley representation, proposed the on-ramp. President Obama came out in support of the reform effort. Although institutional groups and Mary Shaprio raised concerns about the changes, the bill was on its way to passage. Opponents of the bill could not get the supermajority 60 votes necessary to block consideration of an alternative bill in the Senate, achieving only amendments to the crowdfunding provisions that added additional fraud protections for issuers and platforms.
Thus we have a bill that provides the first change in the public/private line of 1934 Act in almost half century, a dramatic bifurcation of regulation for 1934 Act reporting companies, and new freedom for smallest issuers in raising funds. Details will be discussed in subsequent posts.
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