This past Thursday, the Senate voted 73-26 to approve its version of the JOBS bill. The House had previously approved a similar bill and the process will now go back to the House to come up with a modified bill that can be approved by both the House and Senate. I hope they make quick work of that and present the bill for signature to Obama who has committed to sign it.
I suspect most readers of this blog know a bit about this bill. The three provisions that are most meaningful are the crowdfunding provision, the increase in shareholder ceiling for private companies from 500 to 2,000, and the "sub $1bn revenue IPO" provision that we discussed previously here at AVC.
I had held off blogging about the crowdfunding provision because frankly I had some reservations that I had privately discussed with friends, colleagues, and elected officials. I did not want to publicly throw cold water on this provision, but I privately hoped that the provision would be modified to help insure that equity crowdfunding of startups doesn't become a fraud infested sector of the capital markets.
The Senate added a number of measure to address the fraud concerns. This is how the NY Times described these modifications:
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.
I am a huge fan of allowing every person, not just the super wealthy and institutions, participate in the funding of startups. Frankly it's a shame that the average Facebook (NASDAQ:FB) user has not been able to own shares in Facebook during its increase in value from zero to $100bn. The same kind of thing can be said about Twitter and many other of our portfolio companies. The changes to securities regulations in the JOBS bill are fundamental and important and very much needed.
But it is also true that investors are due some basic disclosure when parting with their capital. If they choose to ignore the disclosures, then that's fine. But the disclosures should be there for them when they want it and/or need it. The Senate was wise to add some basic disclosure requirements to the crowdfunding bill. I suspect the disclosure requirements might get toned down a bit in the final bill and that is probably a good thing. Requiring an audit for a $500k seed round seems a bit nuts to me.
As for the changes to the shareholder number rule (increase from 500 to 2,000) and the regulatory relief for "sub $1bn revenue IPOs", I am ecstatic about these new rules. Our portfolio companies have spent countless hours handwringing about the existing rules. They have made important decisions based on the current rules which are unnecessarily stringent and have hampered their access to capital. These new rules are much needed regulatory relief for startup companies.
Finally, I'd like to thank our elected officials for coming together in a non-partisan way to address an important set of issues and deal with them sensibly and correctly. This doesn't happen enough in Washington and we need more of this. I know that the majority leadership in the Senate, particularly Harry Reid and Chuck Schumer, fought back a mini revolt among the left wing of its party to get this bill passed. I applaud them for doing that and standing up for something that was not popular in their caucus. That is leadership and I appreciate it and I am sure the readers of this blog do too.