House Republican lawmakers on Wednesday released a wave of seven JOBS Act 2.0 bills that seek to reduce state and federal regulatory costs for initial public offerings and smaller public companies.
However, Democrats expressed outrage over most of the bills at a hearing of the House Financial Services Committee, especially noting a loss of transparency and oversight.
"I am concerned that we are in danger of tipping the scales too far in favor of the issuing companies and away from the investors," said Rep. Carolyn Maloney, D-N.Y., the second-highest-ranking Democrat on the panel. "No one disputes that preparing audited financial statements is a time-consuming, labor intensive process but that does not mean that preparing audited financial statements is overly burdensome."
The package would add to rules being implemented by the Securities and Exchange Commission based on the 2012 Jumpstart Our Business Startups Act, which was enacted to ease restrictions on entrepreneurs and lower their costs of raising capital as part of an effort to grow the economy and create jobs. They also would add to a series of JOBS Act 2.0 bills that the congressional committee has already approved, including many provisions that were approved on a wide bipartisan basis.
Democrats focused their angst on bills that would exempt certain securities offerings from SEC or state review. Of particular concern was a bill introduced by Rep. Kevin McCarthy, R-Calif., that would lower the threshold for a corporation to be considered a "well-known seasoned issuer" from $700 million market capitalization to $250 million.
Companies which qualify that way generally have access to a relaxed regulatory regime and can offer a certain amount of stock and other securities when markets are favorable without the offerings being subjected to a time-consuming SEC review before they are issued.
Democrats and a high-profile academic worried that the SEC staff members who review securities offering registration statements would be unable to focus on follow-on offerings made by a large number of midsized companies and would be left to concentrate on IPOs and small issuers. The result, they said, would be more misbehavior and costly litigation.
"That's a poor allocation of the SEC's resources," Columbia Law School professor John Coffee told reporters after testifying at the hearing. "It's a fairly radical step to deny the SEC's staff any opportunity for a preoffering review of the securities to be issued by most companies. Probably two-thirds of the New York Stock Exchange would be over $250 million."
Coffee added that expanding the definition of a well-known seasoned issuer could have the unintended consequence of encouraging secondary sales by large shareholders, which don't have to be disclosed in certain regulatory filings. Coffee said this is particularly problematic in the case of smaller companies because it can encourage bailouts by insiders at corporations.
Democrats and Republicans also clashed over bills that would exempt certain companies from state securities regulatory oversight.
Rep. Ann Wagner, R-Mo., introduced a bill that would exempt securities issued by smaller reporting companies that are not listed on a major U.S. exchange from most state oversight. Wagner suggested that it made more sense to have federal regulation as opposed to the "patchwork" of state rules. However, Democrats raised concerns about eliminating state oversight.
"There is a tremendous local risk that is far beyond what the general market faces and my problem is that now under two bills, the state regulator, the person who knows the company best, is taken out of the regulatory regime and this puts the local state economy at greater risk than would otherwise be the case," said Rep. Stephen Lynch, D-Mass.
Democrats also raised concerns about another provision that would expand the number of U.S. corporations that would be exempt from auditing controls required by Section 404 of the 2002 Sarbanes-Oxley Act. Coffee pointed out that the JOBS Act gave small public companies a five-year "on ramp" where they can learn and prepare themselves for the new auditing reviews before being required to comply with them. However, this measure would allow many companies to be exempted permanently from the audit requirement, not just for five years. "The bill exempts not only emerging growth companies but also old and stale companies," Coffee said.
Nevertheless, a handful of Democrats expressed support for one bill introduced by Rep. Blaine Luetkemeyer, R-Mo., which seeks to exempt certain advisers to funds and small business companies from SEC rules based on the post-crisis Dodd-Frank Act. Maloney, a co-sponsor of the measure, said that the bill fixes an unintended consequence. "Under Dodd-Frank an investment adviser that only advises a venture capital fund is exempt from SEC regulation," Maloney said. "Similarly, an adviser that only advises small business investment companies, or SBICs, is also exempt. But an investment adviser that advises both venture capital and small business investment companies is not exempt. This makes no sense."
Maloney told The Deal after the hearing that in addition to backing the Luetkemeyer bill she also supports a measure introduced by Rep. Scott Garrett, R-N.J., that would direct the SEC to permit a company to include a summary page in annual reports. Garrett said the measure would make annual disclosures easier to understand for current and prospective investors.
The new package of bills adds to a growing number of JOBS Act 2.0 bills that have been considered by the House Financial Services Committee in recent months, many of which have been approved by the House on a bipartisan basis. However, the measures haven't had traction in the Senate or with the Senate Banking Committee, which has yet to vote on any bills following up on the JOBS Act.
On March 14 the House Financial Services Committee approved a package of provisions that seek to give small public companies conducting IPOs more comfort that they can continue to complete their public issuances even if they cross thresholds at some point in the process that would disqualify them from taking advantage of a variety of benefits included in the JOBS Act.
The measures, which were introduced by Rep. Stephen Fincher, R-Tenn., as one bill, were approved by a vote of 56-0. One provision would allow companies that began the IPO process as emerging growth companies to have until their IPO process is concluded or one additional year to complete their issuance in that category even if at some point in the process they grow to beyond $1 billion in revenues.
Companies below the revenue threshold -- but close to crossing it -- worry that they would need to refile if they cross the limit, adding costs and complications to their offerings.
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