Why has the JOBS Act, which President Barack Obama signed today, been able to cut through Washington’s gridlock? Perhaps because, every politician sees that it might work when trillions in government spending have failed.
Whereas previous policies to foster entrepreneurship have sought to target opportunity zones, the Jumpstart Our Business Startups Act places the focus on those who can seize opportunities—entrepreneurs.
Entrepreneurs, not big firms, are the trick to economic expansion, to growth and, ultimately, to recovery. Indeed, virtually every fiscal problem the country faces could be solved or slowed with faster economic growth.
Firms less than five years old accounted for all net job growth from 1980 to 2005, according to Kauffman Foundation research. On average, nearly 92 percent of that job growth occurs at firms after they go through an initial public offering, according to the National Venture Capital Association.
New firms create 3 million new jobs each year. We need more than that just to keep up with population. But entrepreneurs help make the recession a lot more mild than it would otherwise be.
Throughout U.S. history, new firms have been disproportionately, and overwhelmingly, responsible for many of the innovations that characterize modern life — including the automobile, the airplane, computers, air conditioning, Internet search and gene therapies—that have helped improve living standards.
It would seem a no-brainer, then, to want to increase the number of new firms going to I.P.O., but regulations, particularly Section 404(b) of Sarbanes-Oxley, have made getting there tougher. However well-intentioned in the wake of the Enron and WorldComm accounting scandals, Sarbanes-Oxley has made it far more costly to file for an IPO. Thanks to this bill, the average cost to go public is $2.5 million, and the annual cost to stay listed is $1.5 million.
Since Sarbanes-Oxley, the IPO market has experienced a steady, swift decline. The pre-1999 average of IPOs per year was 547 annually. Since 1999, only 192 IPOs per year occurred. Only 45 IPOs occurred in 2008. Indeed, from 2001 to 2011, the annual figure for small firms going public was 80 percent lower than in the previous two decades.
A few provisions of the new Jobs Act could help make IPOs significantly more likely. Its five-year “on-ramp” to IPO for new firms would give emerging growth companies the time they need to focus on improving their products, not their balance sheets and enable them to carry on important research, rather than costly, unnecessary audits.
It reforms the Securities and Exchange Commission’s Regulation A, allowing firms to remain private with 50 million in transferable shares instead of only $5 million annually. It also fixes Regulation D, which allows entrepreneurs to “crowd source” and allows startups to raise $1 million or less from non-accredited investors.
Such reforms will likely help entrepreneurs broaden their investor base and enable firms to stay private as the number of owners increase to 2,000, from 500. Indeed, by allowing firms to solicit funds from sources other than Silicon Valley or Wall Street, the Jobs Act may finally kill what I call the “cartel of capital,” which can turns “V.C.” from venture capital, to “vulture capital.”
These provisions, taken together, are all a good start — but more is needed. Here are some suggestions for the next time Congress wants to start up the economy:
First, new firms could be exempt from federal regulation for the first five years, or, at the very least, sunsetting. Two, the patent system is desperately in need of streamlining.
Three, while this new legislation is helpful to firm formation, it ignores an essential ingredient in most new high growth firms today: immigrants, particularly from India and China. They are disproportionately represented among America’s fastest growing companies. In a quarter of U.S. technology companies founded from 1995 to 2005, the chief executive officer or lead technologist was foreign-born. In 2005, those companies generated $52 billion in revenues and employed nearly half a million workers.
We must also cultivate domestic entrepreneurs — especially in the science, technology, engineering and math fields. More work needs to be done to create the jobs of the future.
Still, the Jobs Act is a good start for startups.
Carl Schramm is a Bush Fellow, visiting scientist at the Massachusetts Institute of Technology, and former president of the Ewing Marion Kauffman Foundation.
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