Lots of grand promises, but few results to show

Dina ElBoghdady • The Washington Post /

Published Mar 30, 2013 at 05:00AM

WASHINGTON —

When lawmakers unveiled the carefully named JOBS Act a year ago, backers expected it to get caught up in the typical grind of Capitol Hill: vigorous debate followed by a long wait for a vote that might never happen.

Instead, the legislation sailed through — perhaps too fast. Even supporters say they expected more time to work out the kinks in the Jumpstart Our Business Startups Act, which aimed to help small, private firms raise money and grow so they could hire more workers.

Now, nearly a year after its enactment, major portions of the act are in limbo, and other parts have failed to measure up to the grandiose job-creation promises.

The act underscores how difficult it can be for Washington to spur job creation, even when there’s strong bipartisan consensus around a plan. President Barack Obama hailed it in a Rose Garden ceremony as “exactly the kind of bipartisan action needed” to help the economy. Republicans claimed it as their own. The measure came together months before last year’s election, making it politically difficult to resist a proposal that promised to yield jobs.

“It was a short-lived, political fad,” said Simon Johnson, a professor of entrepreneurship at the Massachusetts Institute of Technology. “There was this combination of wanting to look busy and wanting to create jobs, and skeptics like me never thought it would do anything good.”

Uncoordinated ideas

The measure is a grab bag of ideas cobbled together for greater impact. It allows private firms to raise money by advertising to the general public for the first time in decades, raise up to $1 million in capital from investors via the Internet, and temporarily skirt some of the federal disclosure and accounting rules when they go public.

The legislation was built on the premise that regulation constrains the growth of small businesses and their potential for explosive job growth — an assertion that has been hotly debated by economists for decades.

But with unemployment high and an election looming, lawmakers hastily introduced the JOBS Act in December 2011, and it got a thumbs up from the president.

The measure passed the House with an overwhelming majority three months later. Many who were tracking the bill, including its supporters, expected more scrutiny in the Senate. But it whizzed through that chamber, too, in part because Democrats who were skeptical about the measure were reluctant to break ranks with Obama.

“Once the White House endorsed the measure, it was a speeding train coming through the Senate,” said a Senate staff member who was not authorized to speak publicly on the issue and whose boss supported the JOBS Act. “It gained momentum very quickly after that even though some of us felt there was room for improvement.”

Risky new laws

Obama signed the bill April 5, four months after its introduction — record speed by Washington standards. The result, critics say, are laws fraught with risks to the investing public.

A group of investor advocates, shocked by the swift action, went to Capital Hill to follow up, said Lynn Turner, a former chief accountant at the Securities and Exchange Commission (SEC) who took part in the meetings. The group asked one senior Senate staff member how lawmakers would track the number of jobs created by the measure.

“There was a moment of silence, and she said, ‘We don’t do that up here. It would take too long,’ ” Turner said.

Sen. Jack Reed, D-R.I., who voted against the measure, put it more bluntly: “We saw bipartisan support for a concept that had a lot of political appeal because of its title. . . . It’s just a relaxation of traditional investor safeguards.”

A senior administration official said it is unfair to portray the legislation as a rush job. For months before the JOBS Act was introduced, Congress worked on the measure. The White House weighed in with its own framework for the legislation, including the investor safeguards needed, said the official, who was not authorized to speak publicly on the issue. Congress adopted some of the protections, ignored others and added provisions that were not priorities for the administration.

“But all along, we continued to urge the Senate to improve on the legislation,” the official said.

Obama continued to press for improvements at the Rose Garden signing ceremony, when he highlighted the key role regulators would play in writing the rules needed to implement controversial parts of the measure and build in investor protections.

“That was the balance the president struck in signing the bill.”

From private to public

A central feature of the JOBS Act makes it easier for private firms to go public.

That portion of the measure, which took effect immediately, grew out of a March 2011 forum at the Treasury Department. Kate Mitchell, a Democrat and a Silicon Valley venture capitalist, spearheaded a discussion about reviving the market for initial public offerings of stock, or IPOs.

Eager to come up with a plan, she recruited investment bankers, entrepreneurs, lawyers, academics and other venture capitalists to form the IPO Task Force.

The task force successfully lobbied to temporarily remove certain regulatory barriers for “emerging growth companies,” defined as those with less than $1 billion in revenue.

Those firms can now give regulators less financial data before they go public and fewer details about executive compensation. They can also delay an audit of their internal controls that was mandated for all companies after the Enron accounting scandal.

The most controversial element allows investment banks that take a firm public to also publish research about the firm, removing a firewall that was put in place after the dot-com bust, when it became clear that banks were promising to hype a firm’s stock through research to secure the lucrative underwriting business.

Companies can only take advantage of the relaxed rules for up to five years, which appealed to Democrats, Mitchell said. The deregulatory bent pleased Republicans.

“There was nothing radical about the relief granted,” Mitchell said. All the changes had a basis in existing practices, she said. For example, very small firms have been allowed to file scaled-back versions of financial documents for years.

Even the staunchest critics say it’s too early to tell whether these provisions are working, especially because it typically takes more than a year to prepare for an IPO. But they also acknowledge the initial signs suggest the measure has had lackluster results.

Firms can pick and choose which of the relaxed rules to embrace. Many companies are adopting some of the less controversial options and steering clear of others for fear they will be shunned by investors.

A misdiagnosis?

Meanwhile, the number of IPOs has not taken off, and enthusiasm for the act has waned. Only 29 percent of investment bankers say it has helped boost the number of IPOs, down from 55 percent last summer, according to a December survey by consulting firm BDO. Forty-two percent said they saw no positive effect.

Critics say the JOBS Act misdiagnosed the root causes of the IPO drought.

They say the most promising companies have no problem raising money privately, and many of them don’t want to go public.

Besides, investor appetite isn’t there for smaller firms that do, said Jay Ritter, a finance professor at the University of Florida. Small firms with less than $50 million in annual sales have generated dismally low returns in the three years after their IPOs, he said, and that has held true for the past three decades.

“For every successful company, there have been too many failures,” Ritter said.

Although critics continue to blast those provisions, the most controversial portions of the act are not in place yet.

Among them is one that allows fledgling firms to raise small sums from a large number of people on the Internet. Artists and charity groups have long used this “crowd funding” method, but it has never been used to offer an ownership interest, or stake, in a company.

Investor advocates fear that crowd funding will emerge into a platform for frauds making bogus appeals to unsophisticated investors. A group of state securities regulators said it tried to mitigate the potentially disastrous consequences by urging the White House to allow state regulators, who are closest to businesses, to oversee crowd funding.

But the White House “wouldn’t hear of it,” said Heath Abshure, head of the North American Securities Administrators Association. “Crowd funding was already part of the president’s platform to help small businesses by then.”

Reduced regulation

Investor advocates also lost their bid to strip a provision that allows private firms to solicit the public without regulatory oversight for the first time since the 1930s.

Hedge funds, for example, will be able to advertise via e-mail, billboards or Facebook. Before, they could only solicit sophisticated investors, who could presumably withstand potential losses. Now the firms will be left to determine whether an investor meets net-worth and income criteria.

For years, the SEC has considered allowing this type of crowd funding and lifting the advertising ban. But it grappled with how to do it while balancing investor protections with the desire for businesses to raise money. The agency must act but is struggling with the details.

On Capitol Hill, signs of buyers remorse are emerging.

When the advisory board to the Democratic leadership in the Senate released a list of the jobs-boosting measures enacted by the Senate in the past five years, the JOBS Act was not among them.

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