The Jump-start Our Business Start-ups (JOBS) act just passed the Senate. The House passed a measure with the same objectives, so now it's up to the that body to revise the legislation and move a bill closer to becoming law. You can read a summary here.
This is not legislation that has failed to inspire both support and dismay.
Venture capitalist Fred Wilson loves it:
I'd like to thank our elected officials for coming together in a non-partisan way to address an important set of issues and deal with them sensibly and correctly. This doesn't happen enough in Washington and we need more of this. I know that the majority leadership in the Senate, particularly Harry Reid and Chuck Schumer, fought back a mini revolt among the left wing of its party to get this bill passed. I applaud them for doing that and standing up for something that was not popular in their caucus. That is leadership and I appreciate it and I am sure the readers of this blog do too.
Former New York Governor Eliot Spitzer hates it (but couldn't get it killed — he wrote this for Slate before the bill passed):
The bill that has already passed the House will remove the critical protections imposed in the analyst settlement a decade ago with respect to companies with revenues of less than $1 billion per year, allowing them to return to the fraudulent practices of yore.
Did the House conduct any meaningful hearings before it voted on this issue? No. Did Congress inquire about the long-term harm to the capital markets that resulted from the fraud committed by these very banks when they were free to act as they now want to once again? No. Congress merely responded to the commands of Wall Street capital.
While the Senate will consider several amendments to the bill this week that might provide marginal improvement, there is only one real answer: Defeat the entire bill. The notion that Wall Street needs regulatory relief—rather than greater structural reform—is simply wrong.
Wilson and Sptizer favor/detest different things. Fred likes, for example, the idea that companies can remain private, with private shareholders, for longer. The limit now is 500 shareholders. JOBS would raise that to 2,000. For better or worse, this will remove the pressure to stage IPOs, which the SEC currently requires at 500 shareholders (Facebook has this precise problem).
Spitzer is worried that regulatory reforms that enabled investment banks to pump-and-dump companies whose shares they'd underwritten, or whose IPOs they're in the process of running, will be rolled back. He figures it will be happy hunting where companies with less than $1 billion in revenues are concerned — in other words, high-growth companies, many of the tech flavor.
Quite a few of those companies are going to be started — or have already been started and funded by venture capitalists — in California. So you see how important this bill is to the state.
Let me offer a third view. The JOBS bill was specifically designed to prevent startups from being exposed to public scrutiny for longer than in the past — and to enable the more rapid development of private markets in their shares. This is great for the companies, because they can obtain funding for longer before having to consider an IPO or an acquisition. It's also great for investors because they can buy and sell shares while aiming for bigger IPOs and larger eventual payouts. And it's great for up-and-coming private exchanges, like Second Market.
Offsetting this, JOBS makes it easier for companies to access "crowdfunding" from investors below the angel-investor level, which theoretically allows people who are now frozen out of investing in high-growth companies to get in on the action.
It's the increased shareholder provision that most concerns me, in other words, even though the entire bill is a big fat gift to the banking and finance community. True, it gives startups the chance to get funded while staving off an IPO they might not be ready for — a positive for companies that aren't Facebook.
But it also allows for the emergence of private markets that aren't as closely regulated as exiting public ones. On the one hand, you get an alternative financing model, based on (potentially) more crowdfunding a share-trading on private markets. On the other hand, you don't let companies hide in private markets to avoid appropriate public scrutiny.
It now looks as if the bill is on its way to becoming law. But there's still time to debate some of its provisions.