A Way Forward For The JOBS Act

On a sunny day in the Rose Garden last April, the President signed the auspiciously named Jobs Act into law. Surrounded by legislators from both parties, the President heralded the law as a ‘game changer’ for startups and small businesses.

One year later, the 28M small businesses that account for nearly one third of the nation’s workforce are still waiting. The SEC clearly has reservations about implementing key portions of this law; most notably the lifting in the ban on general solicitation (advertising) and establishing a new ‘crowdfunding’ exemption.

The fault lies not with the regulators, but with the law itself. The Jobs Act is in fact a messy amalgamation of several different bills. Critics have rightly pointed out that most of the provisions have little to do with actually creating jobs. It would be difficult to argue that allowing large long/short hedge funds to advertise for more capital is the most efficient path for creating jobs.

But, there is a path forward. The SEC should adopt a phased implementation of the bill, initially opening up advertising only for direct investments in small businesses that have less than $50M in revenue.

The benefits of such a staged approach are many. First, it follows Congressional intent. Even a cursory survey of the Congressional record demonstrates that lawmakers were voting to “better facilitate access to capital for our nation’s startups and small businesses,” in the words of three US Senators who urged implementation last summer. In the debate, there was little public advocacy for improving hedge fund capital formation.

Second, opening this smaller market initially reduces the risk for regulators who are clearly uncertain about the impact of an immediate full implementation of the law. In fact, in 2012, direct investments into private businesses accounted for only about 12% of the total market for Regulation D Rule 506 offerings. Hedge funds and other pooled investment vehicles account for more than 85% of the market. Implementing the change only for direct investments will allow regulators to study the impact of the change prior to lifting the ban for more complex financial products.

Finally, staged implementation efficiently targets the engine of our economic growth. Investment capital is the lifeblood of small businesses, which collectively account for two thirds of all net job creation in the past two decades. What today takes many companies six to twelve months, can be reduced to a few weeks by letting buyers and sellers in an existing market find each other more efficiently. Without tackling the much more controversial issue of who can invest in these companies (the crowdfunding provision), or adding a penny to national debt, regulators will increase the flow of capital from qualified investors to the most productive areas of our economy.

One year ago today, the President signed the Jobs Act celebrating entrepreneurs and small businesses, and our ‘nation of doers.’ There was no mention of hedge funds. The SEC should follow suit. We cannot let sensible solutions continue to be held hostage by hidden agendas. Implement the lift in the ban on general solicitation for small businesses without delay.

Source: Forbes – Ryan Caldbeck


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