Since 2010, more than 500 new “economically significant” regulations have been imposed, according to the White House Council of Economic Advisers. Bank compliance costsalone have doubled, as per Federal Financial Analytics. Regulatory restrictions on securities and investment have increased 54% in 10 years—and 80% over 20 years—reports QuantGov.
JPMorgan Chase claimed in its annual report for 2016 that Dodd-Frank cumulatively costs America’s economy at least 0.5 percentage point in annual growth. S. 2155 will ease some of these burdens on community and regional banks, helping the U.S. remain globally competitive.
Yet 80% of U.S. business debt financing comes not from banks but from investors in capital markets. They need regulatory modernization, too. The House Financial Services Committee, which I lead, has been busy passing more than 20 bills on capital formation, known collectively as the JOBS and Investor Confidence Act of 2018, or JOBS Act 3.0. As part of the agreement to pass S. 2155, the Senate has committed to take up this important package.
The JOBS Act 3.0 is principally designed to spur entrepreneurship by reinvigorating business startups and initial public offerings. U.S. startups approached a 40-year low in 2016, and the number of domestic IPOs, though making a comeback, is half what it was 20 years ago, according to Scott Kupor of Andreessen Horowitz. Last year China produced more than one-third of the world’s IPOs, vs. America’s 11%. This gap has probably cost the U.S. millions of jobs.
Without a steady stream of small businesses in the pipeline, the U.S. cannot sustain strong long-term economic growth, much less compete with China. Small businesses employ almost half of Americans working in the private economy. They include the Apples, Googles and Amazons of tomorrow. Yet too many startups never make it off the launchpad.
The House is working to address these problems and restore U.S. competitiveness. First, to stimulate venture capital, the JOBS Act 3.0 would provide legal certainty to “angel investors” and entrepreneurs by allowing them to interact without running afoul of securities laws. Another measure would expand the pool of early-stage capital by broadening the definition of “accredited investors” who can participate in a nonpublic offering. Today’s definition relies on criteria like income and net wealth, without taking into account an investor’s experience and expertise.
The House has also acted to help companies that should be ready to go public but are deterred by the cost. The average cost of initial regulatory compliance for an IPO is $2.5 million, according to a 2011 report by the IPO Task Force. That’s why the House would specifically lengthen the “onramp” exceptions for compliance with Sarbanes-Oxley section 404(b), one of the most complex and expensive provisions of securities law. The JOBS Act 3.0 also expands confidential filings and “testing the waters” rules to help companies time their IPOs better and communicate with accredited investors without harming retail investors.
Unfortunately, too many companies that go public wither on the vine because their stocks are thinly traded and subject to high volatility. A stock with 10,000 shares of daily trading volume should not be regulated the same as one with 10 million shares. The House would address this disparity by allowing the creation of venture exchanges. Concentrating a small issuer’s trading into a single exchange would aggregate liquidity and help attract post-issuance support, including research, sales and capital commitments by market makers. This would be a game-changer for many small issuers.
These are only a few of the capital-formation bills that the House has designed to breathe new life into markets suffocating under aging regulations. The trouble is that given the Senate’s filibuster rules, none of the JOBS Act 3.0 provisions can become law without the support of at least 10 Democratic senators. When President Obama signed the first JOBS Act in 2012, he called it “one useful and important step” on the journey “to remove a number of barriers that were preventing aspiring entrepreneurs from getting funding.” For the sake of America’s long-term growth and competitiveness, let’s hope support for the Job Act 3.0 will be similarly bipartisan.
Mr. Hensarling, a Texas Republican, is chairman of House Financial Services Committee.
