Call it the Maxine Waters test of political moderation. Late
last week, this test was failed by Senate Majority Leader Harry
Reid (D-Nev.), Senate Majority Whip Dick Durbin (D-Ill.), and Sens.
Mary Landrieu (D-La.), Carl Levin (D-Mich.), and Jack Reed
(D-R.I.).
They comprise, as Politico writes, “a chorus of Democratic
senators… raising objections to a bill designed to help small
businesses — throwing bumps in the road to passage of the
legislation that had sailed through the GOP-led House and won
President Barack Obama’s endorsement.” And this bill, the Jumpstart
Our Business Startups (JOBS) Act, also won the endorsement of 158
House Democrats who voted “aye” on Mar. 8, including Reps. Barney
Frank (D-Mass.) and Maxine Waters (D-Calif.)
Waters, in line to be the top Democrat on the House
Financial Services committee upon the retirement of current ranking
member Frank, has made some inflammatory statements such as
wishing the Tea Party would go “straight to hell.” But she was
sounding some congenial notes in the House debate leading up to
passage of the JOBS Act.
“We worked from both sides of the aisle because we are all
concerned about job creation and access to capital,” Waters
said. She and other House Democrats praised the bill’s measures
to allow emerging entrepreneurs to raise limited amounts of capital
through social media “crowd funding” and other methods without
triggering millions of dollars in red tape from Securities and
Exchange Commission rules.
In addition to raising the shareholder threshold for when
a company must go public and be subject to regulations such as the
Sarbanes-Oxley accounting mandates and Dodd-Frank proxy provisions,
the bill creates an “on-ramp” that would delay the most onerous of
these rules for most new firms until five years after they go
public.
The bill’s purpose is to address the long-term decline in
U.S. initial public offerings, which began well before the
financial crisis and which, according to the Treasury Department’s
IPO
Task Force, may have cost the U.S. economy 22 million jobs not
created over the last decade. The bill also reflects the emerging
consensus, from the respected Kauffman Foundation in Kansas City,
Mo., to President Obama’s Council on Jobs and Competitiveness that
startups and “emerging growth” firms less than five years old
create the bulk of America’s new jobs
Waters also noted that she worked with Rep. Patrick
McHenry (R-N.C.) “to add critical investor protection provisions to
this crowd funding bill.” But the bill with investor protections
deemed sufficient by Waters and supported by 157 other House
Democrats is the same measure coming under fire by Senate Democrats
as too laissez faire. Levin, Landrieu, and Reed are expected to
introduce an amendment Monday substantially weakening the already
modest regulatory relief in the House bill. It’s unclear whether
Majority leader Reid will even allow a vote on anything close to
the House-passed bill should this amendment fail.
As Politico
reported, Levin said Thursday: “I am frankly stunned by the
speed with which these special interest folks representing very
powerful interests in this country have been able to move this bill
through the House, and we’re going to try to see if we can’t build
in some protections in the Senate.”
But the question remains: once a bill has investor
protections accepted by Maxine Waters, Barney Frank, and the Obama
administration, what exactly do you need further protection from?
The answer is that these Senators wish to protect the Wall-Street
centric system of securities regulation enacted eight decades ago,
when many households didn’t have telephones, from any meaningful
modernization for the age of the Internet. While Republicans are
accused of being stuck in the '50s on cultural issues, it is fair
to say that these Democrats are mired in the 1930s when it comes to
entrepreneurs’ accessing of capital.
Jack Reed, for instance, can’t bear the thought of
entrepreneurs and investors pooling capital online. He
said in the Senate on Thursday, “The Craigslist or eBay model
may work to enable people to sell unwanted clothing, bikes, and
other goods, but it certainly doesn’t work for a financial security
that requires a much more careful analysis than simply kicking the
tires.” Yes, as millions of its users know, all that is sold on
Ebay are clothes and bikes… and valuable antiques priced in the
thousands and real estate priced in the hundreds of thousands. If
anything, these transactions require more “careful analysis” than
the purchase of shares of stock.
Yet because of outdated and all-encompassing securities
laws, an entrepreneurs can’t even raise money online in $100
increments from Facebook friends Twitter followers without
complying with Sarbanes-Oxley, Dodd-Frank, and nearly all the SEC
regulation that large public companies face. Popular crowd funding
sites like Kickstarter are basically limited to a donation model,
in which musicians and filmmakers can only offer token rewards such
as movie or album credits, rather than a share of the product’s
proceeds.
The House-passed JOBS Act changes this in two ways. First
it lifts the “threshold” for many SEC mandates from 500 to 1000
shareholders (and to 2,000 shareholders for community banks). This
threshold, which hasn’t been raised in more than 50 years, is
woefully out of date given that many social network uses have way
more than 500 connections. This limit also prevents growing firms
from rewarding rank-and-file employees with ownership
stakes.
The bill then allows an exemption from these mandates for
crowd funding, or pooling capital, of up to $2 million. Ordinary
investors are permitted to invest the lesser of $10,000 or 10
percent of their income. As Patrick Ruffini
notes at Huffington Post, the JOBS Act “limits the
size of investments so that no investors could lose their shirts in
the same way they did with traditional investments in GM, Fannie
Mae.”
And contrary to the Dem Senators who say the bill has no
investor protections, the bill requires to crowd funding operators
to provide notice to the SEC to be shared with state securities
regulators, and prevents “bad actors” from engaging in crowd
funding. True, the bill does not force on investors and
entrepreneurs all the accounting minutiae from the Sarbanes-Oxley
Act of 2002, but these mandates — burdensome as they are for
legitimate entrepreneurs — didn’t exactly protect investors from
the implosions of Lehman Brothers and MF Global.
The South by Southwest technology and entertainment
festival that wrapped up this weekend, which I attended earlier
this month as a correspondent for the Daily Caller, is not exactly
a GOP-friendly venue both due to its location in Texas’s blue
island in Austin and the attendees from the Left Coasts. But
speaker after speaker hailed the revolutionary implications of
crowd funding and urged the attendees to tweet the Senate to pass
the JOBS Act.
AOL co-founder Steve Case, now chairman of the Startup
America Partnership that connects entrepreneurs with venture
capitalists and advocates for startups in public policy, hailed the
JOBS act from at an event on the stage of the PBS series “Austin
City Limits,” calling it “the chance to do something
positive.”
So kudos to Maxine Waters for getting on board the crowd
funding train. And raspberries to her party’s colleagues in the
Senate who don’t even understand how eBay works.
