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The JOBS Act: Five Years Later

In April 2012, then-President Obama signed into law a package of reforms aimed at easing the financing path for new start-ups and other emerging growth companies. That law – the Jumpstart Our Business Start-Ups (JOBS) Act—could be a “game changer,” he said, in terms of opening new avenues for business funding and boosting entrepreneurship.

“America’s high-growth entrepreneurs and small businesses play a vital role in creating jobs and growing the economy,” the president said upon signing the law. “I’m pleased Congress took bipartisan action to pass this bill. These proposals will help entrepreneurs raise the capital they need to put Americans back to work and create an economy that’s built to last.”

New small businesses often lean heavily on debt (personal loans, credit cards and bank credit lines) and private support (like investments from family and friends, also referred to as angel investing) to steer through the start-up process, in hopes of gaining access to larger pools of capital as they grow. The JOBS Act was designed to enhance funding opportunities for start-ups and emerging growth companies. Among the key provisions, the law would:

  • Allow companies to accept funding from small investors through equity crowdfunding;
  • Loosen disclosure requirements for small companies seeking to grow through an initial public offering (the so-called “IPO on-ramp”); and
  • Permit general solicitation appeals via mass media or social media channels to attract a wider range of investors.

The primary beneficiaries of the JOBS Act are smaller and emerging companies—which happen to be among the primary drivers of new employment growth in the U.S. economy. One study by the Kauffman Foundation found that virtually all of the net job creation in the United States since the 1970s could be attributed to businesses less than five years old.

While it’s difficult to estimate with precision the boost that the JOBS Act might have given to employment in its first few years, enhancing flows of capital to these businesses will inevitably help to create jobs for American workers. Getting more funding into the hands of entrepreneurs is good for job growth.

In April, the JOBS Act marked its fifth anniversary, and we’re starting to see the outlines of what the legislation achieved – along with ways in which it might be strengthened now to expand access to capital. To mark the anniversary this year, here are positive outcomes of the JOBS Act so far:

Opening new business financing avenues

The law’s aim was to modernize securities laws to broaden the pool of potential investment capital to a wider range of investors and to incentivize entrepreneurs to seek out new streams of financing beyond (or alongside) such traditional forms as debt financing, angel investing and venture capital.

There continues to be talk about angel investing and venture capital, but the reality is that only a tiny fraction of companies receive funding from these sources. New thinking about how companies finance their growth was desperately needed.

In a statement marking the JOBS Act’s fifth anniversary, House Majority Leader Kevin McCarthy and Majority Whip Patrick McHenry noted the increase in capital flowing to new companies thanks to the law:

By reducing regulations on companies going public and providing more space for startups to raise capital, the JOBS act has allowed more than 6,000 companies to raise $1.4 billion in capital. In the past five years, about 83% of all IPO registration and 87% of all completed IPOs have been aided by provisions in the JOBS Act. That translates directly into American jobs and a growing economy. *

While that total amount of money raised via JOBS Act-related financing is small compared to the much larger pool of funding available through traditional capital market channels, it marks a solid beginning to the process of putting more money in the hands of entrepreneurs and innovators.

Opening up opportunities for small investors

We’ve written before about equity crowdfunding, a financing method made possible by the JOBS Act that gives small investors a chance to become early supporters of companies they believe in. The rise of equity crowdfunding platforms like IndieGoGo, MicroVenture Marketplace, Inc., Fundable and others points toward a promising new way for small companies to finance their early stage growth.

Of course, that doesn’t mean investor risk has been eliminated – as with any form of investing, there’s always a chance of losing your investment. That’s why the Securities and Exchange Commission has placed limits on how much investors can put into crowdfunding equity investments in any 12-month period based on net worth and annual income, to protect investors against potentially catastrophic losses. Before deciding to invest in any equity crowdfunding venture, consult with your financial advisor or other financial professional to determine if it’s right for you.

Unleashing innovative industries

For a good example of how new financing arrangements made possible by the JOBS Act are making a difference in cutting edge industries, look to biotechnology and pharmaceuticals. Former Pennsylvania Congressman Jim Greenwood, who now chairs the Biotechnology Innovation Organization, points to how JOBS Act provisions have helped his association’s members secure the funding they need to grow. As Greenwood writes in The Hill:

“New York-based Intercept Pharmaceuticals was one of the first biotech startups to take advantage of the JOBS Act. The company launched to develop a new treatment for primary biliary cholangitis — an autoimmune liver disease prevalent in older women that can lead to liver failure and death. 

“It took CEO Mark Pruzanski, a board member of the Biotechnology Innovation Organization, a decade to raise $50 million in venture capital to fund his company’s research. Utilizing several JOBS Act provisions, he raised $1.1 billion in less than five years and his company grew from 20 employees to nearly 500. The FDA approved Intercept’s Ocaliva last year, and 20,000 Americans who have no other treatment options now have hope because of this law.” 

In the coming years, it’s likely that other innovative industries will take advantage of the JOBS Act to line up funding for additional types of life-saving and world changing products and services. 

Providing a model for bipartisan policymaking

The bipartisan JOBS Act passed Congress at a time of stark division in the nation’s capital (recall that 2012 was a heated election year, in which control of both the White House and Congress were at stake).

Venture capitalist Steve Case, a co-founder of AOL and JOB Act advocate, made this argument in a 2014 op-ed for The Wall Street Journal.

“The JOBS Act is making it easier to take companies public, where they can grow. Once the SEC finishes rule-making for crowdfunding and general solicitation, the public’s participation will also increase,” Case wrote. “But perhaps the JOBS Act’s greatest contribution will be if it provides a model to tackle other hard problems, with innovation, compromise and courage.” (emphasis added)

Although Washington remains divided and gridlocked today, policymakers would do well to look back to the JOBS Act for a good example of how to rise above politics and partisan rancor to craft effective and forward-looking laws.

The JOBS Act was a good start, but the reality is that new business formation and IPOs have yet to bounce back to earlier levels in the aftermath of the 2007-2009 economic slowdown.  And there remains some concern that too few businesses are taking advantage of these new provisions. The next step will be for Congress to take a closer look at how the law is working to see how it can be improved.

 

*According to Crowdnetic, a crowdfunding and marketplace lending researcher

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