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The JOBS Act and the Return of the Microcaps
Six years ago, I wrote in a sister publication opposing the application of the Sarbanes-Oxley Act's internal accounting control rules to small public companies, but I broke with my fellow critics on the reason why. I argued that small companies shouldn't be treated like big companies, not because they couldn't afford regulation, but because being small made them qualitatively different. Intrusive regulation made sense for large companies, I argued, because their failures could cause wide-ranging damage. Words like “systemic risk” were not yet in vogue, but that's what I meant. On the other hand, because failure and fraud in small companies would not impact the rest of the economy, they should largely be left alone, and their investors left to their traditional fraud remedies. It was, admittedly, a radical position. See Aegis J. Frumento, The Rich are Different, The Corporate Compliance & Regulatory Newsletter (May 2006), available at www.lawjournalnewsletters.com/issues/ljn_corporate/3_9/news/146512-1.html.
Now, one Great Recession later, Congress has officially recognized that small companies are indeed different by passing the Jumpstart Our Business Start-ups Act of 2012, which President Obama signed into law on April 5, 2012. Pub. Law 112-106, 126 Stat. 306 (the JOBS Act). It won't become fully implemented until next January, when ' if ' the SEC passes enabling rules. Even now, though, we can say with confidence that the JOBS Act will encourage small businesses and their investors to take more unregulated risks than they have been able to for a long time.
The catalyst for this change was ' in case you haven't guessed ' jobs. The JOBS Act rests on two recent studies. The Interim Report of the President's Council on Jobs and Competitiveness, issued in October 2011, had as one of its five recommendations, nurturing high-growth enterprises. The Report showed that firms less than five years old accounted for over 40 million jobs in the past three decades. Of those, young companies that doubled their revenues every few years accounted for an average of 88 new jobs each. However, labor statistics showed that the number of start-ups declined by 23% from 2007 to 2010, and that small IPOs declined even more.
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