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What Dodd-Frank Forgot and Washington Can Still Do in an Election Year: Help American Businesses and Entrepreneurs Succeed

Few overhauls of our nation’s financial regulatory system have been bigger and more comprehensive than the Dodd-Frank Act, which was enacted in the summer of 2010. While stakeholders may disagree over the details, few could argue that federal regulations have been adequately updated to keep pace with technological and financial innovations. From online stock trading to new kinds of mortgages to financing a home, the financial services world is not your grandfather’s community bank anymore. 

But much like the childhood story of Goldilocks and the three bears, there are differing views on whether this new set of laws and regulations is too hot or too cold for financial markets and consumers.  Some are not as concerned about the temperature of the Dodd-Frank porridge as they are about its lack of sweeteners for Main Street businesses and entrepreneurs.  The brown sugar and raisins that many American businesses have been looking for come in the form of updating regulations that crimp hiring at fast-growing and well-established firms alike; constricting capital formation for technology startups; and saddling many companies with a one-size-fits-all regulatory regime.  

The changes in our economy have been massive since 1933 or 1964 — years when many of these laws and regulations were implemented.  Private companies are taking much longer to “go public,” small public companies can languish in the public markets without stock research reports, stock brokers no longer identify diamonds in the rough for retail investors, and investors hold stocks for far less time than they once did.  As a result of these and many other changes in the public markets, only the very largest companies are able to go public and thrive. Weighty studies and papers by Grant Thornton, the Progressive Policy Institute and the President’s IPO Task Force have examined some of the causes of and suggested fixes for the problems that exist in the capital.  

Along those lines, there a lot of good reasons for entrepreneurs, well-established private companies, and other technology and financial innovators to find a seat at Washington’s policy-making table in 2012. There are a number of bipartisan measures that are being considered by both the House and the Senate, and are being championed by the White House. These measures would address the challenges that American businesses may be facing due to existing law as well as  in the capital markets. They would also cut through some of the regulatory red tape at the Securities and Exchange Commission.  While some problems in the capital markets are clearly systemic – far fewer initial public offerings this decade than the previous decades, because of reduced access to capital for startups –  there are others born out of obsolete or burdensome regulations.  

One of the obsolete regulations routinely cited is the 500 shareholder rule.  It was enacted by the Securities and Exchange Commission in 1964 – the same year that President Johnson signed the Civil Rights Act and Major League Baseball first experimented with a free agent draft. The SEC implemented this rule, which requires companies that have exceeded the shareholder count to essentially become publicly-reporting entities, in order to protect investors.  A bipartisan bill recently passed the House Financial Services Committee that would exempt current and former employees from the shareholder count and allow the increase of the overall count. This would give small companies more flexibility in hiring and attracting broader bases of institutional and accredited investors (a similar bill was introduced in the Senate recently, as well).  The bills have received tremendous support from some of the oldest private companies and newest high tech startups in America, the stock exchanges, and venture and angel investors.  

Another bipartisan bill, which intends to make it easier for smaller companies to launch initial public offerings by easing certain securities regulations, was introduced in both the House and Senate this month. The bill seeks to exempt certain smaller companies that are planning initial public offerings from burdensome securities regulations.  It would loosen auditing requirements, potentially increase independent analyst research, expand the range of pre-IPO communications with institutional investors, and exempt repeated “say on pay” votes for shareholders.  The bill defines a new class of issuers, emerging growth companies, which have less than $1 billion in annual revenue at the time of SEC registration and less than $700 million in public shares.  The bill has significant support from the White House, venture capitalists and other important stakeholders.  

We have only scratched the surface of the issues and bills in the capital formation space.  These issues are complicated. However, they’re not impossible for policymakers to wrap their heads around as we have seen from the slew of bipartisan bills that have been introduced — and in some cases, passed —  by the House this year and the number of hearings and markups ongoing in both chambers.  Many experts consider presidential election years a dead zone for legislating or getting anything substantial done in Washington.  But if the stars align on these capital formation and job creation bills, President Obama could be signing some bills in 2012 with congressional Democrats and Republicans looking over his shoulder.