From Venture Exchanges to Revising What It Means to Be an ‘Accredited’ Investor, This New Legislation Could Change the Face of Going Public in America
Why lawmakers think the JOBS and Investor Confidence Act will give a boost to the U.S. economy.
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Lawmakers in the U.S. House of Representatives have a plan to jumpstart the IPO market by, among other things, lowering the bar for investors and reducing filing and compliance costs.
In a recent op-ed published in The Wall Street Journal, Representative Jeb Hensarling (R-TX), expanded on the series of roughly 20 bills on capital formation that have passed through the House Financial Services Committee, in which he chairs. The overarching package, collectively called the JOBS and Investor Confidence Act of 2018, or the JOBS Act 3.0, is designed to make it easier for startups to get funding and pursue initial public offerings.
Indeed, writes Hensarling, it will "restore U.S. competitiveness" and spur long-term economic growth. The congressman did not immediately respond to Inc.'s request for comment on Monday.
The original Jumpstart Our Business Startups (JOBS) Act was signed into law in 2012 by then President Barack Obama to help small businesses secure funding primarily by easing securities laws and allowing equity crowdfunding--which lets businesses use specialized crowdfunding sites to raise up to $1 million in exchange for a stake in the company.
Here are the main changes outlined in the new legislation, which is expected to go up for a vote in the House as early as this week.
1. Establishing legal certainty
The bill clarifies how entrepreneurs and angel investors can interact to discuss potential investments without "running afoul of securities laws," writes Hensarling. It proposes to review the S.E.C.'s Regulation D rules--which govern how startups raise capital from investors--and adds exemptions to its prohibitions against general solicitation. Hensarling writes that creating this legal certainty could stimulate venture capital activity.
2. Expanding the definition of accredited investors
Currently, individuals with an annual income of more than $200,000 (or $300,000 for couples filing jointly) for the past two years or a net worth in excess of $1 million qualify to become an accredited investor. The proposed legislation seeks to expand the criteria to allow more people to invest in startups based on their "experience and expertise." In other words, expertise could supplant financial means.
3. Changing rules for confidential IPOs
The new legislation would also further ease the ability for companies to pursue so-called secret IPOs, claims Hensarling. The current rules let "an emerging growth company" or any person authorized to act of its behalf to file confidentially. The Jobs Act 3.0 proposes to strike and change the wording to "an issuer" or any person authorized to act on its behalf, thus widening the pool of companies that are able to explore this option. The effort would help companies plan their IPOs better, Hensarling writes. This, he says, would also help companies open up a dialogue with accredited investors without negatively impacting retail investors.
4. Lowering the cost of going public
Initial regulatory compliance costs for companies going public amount to an average of $2.5 million, according to a 2011 report by the IPO Task Force. Hensarling says the Jobs Act 3.0 would create additional exceptions to certain rules and allow companies to delay various financial reporting requirements.
5. Creating venture exchanges
The congressman argues that companies with 10,000 shares should not be regulated the same as those with 10 million shares. That's why the legislation he proposes calls for the creation of "venture exchanges," in which companies with fewer outstanding shares would be listed in a single exchange. This would attract research and sales support for small issuers, he writes.