Senate Passes Start-Ups Bill, With Amendments

By EDWARD WYATT
Published: March 22, 2012

The Senate voted 73 to 26 to approve the JOBS Act, whose acronym stands for Jump-start Our Business Start-ups.

The legislation, approved overwhelmingly by the House two weeks ago, would designate a new category of “emerging growth” companies that could conduct initial public offerings of stock while being exempt from certain financial disclosure and governance requirements for up to five years.

In addition, the measure would provide a new form of financing to small companies. Through crowd-funding, or the sale of small amounts of stock to many individuals, companies could solicit equity investments through the Internet or elsewhere, raising up to $1 million annually without being required to register the shares for public trading with the Securities and Exchange Commission.

“This will make it easier for small and growing companies to raise the capital they need to keep growing and to hire more workers,” Senator Pat Toomey, a Pennsylvania Republican, said after the vote.

Until now, “we’ve made it more expensive to go public in this country and done nothing to make it easier to raise capital privately,” he added. “This bill addresses both.”

Because the Senate made several amendments to the House bill, the package will be sent back to the House to work out differences. House Republican leaders said Thursday that they expected to take up the amended bill next week and hoped to send it quickly to President Obama, who has said he will sign it.

Some Democrats, who made up all the opposing votes to the bill, and consumer-advocacy organizations were less optimistic about the effect of a law that rolls back regulations on corporate financial disclosure. Pension funds, lobbying organizations like AARP and the chairwoman of the S.E.C. have also opposed the bill.

“Hasty deregulation has repeatedly been the source of financial crises — the savings and loan crisis, the Enron-era crisis and the Great Recession of 2008, to name a few,” said Senator Jack Reed, a Rhode Island Democrat who voted against the measure after his effort to substitute a rewritten bill failed earlier this week. “I believe history will judge this misnamed bill quite harshly.”

Under the JOBS bill, companies with up to $1 billion in annual revenue would be free to ignore — for their first five years as a public company — regulations that were put into place after the end of the dot-com bubble and the collapse of Enron. Among them are requirements to hire an independent outside auditor to attest to a company’s internal financial controls, and restrictions on how financial analysts interact with investment bankers in promoting a company’s stock.

The bill also allows some companies to advertise for investors in almost any medium, a provision that skeptical regulators contend will mainly benefit the sale of worthless securities by bucket-shop brokerage firms.

Companies that wish to avoid registering with the S.E.C. will be able to do so for longer because the bill raises the threshold for private firms to a maximum of 2,000 shareholders, up from 500. In recent years, several markets for the trading of shares of privately held companies have begun operating, and the bill is expected to help those markets continue to grow.

The element that has most small-business advocates excited is the crowd-funding provision, which institutionalizes a form of financing that is, on a small scale, much like venture capital investing. A company can raise up to $1 million from investors while providing much less disclosure than required by companies seeking to become publicly traded.

Steve Case, the former America Online executive who now heads a private foundation and who campaigned for the crowd-funding measures, said in an interview that while the Internet played a significant role in the lives of most people, “the ability to use that platform to leverage investment has been limited.”

“This democratizes the access to investments,” he said, for companies and for investors.

Under the Senate amendments, any company using crowd-funding methods must still file some basic information with the S.E.C., including the names of directors, officers and holders of more than 20 percent of the company’s shares, plus a description of the business and its financial condition.

Companies seeking to raise $100,000 or less must also provide tax returns and a financial statement certified by a company principal; those raising up to $500,000 must provide financial statements that are reviewed by an independent public accountant. Companies raising more than that must provide audited financial statements.

The Senate also inserted requirements that intermediaries seeking to help companies raise money through crowd-funding must register with the S.E.C., make sure investors are advised of the risks they are taking, and take measures to prevent fraud.

It is the prospect of fraud that has most critics worried.

The Council of Institutional Investors, a pension fund trade group, said that while it was not clear that the JOBS Act would in fact create jobs, the act would “create greater risks for investors and ultimately could erode confidence in our capital markets.”

But Representative Patrick McHenry, a North Carolina Republican who worked on the crowd-funding portion of the bill in the House, said that the market would have sufficient incentive to police itself.

“We don’t want any fraud in this space because fraud will prevent more people from participating,” Mr. McHenry said. “You can have crowd-funding take place with minimal amounts of fraud and illegality.”

Crowd-funding markets, which have to register with the S.E.C., Mr. McHenry said, “will be incentivized, if they want to stay in existence, to root out fraud.”
A version of this article appeared in print on March 23, 2012, on page B1 of the New York edition with the headline: Bill to Aid Start-Ups Is Approved By Senate.

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