JOBS Act at Five: The Power of Smart Deregulation for Entrepreneurs and the Economy
By SBE Council at 23 March, 2017, 12:12 pm
by Raymond J. Keating-
On March 22, I had the opportunity to testify before the Subcommittee on Capital Markets, Securities, and Investment of the Committee on Financial Services in the U.S. House of Representatives. The subject of the hearing was “The JOBS Act at Five: Examining Its Impact and Ensuring the Competitiveness of the U.S. Capital Markets.”
Read the subcommittee’s press release about what they learned at the hearing here.
The subcommittee chairman, U.S. Rep. Bill Huizenga (R-MI), deserves credit for holding this hearing, as the emphasis was on evaluating the results of the Jumpstart Our Businesses Startups Act (JOBS Act), which overwhelmingly passed Congress on a bipartisan basis and was signed into law by President Barack Obama in 2012. Unfortunately, it took the Securities and Exchange Commission (SEC) four years to fully implement Title III of the JOBS Act, which allowed ordinary people (non-accredited investors) to invest in startups and small businesses on regulated online platforms. Still, the impact of Title III has been positive even in its early stages. The law’s other titles have been on the books longer and they are showing great promise. These positive aspects of the law were discussed by witnesses and committee members alike, as well as suggestions for improving JOBS Act provisions and rules.
The State of Capital for Entrepreneurs and Small Businesses
In my own testimony, I presented data on the recent trends in bank small business loans, angel investment, and venture capital investment. To sum up, the value and number of traditional small business loans are still down from pre-recession levels. Angel investment also remains down from its 2008 level, while also experiencing stagnation over the last two years. In addition, venture capital has shown the most life post-recession, but a decline in 2016 is troubling. These trends highlight the challenges that entrepreneurs and small businesses face in terms of gaining access to financial capital.
It is that challenge, of course, that the JOBS Act sought to help redress. Again, in my testimony, I focused on two important parts of the JOBS Act focused on opening up new avenues for individuals to invest in entrepreneurial ventures via crowdfunding. Title II of the JOBS Act was about “accredited investor” crowdfunding and Title III crowdfunding for everyone else, if you will. While it takes time for new investment tools to develop and be utilized, the early numbers are very encouraging. For example, according to Crowdfund Capital Advisors, since Title III launched in May 2016, capital commitments have topped $30 million.
JOBS Act in Action
One of the other witnesses at the hearing offered a firsthand example of how the JOBS Act can make a real difference for an entrepreneurial firm in need of financial capital to grow. I sat next to Brian Hahn, chief financial officer for GlycoMimetics, Inc. In his testimony, Mr. Hahn noted that GlycoMimetics is a 45-employee public biotech company, and he explained how changes brought about via the JOBS Act worked for this firm as an emerging growth company (under Title I of the JOBS Act):
GlycoMimetics was a key beneficiary of the new approach to a public offering created by the JOBS Act’s IPO On-Ramp. During our 2014 IPO, which raised $64.4 million to fund our clinical research into treatments for sickle cell disease, acute myeloid leukemia, and multiple myeloma, we took full advantage of the law’s testing-the-waters, confidential filing, and regulatory relief provisions.
In the lead-up to our IPO, the ability to conduct testing-the-waters meetings and increase our dialogue with potential investors was a game-changer. More than half of our testing-the- waters meetings eventually resulted in the investor participating in the IPO, and across the board we saw substantially increased investor awareness of our company and interest in the offering. Biotech companies like GlycoMimetics have complicated technology, an opaque regulatory pathway, and a complex commercial story – and the additional time with investors gave us time to clarify questions about these aspects of our business in a more robust way that would not have been possible in a traditional half-hour roadshow meeting.
This entire process took place while we were on file confidentially with the SEC. The JOBS Act’s confidential filing provision allowed us to conduct our investor meetings out of the glare of the media spotlight and without the heightened scrutiny that could have placed an undue expectations burden on the company or our potential investors. Filing confidentially also allowed us to effectively time our offering, enabling us to wait until the market was strong before we made our S-1 public and began our roadshow.
Both at the time of our IPO and continuing for our first five years as a public company, the JOBS Act’s regulatory relief provisions have helped preserve capital for R&D and allowed us to focus on our research. The Act takes a significant step away from costly one-size-fits-all regulations by reducing the regulatory burden on EGCs, ensuring that the capital raised in an offering is not subsequently diverted from R&D and company growth. In particular, the five- year exemption from Sarbanes-Oxley (SOX) Section 404(b) continues to save us hundreds of thousands of dollars per year.
Because pre-revenue small businesses like GlycoMimetics utilize only investment dollars to fund our work, we place a high value on policies like the JOBS Act that incentivize investment in innovation and prioritize resource efficiency. Any policy that increases the flow of innovation capital to emerging companies could lead to funding for a new life-saving medicine – while any policy that diverts capital to unnecessary and costly regulatory burdens could lead to the same treatment being left on the laboratory shelf. The JOBS Act has been an unqualified success, enhancing capital formation and allowing companies to focus on science rather than compliance.
The Need for Smart Regulatory Reform
This is a powerful, firsthand testament to smart deregulation efforts like the JOBS Act. And that last phrase – “focus on science rather than compliance” – is a vital message that undergirds all efforts to reform or rescind misguided, repetitive, ineffective and costly regulations. Just replace the word “science” with whatever endeavor a business is involved in – such as focus on manufacturing rather than compliance, technology rather than compliance, customer service rather than compliance, building rather than compliance, and so on.
It’s not that compliance with sound laws is burdensome – entrepreneurs, businesses, investors and consumers need a sound rule-of-law foundation for free enterprise to flourish – but it’s compliance with outdated, costly and unnecessary regulatory burdens that means enterprises are wasting resources rather than competing, investing, growing, employing and serving customers better.
Of course, even given the aforementioned positive developments and changes, areas in need of improvement always exist, including for the JOBS Act, such as government placing too many limits on the ability of entrepreneurs to gain access to capital and/or on investors’ abilities to make investments in entrepreneurial ventures. These and other improvements were given serious attention at the March 22 hearing, which I included in my statement to the subcommittee.
As I concluded in my testimony: “Regulatory policy needs to protect against fraud and abuse, but it also needs to reflect the reality that free markets provide the foundation upon which entrepreneurship, investment, innovation and business can flourish, thereby providing a breathtaking array of goods and services that improve all of our lives in seemingly countless ways. It is vital that financial regulation recognize these realities, the transparency that technology has imposed upon the system, and be built on a respect to free enterprise.”
Raymond J. Keating is chief economist for the Small Business & Entrepreneurship Council.
Keating’s latest book published by SBE Council is titled Unleashing Small Business Through IP: The Role of Intellectual Property in Driving Entrepreneurship, Innovation and Investment and it is available free on SBE Council’s website here.