Regulation A Reform in JOBS Act a “Game Changer” for Small BusinessPosted by on June 27, 2012
The JOBS Act, passed by Congress and signed by the President earlier this year, reduces government barriers to entrepreneurship, innovation and capital formation. It combines six separate proposals that originated in the Financial Services Committee into one bill. These six proposals were part of the Committee’s plan announced in January 2011 to help small companies gain greater access to the capital that is necessary for them to grow and hire workers.
One of those six proposals, the Small Company Capital Formation Act sponsored by Rep. David Schweikert, makes it easier for small companies to raise capital and test the waters for a future initial public offering (IPO). It does this by raising the offering threshold for companies exempted from registration with the Securities and Exchange Commission under Regulation A from $5 million to $50 million. Raising the offering threshold helps small companies gain access to capital markets without the costs and delays associated with the full-scale securities registration process.
While that may sound complex, the result “will be a game changer” for small businesses trying to raise capital, according to a recent column in the Washington Post.
“What this means to small businesses across the country is that they will be able to access needed capital without having to conduct an IPO or complying with the significant restrictions on resale. In addition…there will be a larger pool of potential investors, many of whom will now be less hesitant to invest in smaller offerings.”
BACKGROUND AND NEED FOR LEGISLATION
Section 3 of the Securities Act of 1933 authorizes the Securities and Exchange Commission to exempt small securities offerings from registration. Under Section 3, the SEC promulgated Regulation A, which exempts public offerings of less than $5 million in any 12-month period. The SEC set the threshold at $5 million in 1992, where it had remained until passage of the JOBS Act.
Congress originally authorized the SEC to set the Section 3 threshold at $100,000. It has raised the limit several times since: to $300,000 in 1945; to $500,000 in 1972; to $1,500,000 in 1978; and to $2,000,000, also in 1978. Before 1980, each time that Congress raised the statutory limit, the SEC promptly exercised its authority and raised the Regulation A threshold. Congress established the current level of $5,000,000 in 1980, but the SEC waited 12 years, until 1992, before raising the Regulation A threshold to the statutory limit authorized by Congress.
Since the SEC set the Regulation A threshold at $5 million in 1992, issuers and market participants have pointed out that the offering threshold has been too low to justify the costs of going public under Regulation A. In addition, inflation, which has risen approximately 165% since 1980, when Congress gave the SEC the authority to set the Regulation A offering threshold, has further exacerbated the imbalance between costs and benefits. Between 1995 and 2004, companies have used Regulation A only 78 times; in 2010, only three times. The low number of Regulation A filings—each for the maximum amount of $5 million—demonstrated that a revision to Regulation A was necessary. To increase the use of Regulation A offerings and help make capital available to small companies, Rep. Schweikert introduced the Small Company Capital Formation Act, which increases the offering threshold to $50 million.
After its approval by the Financial Services Committee on June 22, 2011, the House voted 421-1 for the Small Company Capital Formation Act on November 2. It was later incorporated into the JOBS Act along with five other bills from the Committee, which became law on April 5, 2012.
Small businesses are critical to job growth in the United States. Information released in January 2011 from the Small Business Administration states that 65 percent of all net new jobs created in the United States during the previous 17 years came from small businesses. Amending Regulation A to make it viable for small companies to access capital will permit greater investment in these companies, resulting in economic growth and more jobs. By reducing the regulatory burden and expense of raising capital from the investing public, Regulation A reform will boost the flow of capital to small businesses and fuel America’s most vigorous job-creation machine.
The opinions expressed below are those of their respective authors and do not necessarily represent those of this office.
Post a Comment