WASHINGTON – Despite warnings that less government oversight might mean more investment scams, Congress on Tuesday sent President Obama legislation he endorsed making it easier for startups to raise capital without running afoul of federal regulations.
The legislation, backed by Silicon Valley and the high-tech industry, is on course to be one of the few achievements this year for a Congress mired in partisan divisions and primed for the fall elections.
The strong 380-41 vote in the House overshadowed misgivings among some Democrats and Democratic allies -- including unions and consumer groups -- that the bill backpedals on investment protections put in place after the dot.com excesses and Wall Street meltdown and could lead to fraud and abuse.
The Senate passed the bill last week on a 73-26 vote after attaching an amendment that tightened rules for seeking out investors on the Internet. All `no' votes in both the House and Senate came from the Democratic side.
The legislation combines a half-dozen smaller, bipartisan bills that exempt young companies from Securities and Exchange Commission reporting rules in order to reduce the costs and red tape of raising capital.
The centerpiece provision would phase in SEC regulations over a five-year period to allow smaller companies to go public sooner. Firms that have annual gross revenues of less than $1 billion would enjoy this "emerging growth company" status.
Another provision facilitates the practice of "crowdfunding" in which the Internet is used to solicit a large number of smaller investors.
House Republicans hailed the legislation as a jobs bill that by spurring capital formation would lead to small businesses hiring more people. "The jobs act is a victory for unemployed Americans who are literally crying out for jobs. It is a victory for small companies and for entrepreneurs who want Washington to reduce the red tape that stifles innovation, economic growth, and job creation," House Financial Services Chairman Spencer Bachus said.
Democrats, who have criticized Republican opposition to their efforts to stimulate the economy and create jobs, referred to the measure as an IPO or initial public offering bill, and said its effect on job markets would be modest at best.
Obama came out in support of the bill when it first emerged in the House three weeks ago, saying it paralleled many of the initiatives he had put forth to encourage small-business growth. The White House tempered that support somewhat after SEC chairman Mary Schapiro and consumer advocacy groups, in the wake of the original House vote, came out with concerns that it went too far in removing SEC oversight, opening the door to repeats of the Enron scandal or the mortgage industry deceptions.
After the Senate vote last week, White House press secretary Jay Carney said the White House was heartened by investor protections on crowdfunding added by the Senate and would "remain vigilant in monitoring this and other elements to ensure the overall bill achieves its goal of helping entrepreneurs while maintaining protections for investors."
Reviews were mixed among those affected by the legislation. TechAmerica senior vice president Kevin Richards, whose group advocates for the technology industry, said after the Senate vote that the bill was "a major step for technology innovation that will lead to job creation and greater U.S. economic prosperity."
But Ann Yerger, executive director of the Council of Institutional Investors, an association of pension funds and other employee benefit funds, said it "will create greater risks for investors and ultimately could erode confidence in our capital markets." AARP senior vice president Joyce Rogers, noting that older people are disproportionately the victims of investment fraud, said the bill "lacks vital investor protections and undermines regulations that guard against fraud and abuse."
In addition to the emerging growth company and crowdfunding provisions, the legislation removes SEC regulations preventing small businesses from using advertisements to attract investors and raises from 500 to 2,000 the number of shareholders a company or community bank can have before it must register with the SEC. It also raises, from the current $5 million to $50 million, the aggregate share offering amount a company can make before it must register the offering with the SEC.
Senate Democrats were unable to rewrite the bill to add across-the-board investor protections, but succeeded in attaching one amendment that requires websites involved in crowdfunding to register with the SEC and demands that companies seeking to raise money this way provide information on its financial status, business plans and shareholder risks.