Political Hay

The JOBS Act and the Maxine Waters Test

Key Senate Democrats do a job on small business startups that even Maxine Waters and Barney Frank support.

By 3.19.12

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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. 

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About the Author
John Berlau is Senior Fellow for Finance and Access to Capital at the Competitive Enterprise Institute and blogs at OpenMarket.org.