Jumpstart Our Business Startups Act
Madam President, I yield the floor.
Mr. REED. Mr. President, the House of Representatives has just passed H.R. 3606, which is styled as a capital formation bill, but it is fundamentally flawed. As more and more people have looked closely at the bill, they have found more and more problems with it--problems that could roll back key consumer protections and dramatically decrease the transparency of our capital markets.
One of the fundamental misconceptions in this bill is that we can have robust capital formation without good investor protections. My view is we can't have one without the other; that the strength of our market is the reliance investors have that they will have the right information and know enough about the entity they are investing in to make judicious, sound economic judgments. The Cantor bill would roll back many investor protections, would deny investors critical information that is essential to making sound judgments, and would ultimately not lead to the proposed goal of the bill--providing more access to capital, particularly for small, emerging companies.
Serious concerns have been raised about the Cantor bill by current and former regulators in the last 2 weeks: Mary Shapiro, Chairman of the Securities and Exchange Commission; the North American Securities Administrators Association; Arthur Levitt, former Chairman of the SEC and head of AMEX; and Lynn Turner, former chief economist of the SEC.
Some of the largest pension plans in the entire country have been weighing in through the Council of Institutional Investors, and these are the entities most people want to have invest in their companies as long-term investors. They have real concerns about the House action.
We have been getting phone calls and letters from a diverse array of consumer groups, such as the AARP, the Consumer Federation of America, the AFL CIO, and SAFER, the Economists' Committee for Stable, Accountable, Fair, and Efficient Financial Reform.
Academic experts, such as Professor John Coffee of Columbia University School of Law, for one, have called the Cantor bill the ``Boiler Room Preservation Act'' because it will mean more pump-and-dump schemes, where people are pressured to invest in highly risky firms and products. Two other noted securities experts from Harvard University Law School and Business School, respectively, John Coates and Robert Pozen, have said the bill does more than, in their words, ``trim regulatory fat; parts of it cut into muscle.'' We need to slow down this process and get it right. H.R. 3606 can be improved and should be improved. That is why I--together with Senators Mary Landrieu, Carl Levin, Sherrod Brown, Jeff Merkley, Daniel Akaka, Sheldon Whitehouse, Al Franken, Tom Harkin, and Dick Durbin--am introducing a substitute amendment to this bill today. We hope our legislation can serve as a base bill for the Senate to discuss and amend as we move forward.
What are some of the most serious flaws we are trying to address in the Cantor bill? First and foremost, this bill is unlikely to create jobs, despite the title the House has bestowed upon it. In fact, it may actually have the opposite effect. By weakening investor confidence, it could actually decrease the number of IPOs and lead to fewer investments in our capital markets.
Currently, our markets are considered the most transparent and liquid in the world, which has been one of its great strengths--the confidence that when an investor puts money into an American financial product and American market, he or she has detailed information about the current status and the prospects of that investment. Under the Cantor bill, our markets would become less transparent and more opaque. Fewer protections will be provided to investors. This could actually lead to fewer investors investing in the United States, since we are in a global economy or increasing competition with capital markets in London, Paris, Hong Kong, and Singapore--to name just a few.
Again, one of the great hallmarks of our markets, starting in 1933 with the securities legislation of the New Deal, was the feeling that investors would be protected, that there would be standards in place, information would be made available to them, and they could have confidence--as much confidence as they could get--in their investments. If we undermine that confidence, eventually we will undermine both our appetite and capacity to invest.
The Cantor bill has more problems. It tries to create a way that crowdfunding can be used to raise money for small enterprises, but it does this with very few protections for investors and would allow unregulated Web sites to peddle stock to ordinary investors without any meaningful oversight or liability.
Crowdfunding is a very interesting new approach to raising capital. Our colleagues, Senators Merkley and Bennet have spent a lot of time developing very positive legislation which balances improving small business access to capital, by tapping into social networks and small investors but, at the same time, gives those investors adequate protections. The House has not taken this approach. They have legislation that could, indeed, create a situation where crowdfunding is plagued by fraud, by manipulation, and by people who simply want to make a quick buck and move on, hoping they will just disappear into the Internet.
The Craigslist or eBay model may work to enable people to sell unwanted clothing, bikes, and other goods, but it certainly doesn't work for a financial security that requires a much more careful analysis than simply kicking the tires. People with more credit card debt than savings will be tempted to put their money into these mass-marketed, get rich schemes--money which they can't afford, in many cases. As the economy continues to grow, stocks will rise--we have seen some interesting and very positive developments on Wall Street over the last several weeks--but this ride up could be accompanied by bubbles with these types of crowdfunding schemes, where people are putting money in for a quick return based on, perhaps, the success of one or two companies but not having the information, not having the appropriate controls on the intermediaries so they can make a sound, valid investment.
There is another aspect of the House legislation, in addition to this crowdfunding approach, which is the House IPO on-ramp provisions. An IPO, of course, is an initial public offering. This approach, to try to streamline access to the public markets for emerging companies, has great merit. But once again, what has happened in the House bill is they have done this at the expense of necessary protections for investors.
Relaxing standards for very large, new public companies, when no evidence supports the idea those standards stand in the way of these IPOs and much evidence suggests the standards prevent serious accounting problems, is not the way to go. The basic essence of their approach--this on-ramp approach--is a very large company, with up to $1 billion in revenue, for a period of 5 years or so, can avoid some of the now standard requirements for public companies. This is not an targeted approach for small companies. Companies with $1 billion of revenue are substantial economic enterprises. The protections that have been put in place over the years not only protect the investors but also ensure appropriate audit procedures are in place. Ensuring appropriate managerial behavior for a company of that size should not be indefinitely waived or waived for a period of 5 years.
We could literally roll back the clock to pre-Enron, pre-WorldCom, where because of creative accounting, because of the lack of adequate audit procedures within the company, real abuses occurred. The result was Enron collapsed and their shareholders were left with virtually nothing. One of the more tragic ironies is that many of their shareholders were their employees who had their entire pensions invested in the company, particularly in the case of Enron. Ultimately, the pain to these people, caused by the lack of good standards--which have since been put in place--was significant. If we proceed on this, we might, once again, have a situation where we are repeating industry--and a history we have seen already.
Again, as the economy rebounds, as stocks rise, I think there will be a variable increase in new public offerings--IPOs. If we look at the data, the number of IPOs goes up and down. But the most significant factor is simply economic activity. As economic activity goes up, new companies have opportunities, IPOs go up. In this boom, there could be the temptation for these companies, given these new, very relaxed standards, to ignore the problem because they do not have to disclose them adequately or to deliberately mislead investors because there is no real check on what is being said. The relaxed standards in the House bill could allow companies to engage in deception, to raise and waste more investment money more quickly.
There is a way we can dial back this excessive legislation in a way that will provide capital formation but will also provide protections for investors, and I hope we can proceed in that manner. Increasing IPOs is a valuable goal, but it should be done much more cautiously, in my estimation, with reforms focused on much smaller companies than those with $1 billion in annual revenue, as is indicated in the Cantor bill.
During the course of three hearings in the Senate Banking Committee on these issues, it has become even more clear there are problems with the way shareholders are being counted. This is another aspect of the House bill that is problematic. They have indicated they would like to move beyond a number--500--which requires a company register under the 1934 Securities and Exchange Act with the SEC. This trigger is something that should be considered in terms of present-day standards. The House bill raises this trigger point to 2,000 very quickly, without dealing with the so-called beneficial owners problem. If the provision in the House bill was in force in the past, two-thirds of current public companies would not have been required to register under the 1934 Act. Let me say that again.
If you reach a certain number of shareholders, you are required to register and begin to give those shareholders required information on a quarterly basis. You are required to file other forms. You are required to be subject to other rules and regulations of the SEC.
If this new House standard of 2,000 shareholders was in place, two-thirds of current public companies would not have to register with the '34 Act. They would be operating in the dark. They would be operating with whatever minimal information they might be required to divulge to their shareholders under State corporate law or, in some cases, State securities law. That is an astounding number of companies.
Most investors take for granted that when you reach a critical size in the number of shareholders, et cetera, that you will begin to report. Again, these reports are the lifeblood of the investing community because they rely upon them for their information about what is going on in the company, and they rely upon them for the standards that company has to follow.
Over time, most investors as a result of registration under the '34 Act are entitled to receive regular disclosures. Again, these provisions raising up the level to 2,000 shareholders would undermine the other stated goal of the Cantor bill, to make it easier for companies to go public and easier to disclose information. In fact, some would describe this as sort of a bipolar piece of legislation.
On the one hand, they want to relax the standards for going public, and on the other hand they want to relax the standards and allow more companies to go private. I think we have to be careful in each instance to ensure that investors are protected, as well as capital formation is enhanced.
The House bill will eliminate an SEC rule on general solicitation, allowing companies to advertise risky, less regulated, unregistered private offerings to the public using, for example, billboards along highways, cold calls to senior living centers, or other mass marketing methods. It also will tear down protections that were put in place after the late 1990s Internet stock bubble burst that prevented conflicts of interest from tainting the quality of research about companies.
What we found in the wake of the dot-com bubble--with many protections in place that would be taken out by this legislation--was there were analysts who were touting companies at the same time other parts of their business were trying to sell those companies' shares. This conflict of interest with someone you hope is giving an objective opinion would be encouraged, not discouraged, under the House bill.
The Cantor bill would allow extremely large corporations to avoid SEC oversight. It also would allow banks, with even hundreds of billions of dollars in assets, to deregister and stop being subject to SEC oversight and critical investor protections.
Finally, the Cantor bill actually doesn't include provisions that are more likely to create jobs for Americans. For example, the House bill does not include reauthorization of the Ex-Im Bank. Time is of the essence, by the way, to get this Ex-Im Bank reauthorized. The bank's temporary extension expires at the end of May and is close to exceeding its operating level of $100 million by the end of this month.
Renewing the Ex-Im Bank's charter with increased lending authority is practically the only way of countering the predatory financing practices of other trading nations. We spend a lot of time on this floor pointing the finger at companies that are using their sovereign institutions to undermine American jobs, to get them overseas. Yet one of the major institutions in our country that helps American products to be sold overseas is literally in danger of going out of business. That is something that will, in fact, enhance job creations, and it is not in the House bill. In fact, it has been suggested that Ex-Im Bank activities supports almost 300,000 jobs in the United States each year.
It also doesn't include two other programs that would result in the creation of more jobs, and these two programs are particularly the result of the hard and aggressive and thoughtful work of Senators Landrieu and Snowe. One program expands the capacity of the Small Business Investment Company program, SBIC. They have proposed legislation that would allow another $1 billion in equity-like financing for smaller, fast-growing firms. The other program would extend for 1 year the SBA's 504 refi loan program to help firms refinance commercial real estate into long-term, fixed-rate loans.
These modifications have created and saved hundreds of thousands of American jobs at no cost to the taxpayers. These are tried and true ways to increase jobs in America without running the risk of undermining the information that investors need to make sound choices about where to invest their dollars.
It is very tempting to suggest we simply have to cut a couple of regulations and jobs will expand. That was the theme that was rampant here during the Bush administration and, for a while, frankly, it looked like it was working. But then, with the sudden and colossal collapse, we knew that was not the path to long-term sustained job creation. Sound investment based on adequate information in companies that produce jobs in the United States is the way to proceed.
We need to listen to those individuals charged with the supervision of our capital markets, the SEC, and now we have both the current chairman and a former chairman saying the legislation the House proposed is a threat to all investors in this country. The stakes are high if we get some of these things wrong. We have been trying to focus on these issues intensely for the last few months to bring legislation to the floor that will balance capital formation with investor protections. You can't get one at the expense of the other. You have to have both.
So I encourage all my colleagues to take a close look at the Reed-Landrieu-Levin substitute. I believe it is a substantial improvement to the House bill. My colleague from Louisiana will speak and, once again, I must commend her passion for protecting investors, particularly small investors, and her passion for creating jobs through the SBA and other organizations as remarkable, commendable, and indeed exceptional.