JOBS Act supporters insist the initiative is more than just a good idea and could help round-up the crowd-sourced funds to launch more promising businesses.
“The underlying rationale behind the JOBS Act—as long as it doesn’t get screwed up—is incredibly powerful and necessary for our country right now,” Feit said. “Innovation and jobs are at stake with the JOBS Act. The fact that it’s taking so long is frustrating, but it’s not a secret that raising capital is an antiquated process.”
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Feit was one of the players that helped to get the JOBS Act passed last year and since then has been active with the SEC, Congress and White House in an attempt to move the regulations along and open equity crowdfunding to the masses. But only Title I--which allows companies with less than $1 billion in revenue to register with the SEC confidentially and include only two years of disclosure, not three--has been implemented. Criticism abounds given that this provision, intended to open the IPO market to emerging growth companies, has had middling success.
Still, the JOBS Act hasn’t quite been given a fair shake at this point.
“It's definitely too early to judge the JOBS Act, because a lot of the pieces haven't been implemented yet,” said Dara Albright, founder of NowStreet, a financial media, events and advisory company with expertise in the JOBS Act.
Michael T. Williams, a lawyer who runs Williams Securities Law Firm , a firm in Tampa, Flor. that for 38 years has worked with smaller companies going public, said that although the JOBS Act had not yet had significant impact on smaller businesses, the potential for future positive impact remains strong.
“Although limited to private offerings where all of the investors are accredited as defined in Regulation D, this represents the first opportunity startup and early stage companies have had to advertise for investors on the internet and elsewhere,” Williams said. “What’s the hang up? The SEC was required to adopt rules to implement this provision by July 4, 2012. Instead, the SEC has merely issued proposed rules for comment and has not adopted a final rule. Thus startup and early stage companies still cannot utilize this provision of the JOBS Act.”
Part of the SEC slow-down has been the turnover within the federal agency. Mary Shapiro, the SEC commissioner during the implementation of the JOBS Act, was slowing the process down on purpose, according to Feit. Elise Walters replaced her, and then Obama’s nomination for Mary Jo White finally got approved this April. Title II was supposed to kick in July of last year but is still unrealized, and Title III could be six months to a year away.
“It’s not the JOBS Act itself but rather the SEC’s failure to implement rules in the JOBS Act that could be beneficial to startup and early stage companies, despite specific time deadlines in the Act itself, that has frustrated Congress’ intention in the JOBS Act,” Williams said.
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The intricacy of this game-of-charades slowdown is classic Washington.
“The battle is more between the wishes of the legislative branch and the regulatory bureaucracy,” said Grafton "Cap" Willey of CBIZ MHM, a New York-based public accounting provider and management consulting firm. “Congress and the President have seen the fact that raising capital for small business has been a major problem since the passage of Sarbanes Oxley, and they tried to address it with the JOBS Act.” The SEC, under the leadership of Mary Shapiro, was not enthusiastic about the concepts and has dragged its feet on implementation. The state regulators do not like the bill because their authority is superseded in many cases by the bill.
“The pessimism revolves around whether or not the regulations when issued will be designed with enough flexibility to make the JOBS Act work or whether they will be so restrictive that they are designed to kill it,” Willey said. “The lines are drawn between the people that recognize that small businesses need investment capital, and those willing to make such investments recognize the risks and rewards that these types of investments are, and those people that are paternalistic and believe that most investors are not smart enough to make these investment decisions and need governmental protection.”
But Albright says that casting crowdfunding in a beguiling light is unfounded.
“There are a lot of skeptics out there who view crowdfunding as the next penny stock market,” Albright said. “That couldn't be farther from the truth. People who are looking at crowdfunding who are looking at it through viewing it the old Wall Street way. Wall Street is undergoing a dramatic transformation. Crowdfunding is basically based on the same principles that built America in the first place—allowing Americans to invest in the ingenuity of their fellow Americans.”
Investment limits, background checks on issuers, and portals registered with the SEC and FINRA will ensure ample disclosure and investor education. Plus, instead of having investors trade mere ticker symbols, Albright says, people can invest in something they truly believe in as a labor of love.
“People have a different rewards when they're crowdfunding,” Albright said. “They’re funding, because they believe in the business or they genuinely like the product. They feel that this is a company that has a beneficial impact on society.”
The ability for small companies to cast a wide net in funding opportunities marks a new frontier for business by also allowing unaccredited investors to join the fray and put money into a company. Money idly sitting on the sidelines could join the game. In the past, companies had to use the Reg D 506, but now companies will have the opportunity to use the crowdfunding exemption, that is if the SEC stops kicking the can.
But not allowing the plan a trial run with all its pieces in order has put a damper on its potential.
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“All this turn-over at the SEC means there’s been nobody to put the rules to a vote,” Feit said. “We have been working closely with the SEC for a year now and it is troubling for every startup out there that politics and turnover at the SEC will likely delay implementation of the JOBS Act for a full year. There is a substantial amount at stake including America’s edge on innovation, jobs and the entire economy given that startups and small businesses account for half our country’s GDP and two thirds of our new job growth.”
The Promising Future--Too Early To Judge
Initiatives similar to the JOBS Act abroad have shown crowdfunding to provide an economic shot in the arm. The Australian Small Scale Offerings Boards raised $130 million over the last five years for 132 companies without a single case of fraud. In the U.K., more than 1,200 companies have raised capital on crowdfunding site FundingCircle.com over the last two years, and there have been zero cases of fraud and only a 1.5% default rate. It is working so well that the British government even injected £20 million ($31 million) into the site to spur small business lending.
“With very little or no guidance, people are not willing to step out and try to raise capital under this bill when they do not know the rules, so very little activity has taken place,” said Willey of CBIZ MHM. “Until we know what the rules are we are not in a position to judge whether the JOBS Act will work. The fear is that the regulations will be so restrictive that the law will be rendered useless in raising capital.”
The sluggish headway on the JOBS Act implementation is not helped by the anxiety still persisting in the economy: almost half (44%) of Americans are concerned about losing their job, according to the GfK survey. Still more than half of Americans are confident they could find employment if fired, with 38% expressing they are very confident and 31% saying they’re somewhat confident--a number that would surely go up if the SEC lets job-creators tap into some crowd-sourced capital from unaccredited investors, Commissioner White-willing, of course.
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About the Survey
Results contained in this report are based on a survey conducted by TheStreet and GfK Roper Public Affairs & Corporate Communications. Telephone interviews were conducted from April 19-21, 2013 among a total of 1,006 adult Americans. The margin of error for this study is +/- 3 percentage points for the sample.