Jumpstart Our Business Startups Act
Floor Speech
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Mr. REED. Mr. President, this is a critical moment. The Senate is on the verge of adopting legislation that could cost the American people dearly in the future. The House bill with respect to capital formation, which is labeled a jobs bill, but goes more to fundamentally changing security laws, is, in effect, another regulatory race to the bottom. There has not been a normal committee process in terms of weighing this legislation. This is a complicated bill involving the interaction of many different securities laws, interactions which have not been sorted out or analyzed. As a result, we are rushing to justice--or rushing to conclusions.
Hasty deregulation has repeatedly been the source of financial crises--including the savings and loans crisis, the Enron-era crisis, the great recession of 2008, and the list goes on. Those who are impacted by those crises--those who lost their savings or dealt with cleaning them up, experts in this field, and many more--have come out in strong opposition to the House proposal: from the Chairman of the Securities and Exchange Commission, Mary Schapiro, the North American Securities Administrators Association, the State officials charged with enforcing securities laws, auditors, financial analysts, pension fund managers, and organizations like AARP, all who have spoken out against this legislation and supported my efforts to protect investors.
This capital formation bill is fundamentally flawed, and it should not become law in its present form. It undercuts and dilutes investor protections and has no real requirements to protect American jobs in order to use these new capital raising procedures. That is what is so ironic. We have a jobs bill, but actually I see nothing in this bill that requires creating American jobs in order to earn the benefits of this bill. I think it is, again, misnomered as a jobs bill.
In addition to the substitute amendment I offered with Senators Landrieu, Levin, and others that received a majority vote earlier this week, I offered an amendment that we will be voting on later today to clarify the shareholder trigger for Exchange Act reporting so that all companies count their actual shareholders so they cannot avoid periodic reporting requirements.
Adoption of this amendment would achieve one of the stated goals of the legislation, which is ostensibly to have more companies into a transparent marketplace, disclosing and/or listing on stock exchanges. That was the whole essence of this IPO onramp idea: encourage more people to go public so they can disclose information to shareholders, so the market can follow them, and so investment advisers can advise investors about purchasing the stocks on the market.
This proposed amendment would close one glaring loophole, but, frankly, too many others remain, and I have grave concerns about the impact this underlying bill will have on the middle class. Backers say it is needed because initial public offerings are down since the 1990s. They blame regulation, ignoring evidence that the dot-com bubble bursting--which shook the confidence of many investors through lots of new IPOs coming on the market quickly with huge multiples in their prices and then quickly disappearing and leaving the scene altogether--and the biggest financial collapse since the Great Depression, beginning in 2008 and lingering with us today, have shaken the confidence and, frankly, shaken the business calculation of many small businesses.
These small businesses are looking to expand when they see the demand out there for their products. If the demand is there, they will, even in this environment, go forward with initial public offerings. They also repeatedly blame the lack of IPOs on accounting costs and all other compliance costs brought on by Sarbanes-Oxley and other laws. They conveniently ignore that the single largest cost, by a large multiple, is not the Sarbanes-Oxley audit costs or the attorney costs; they are the investment bankers' fees, and there is nothing in this legislation that will affect those fees whatsoever.
In the case of Groupon, for example, the investment bankers were paid 28 times what the auditors were paid. If we ask the shareholders of a company's stock whether they would prefer solid auditing practices going forward to ensure their investment is being wisely used, I think they would say they prefer that to paying large fees to investment bankers. In the case of LinkedIn, the underwriters were paid 18 times what the auditors were. Groupon paid their accountants and auditors $1.5 million, and their investment bankers received $42 million. So the notion that these Sarbanes-Oxley auditing costs and accounting procedures are what is stopping a business person from deciding to go ahead ignores the fact that compared to the investment banking fees which they will still have to pay, these costs are somewhat insignificant in comparison.
Theoretically, this bill is supposed to promote the flow of capital to emerging businesses. But in practice it will likely promote and continue to promote the flow of big fees to investment bankers and others to bring these companies public. There is nothing wrong with that, but there is nothing in this underlying legislation that is going to require discounts in the cost of an IPO because of the reductions in accounting costs. There is nothing in this legislation that will change that dynamic. However, this legislation could give insiders more ways to manipulate the market while average investors are left out in the cold.
There is a difference between cutting redtape and allowing insiders to cut corners--undoing the commonsense safeguards that protect people who play by the rules. The House bill lowers standards for taking companies public and lowers standards for protecting the public from investment fraud.
This so-called IPO onramp desperately needs an offramp, through more careful consideration by the Senate and the House in conference so that we can improve some provisions which have great merit but need improvement. This bill would allow very large companies with up to $1 billion in revenues per year to avoid financial transparency and auditing disclosure designed to ensure they are not manipulating their books while enjoying lighter regulation for up to 5 years after the IPO.
If this unbalanced bill becomes, law without these needed improvements, it could weaken oversight of Wall Street--oversight that in the past has provided investors protections that are extremely important. Again, there is merit to the idea of giving small startup companies more financing options, but the devil is in the details, and the way this bill is written and packaged could have the opposite effect and ultimately make it harder to raise capital.
It opens the spigot to general solicitation and mass marketing of what have traditionally been private securities offerings, and we could fully expect to have senior citizens and others--through nightly cable advertisements, through billboards, cold calls by brokers, or other individuals telling them about the special opportunities for investing their cash, fall for some of these tactics.
Retail investors can be solicited through this bill's reg A process to raise up to $50 million capital for small businesses. They will hear the pitches to make their investment now and get rich.
Again, there is potential for expanding the use of regulation A--it is on the books already at the Securities and Exchange Commission--but not without safeguards. For example, as the bill is currently drafted, these solicitations can be made without audited financial statements. I think as a point of departure, if someone is trying to sell a security, they should at least have to provide ordered financials from the company they are soliciting on behalf of.
Now, the crowdfunding amendment, I hope, will be improved dramatically by the work of Senator Merkley and Senator Bennet and Senator Brown. We will be voting on that later today too. It is a substantial improvement, but I think even they themselves will admit this is an experiment and perhaps could be improved even further. But I commend them and salute them for what they have done, and I hope our colleagues will accept the amendment and move forward.
Over the last few days we have spent a great deal of time talking about the shortcomings in this legislation. With the exception of the proposals before us, many of these shortcomings still exist, and I think they will lead potentially to difficulties and harm to investors.
People understand investing is risky. They try to make an informed choice, and they win some and lose some. But most Americans would agree that U.S. financial markets work best when investors have access to timely, comprehensive, and accurate public information that allows people to make solid investment decisions. In fact, one of the principles of the competitive market, if we refer to an economics 101 textbook, is perfect information.
That is the assumption for competitive markets: perfect information.
Well, there is never perfect information. But there has to be adequate information. Otherwise it is not a market, it is a casino. This legislation undermines some of the decades-long protections we have had in place to provide at least adequate information to investors.
By stripping away auditing standards and giving the investing public less information in almost every setting, sophisticated players and investment banks will have all the advantages. The average investor will be operating in much more challenged circumstances.
Middle-class America will be particularly affected. As USA Today noted:
Banks that manage IPOs will be able to use inside access to past financial results to dominate research on new companies, with incentives to promote their firm's banking clients.
The American people want big banks and large companies to play fair and comply with the basic rules and responsibilities that go with being a public company. That is not too much to ask.
I believe history will judge this misnamed bill quite harshly. Instead of rushing to pass this bill, we should be working together to protect the interests and economic well-being of the American public. We should be focused on creating jobs and helping working families. In my estimate, this bill does not do that and, indeed, ironically, it could harm our constituents by shattering their faith--and it has been tested quite recently by the financial crisis and other crises--in the market, rather than reinforcing their confidence that they will be protected against fraud and manipulation.
I believe we are capable of writing better legislation without sacrificing important investor protections. I hope we can go forward. I am disappointed the substitute amendment, authored by myself and Senator Landrieu and Senator Levin, was not accepted. As such, I would urge, when we get to final passage, people think very seriously about the consequences of the bill. Despite the efforts of Senator Merkley and Senator Bennet, Senator Brown of Massachusetts and others, despite my efforts, I am afraid the final version of this legislation will not protect investors as it should and, therefore, should be rejected.
Mr. President, I ask unanimous consent that any time remaining in quorum calls be equally divided between my Republican colleagues and my Democratic colleagues.
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Mr. REED. Madam President, shortly, we will be voting on my amendment, which will maintain the House's increase in the number of shareholders at 2,000 in order to remain private. But what I do is actually ensure that the shareholders are the real shareholders; that there is not an intermediary holding the stock in the name of perhaps literally hundreds of shareholders, but they are the real shareholders.
There has been some criticism about the affect it will have on ESOPs, private funds, mutual funds, and others. We have been assured by legal experts it doesn't affect any of these funds or entities.
In addition, the SEC has assured us that it, through rulemaking, can clarify that ESOPs, mutual funds, private funds, and other entities similar to these will not be affected.
I believe if a company has 2,000 real shareholders, those shareholders should have access to routine information on a regular basis, and that is the thrust of this amendment.
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Mr. REED. Madam President, the House bill has some very promising concepts about providing access to capital. What it fails to do is adequately protect investors.
We have tried, through our alternative, to protect investors. That alternative has been rejected on a cloture vote by the Senate. We have made some improvements with the Merkley proposal, but we are not quite to the point yet where I think we can be confident that investors will be protected.
As such, I think we should vote against this legislation, and that we should in fact try again and get it right. That is why the head of the Securities Exchange Commission opposes this, and the state securities regulators, and former heads of the Securities Exchange Commission, and the Council of Institutional Investors, and many others.
We are opening up vast loopholes in our securities laws without adequate disclosure for investors. I think we will regret this vote.
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