The Republican Staff of the House Financial Services Committee has produced a report revisiting the JOBS Act of 2012 and the decade since the legislation became law. Perhaps the best-known outcome of the legislation was to legalize online capital formation – or crowdfunding – but the bill was actually a series of regulatory changes that benefited the economy with six different “Titles” (I through IV).
The report provides a brief outline of the legislation:
“Title I created a new “Emerging Growth Company” (EGC) designation and an IPO “on ramp” for companies to gradually begin complying with public company regulatory requirements. Title II eased the process by which startups market their securities by extending the Rule 506 offering exemption to securities marketed through a general solicitation or advertising if the purchaser is an accredited investor. Title III allowed startups to raise funds through a new equity crowdfunding exemption [up to $1.07 million]. Title IV required the SEC to add a class of securities that would be exempt from registration for offerings up to $50 million. Titles V and VI raised the thresholds for mandatory registration as a public company so private companies would not be forced to go public until they were ready.”
The JOBS Act of 2012 helped to stem the decline in initial public offerings while enabling smaller firms to have better access to capital in the three securities crowdfunding regulations: Reg CF (Title III), Reg A+ (Title IV) and Reg D 506c (Title II).
The impact of Title I meant that soon after becoming law 75% of companies that priced an IPO in the US were designated as EGCs. By April 2014, EGCs represented around 85% of all IPOs. The legislation helped to stem the decline of IPOs, returning it to the right direction. The report calls the positive impact of Title I “undeniable” as it made going public easier.
From 2103 to 2017, Title II, or Reg D 506c, saw over 7000 firms use the crowdfunding variant but this paled in comparison to Reg D 506b (old Reg D) where almost 88,000 issuers used the exemption raising around $5.8 trillion.
Former AngelList CEO Kevin Laws is quoted in the report explaining that, “by clarifying regulations for online platforms, the JOBS Act enabled thousands of new companies to get off the ground and made financing accessible to a much broader array of founders than ever before.” AngelList leverages Reg D 506c.
TItle IV, or Reg A+, updated an existing exemption that virtually no one used. By pre-empting state Blue Sky review, and upping the funding cap to $50 million (Tier II), From June 2015 through December 2019, SEC staff estimates that 382 Reg A+ offerings took place.
The SEC Office of the Advocate for Small Business Capital Formation research indicates that 2020 was a record year for Reg CF (Title III) in terms of both the number of offerings and in capital commitments. In 2020, issuers completed 1,511 offerings (an increase of 61% from 2019) with $232.9 million in capital commitments (an 86% increase from 2019).
In 2020, the SEC made several material improvements to Reg CF and Reg A+ including an increase to the funding caps at $5 million and $75 million, respectively. These changes along with other updates continue to help increase the online capital formation ecosystem.
The lessons of the JOBS Act have led to the creation of the JOBS Act 4.0, a series of additional reforms designed to improve capital markets further while benefiting retail investors. There is an obvious opportunity to learn from 10 years of experience to enhance things further.
The report states that remaining regulatory hurdles and needed bureaucracy continue to be impediments to the economy. These burdens impact small businesses disproportionally.
For example, policymakers must work to make going public simpler and less costly. The rule upon regulation approach by elected or appointed officials has undermined the ability of firms to become publicly traded companies while exacerbating the wealth gap.
Fixing the definition of an accredited investor is another item that can easily be fixed – either killing it off altogether – or providing a sophistication qualification that will democratize access to Reg D offerings.
During a JOBS Act Roundtable organized by the Republicans, Rodney Sampson, a Democrat, said that if you raise the threshold to be deemed accredited, you will cut out a lot of people. He also advocated reducing capital gains taxes for people who invest in early-stage firms or funds that back them.
There is a lot more work that needs to be done to simplify the exempt offering ecosystem, streamline the registration of securities and help provide more access to retail investors.
Optimistically, the Republican report claims that today, the political environment is similar to 2012 – a divided Congress that could come together to support small businesses and innovators.
As the economy is struggling with inflation, with some predicting a recession, the report believes that once again there is a need for Congressional action to help the economy by supporting small businesses, entrepreneurs, public markets, and retail investors.
The Report on the JOBS Act and how it can be improved is available below.