The JOBS Act, passed with overwhelming bipartisan support in the Senate and House and signed this afternoon by President Obama in a Rose Garden ceremony at the White House, is important for entrepreneurs and for the nation overall. Here's why.
Although the main event for me is Revolution - investing and mentoring companies that can change the world - over the past year I have been moonlighting on the side, focused on public policy related to entrepreneurship. I have co-chaired the National Advisory Council on Innovation & Entrepreneurship, and also been a member of the President's Council on Jobs & Competitiveness, chairing the subcommittee focused on high-growth companies.
The Council's work highlighted the important role of entrepreneurship in building America into the world's leading economy, and that critical young, high-growth companies have been the primary job creators. Indeed, 40 million jobs have been created by new businesses during the last three decades, and the Kauffman Foundation reports that accounted for nearly all the net new jobs created in the United States during that period. But there's been a dip in this activity recently, with startups down 23% since 2007. There are many reasons for this, as the report we presented to the President in October indicated. But access to capital was critical, and that's why I've spent time in recent months helping to build bipartisan support for the JOBS Act.
In fairness, some companies, in some sectors, in some regions, are doing fine. Social media companies in Silicon Valley, for example, have attracted the interest of a lot of investors. But the vast majority of American high growth companies are not tech companies - and are not in Silicon Valley. And many of those entrepreneurs struggle to raise capital; they are "off the beaten path" for the traditional venture capital investors, but not yet stable enough to get a bank to lend them money. The goal of the JOBS Act is to provide better access to capital for a wide range of companies, in a variety of sectors and regions - and provide new options for accessing capital at each stage of a company's lifecycle.
The JOBS Act has several key components, including legalizing crowdfunding for early stage companies, creating a transitional "on ramp" for Initial Public Offerings (IPOs) for growth companies, and updating a number of rules that haven't changed in decades (including rules that relate to soliciting investors, limiting the number of investors in private companies, etc). Let me explain each in turn:
Crowdfunding can become an important source of startup capital. The ability to use the Internet to raise small amounts of money from a large number of people has been pioneered by companies that are focused on helping people fund projects, like documentaries. But up until now, it has not been possible for crowdfunding intermediaries to raise money for companies. (Somewhat perversely, you have been permitted to sell 100% of your business by listing it on a site like eBay, but it was illegal to sell just 1%.) I expect crowdfunding to be particularly helpful to the entrepreneurs who often get overlooked because they are not located in the cities where venture capitalists tend to cluster or to the entrepreneurs who live in those cities, but aren't able to break through and get noticed in what is all too often a somewhat clubby "who you know" type business.
Obviously, any new approach has some risks. Legislators were concerned about the risks of unsophisticated investors being "scammed" and that's why the Senate amended the crowdfunding legislation to build in safeguards. The companies that plan to offer crowdfunding have started to work on their own self-regulatory standards and practices, and the SEC will also be putting rules of the road in place in the months ahead. I am confident that in the end investors will be protected, while entrepreneurs will have a new source for capital.
The JOBS Act also includes an important temporary “on-ramp” to make it easier for smaller firms to go public. Historically, many of America's most successful companies went public a few years after they got started (Apple, for example, did their IPO just four years after its founding). Venture capitalists invested to get the companies started, and then as they expanded, they typically considered a public offering. In the 1990s, more than 80% of the IPOs were for offerings of less than $50 million, for these young, fast-growing companies. That number has dropped to 20% recently. Companies are going public later in their lifecycle, or not at all, as investors often tire of waiting and force entrepreneurs to sell companies so they can recoup their investment capital. That's a problem for the overall health of our economy, as when companies go public, job growth typically accelerates (According to IHS Global Insight, 90% of job creation happens after a company goes public), but if a company gets sold, all too often job growth decelerates.
The IPO on ramp will enable more companies to consider an IPO by lowering their initial compliance costs. These companies will still be subject to the vast majority of the disclosure requirements, but if they meet the "emerging growth company" criteria they will have some time (either five years, or until they exceed $1 billion in revenue or $700 million in market value) to comply with all of the Sarbanes-Oxley provisions. This in essence says these young emerging companies should be treated differently from our nation's largest companies (GE, Walmart, etc) for an initial period of time, but significant requirements remain in this on ramp phase. Of course, many companies will decide not to go public, for various reasons but at least the JOBS Act creates an option for them to consider, and an option that has the potential to fuel growth, expansion and job creation.
While some worry about the risks to investors of this temporary reduction in securities compliance, I believe a reasonable balance has been struck in the law, and I'm confident that as the JOBS Act is put into practice, the combination of the SEC rules, the governance responsibilities (and liabilities) that still exist for management teams and boards of directors, the reputations that intermediaries such as IPO bankers will seek to protect, and the information transparency made possible by the Internet will all contribute to ensuring that investors are adequately protected, while also being given the opportunity to invest in a new class of emerging companies with high growth potential.
Modernizing Securities Laws for Private Companies
In addition to legalizing crowdfunding and creating an IPO on ramp for emerging growth companies, the JOBS Act also modernizes the securities rules for private companies in several important ways. Many of the current laws have been on the books for more than 30 years. Needless to say, a lot has changed in that period of time, so updating these rules makes sense. With the JOBS Act, companies will now be able to announce when they are seeking capital, and use Internet platforms, presentations at industry conferences, or other tools to get the word out. This will help democratize access to capital, by making more prospective investors aware of a company's plans and needs.
Additionally, the JOBS Act raises the shareholder number that forces disclosure from 500 to 2,000, so companies that opt to stay private longer (and not release data that might be useful to their competitors) can avail themselves of that option.
In summary, the JOBS Act will help a wide range of companies in a wide range of sectors - and is likely to be particularly helpful to the many companies in sectors that haven't typically had ready access to capital (manufacturing, consumer products, business services, retail, restaurants., etc). This will be good for our entrepreneurial economy, and because startups are the big job creators, good for our nation.
To be clear, there are risks associated with any changes to securities regulations. Indeed, any investment in any company particularly a young, high growth emerging company is in itself risky. Some will succeed, but many will struggle - and some will even fail. That's the nature of entrepreneurship, and capitalism. But despite the risks, I'm confident the changes the JOBS Act will usher in will, on balance, be positive.
Indeed, from my perspective the story of America is the story of entrepreneurs taking risks to build companies and jumpstart entire industries. That's why the United States is the leading economy in the world. It didn't happen by accident it was the work of entrepreneurs.
But we can't rest on our laurels. Other nations have figured out the "secret sauce" that has created America's entrepreneurial economy, and are putting policies in place to attract capital and talent to their nations.
So if we are going to stay in the lead, we need to act.
I was pleased that the President created the Jobs Council and put a spotlight on startups and entrepreneurs and delighted that Republicans and Democrats in the House and Senate then came together to pass the JOBS Act with overwhelming bipartisan support. That's a great start, but there's still more work to be done. For example, we need to update our immigration policies, so we can win the global battle for talent. We still attract the best and brightest from all around the world to our great universities, but all too often we then kick them out, and force them to return to their home countries and start companies there that compete with our companies here. That's crazy. So making it easy for entrepreneurs and engineers to come to America or if they are already here to stay in this country is critical and the next place we need to focus.
I'm hopeful we can build on the bipartisan momentum that has been created around entrepreneurship and the JOBS Act to now focus on reforming immigration laws for high-skilled workers.
If we redouble America's commitment to entrepreneurship, I am confident we can in fact remain the world's most entrepreneurial nation.