JOBS Act 2.0

Im-just-a-bill -schoolhouse rocks

It was an unusual show of bipartisan support when the original JOBS Act was passed in the Spring of 2012. Congress is following in the footsteps of movie studios and looking to produce a sequel. Financial Services Committee Chairman Jeb Hensarling has promoted a group of bills that he thinks will comprise the JOBS Act 2.0.

Here is the pitch:

H.R. 1800 Small Business Credit Availability Act will increase the ability of Business Development Companies to lend to small businesses and help ensure the flow of capital to Main Street.

H.R. 2274 the Small Business Mergers, Acquisitions, Sales, and Brokerage Simplification Act will streamline and simplify regulations so that small business owners can sell their small businesses when they retire, rather than perhaps be forced to close them up.

H.R. 3448 The Small Cap Liquidity Reform Act will make small companies more attractive to investors and, in turn, produce higher rates of capital formation and jobs.

Here is what the legislation actually does.

The Small Business Credit Availability Act amends the Investment Company Act of 1940 to allow a business development company to own interests in the business of a registered investment adviser or an adviser to an investment company. It also reduces from 200% to 150% the asset coverage requirements applicable to BDCs and allows a BDC to issue stock. BDCs have been become the hot topic for financing. I have to admit my ignorance about the benefits of using a BDC. Clearly, this bill is trying to clear a bunch of the obstacles to the use of this type of financing. I did notice that the SEC recently issued a no action letter allowing a BDC, Main Street Corporation, to own an investment adviser.

The Small Business Mergers, Acquisitions, Sales, and Brokerage Simplification Act creates a new regulatory framework for “Mergers & Acquisition Brokers” who are in the business of effecting the transfer of ownership of an eligible privately held company. That is a complication in the sale of a small company. If it’s structured as an asset sale, the broker does not need SEC registration. But if transaction is structured as the sale of securities, the broker does need to be registered.

The Small Cap Liquidity Reform Act will provide a pilot program allowing certain emerging growth companies to increase the tick size of their stocks. That’s been a quest for Wall Street ever since decimalization was introduced. It’s killed the profit margin for market makers. That it’s tied to emerging growth companies is just an added bonus. That status allows the company to file privately with the SEC while working on the IPO. It will make this designation more attractive for the deal runners who stand to make a better profit by acting as a market maker on the stock.

Like most movie sequels, this legislative sequel is not as good as the first. Clearly, Congressmen Hersarling recognizes the importance of good marketing to get a bill passed that changes the financial services regulatory regimes. These are three very specific bills that are unlikely to catch the attention of the rest of Congress.

The original JOBS Act flew through Congress with enticing tidbits that would make IPOs easier and enable crowdfunding (sort of). I can’t see JOBS Act 2.0 getting the same kind of interest, even with the positive spin given the bills.