Campaign politics were already
whipping Washington into frenzy. A split Congress shunned
compromise on financial rules or fixes for the economy.
That made it all the more surprising to see President
Barack Obama celebrating with top House Republicans at a Rose
Garden ceremony last month. Together they lauded passage of a
law making some of the biggest regulatory changes to U.S.
capital markets in decades.
While the Jumpstart Our Business Startups Act — JOBS for
short — was touted as a rare show of bipartisanship, it had
more to do with the growing political sway of emerging
technology companies and Silicon Valley venture capitalists,
according to interviews with more than a dozen participants.
“This showed the next generation of entrepreneurs, start-
ups and investors have found their voice in Washington,” said
Israel Klein, a lobbyist at the Podesta Group in Washington, who
helped lead the charge for the law on behalf of his client
SecondMarket Inc., an exchange for shares of private companies.
The coalition argued that expensive and outdated rules were
keeping companies from going public and creating jobs. Obama
agreed, backing the measure over the objections of his
Securities and Exchange Commission chairman and some Democrats
who said it would roll back investor protections dating to the
Great Depression and the Enron accounting scandal.
For Republicans, whose support allowed the White House to
claim political credit, the tradeoff was worth it. They saw the
law as a major piece of deregulation that also fit with their
campaign to convince California technology executives to
contribute to Republicans as well as Democrats.
Capturing the Scene
Among those on hand at the April 5 bill-signing ceremony
were two leaders from the technology coalition. Steve Case, a
founder of America Online Inc. who now runs an investment fund,
stood on the dais behind the president, his iPhone raised to
capture the scene. Kate Mitchell, a venture capitalist who
helped write proposals for the bill from her Northern California
kitchen table, had a front-row seat in the audience.
Lawmakers who showed up included two House Republicans
who’ve been among Obama’s most persistent critics on financial
matters, Majority Leader Eric Cantor of Virginia and Financial
Services Chairman Spencer Bachus of Alabama. Still, the event
had a Silicon Valley feel: Some guests “checked in” via
Foursquare while others marked their arrival with Twitter posts.
The JOBS act consolidates ideas that had been floated for
years without success on Capitol Hill.
Quadruple Shareholders
It speeds initial stock offerings of firms with less than
$1 billion of annual revenue, removes restrictions on how Wall
Street analysts cover smaller companies, allows hedge funds to
advertise for investors and gives companies the ability to
“crowd-fund” by selling stock on the Internet. It also
quadruples — from 500 to 2,000 — the number of shareholders a
company can have before it must publicly disclose its finances.
Before it passed, the legislation was attacked by consumer
advocates as well as current and former SEC officials.
SEC Chairman Mary Schapiro asked that the bill be
“modified to improve investor protections.” Lynn Turner, a
former SEC chief accountant, suggested it be renamed “the
bucket-shop and penny-stock fraud reauthorization act of 2012.”
Barbara Roper, of the Consumer Federation of America, said,
“it’s frankly bewildering that the Democrats have been so
willing to buy into the traditional Republican argument.”
‘Significant Failure’
Arthur Levitt, who served as SEC chairman under President
Bill Clinton, said in an interview that the law “is a
significant failure” of the Obama administration.
“If they truly believe in protecting the interests of the
middle class and the small investor they should have never, ever
signed on to such a bill,” said Levitt, who is a director of
Bloomberg LP, parent of Bloomberg News.
Critics of the law said their concerns center on its
loosening of accounting and disclosure rules for emerging
companies. Lack of such controls, they said, fed the penny-stock
craze in the mid-1980s and the dot-com bubble of the late 1990s.
Under the new rules, companies with $1 billion in revenue
or less are exempt for five years from an audit of internal
financial controls that was required by the 2002 Sarbanes-Oxley
accounting reform law. That means investors have less of a
chance to learn about the kind of weaknesses that led some dot-
coms to crash after going public, the critics say.
State regulators told Congress they worried that other
changes in the law — permitting crowd-funding and lifting the
ban on hedge funds soliciting investors — could leave
unsophisticated share-buyers more vulnerable to fraud.
Proponents said the loosening wouldn’t lead to more fraud.
Most important, they said, the old rules were so costly and
time-consuming that strong young firms were foregoing expansion.
Campaign Cash
That message resonated in both parties, which are also keen
to raise cash from the technology industry. Democrats hope to
retain their edge while Republicans are looking to make inroads.
In 2008, employees at technology and Internet firms donated
$9.3 million to Obama and just $1.6 million to Senator John McCain of Arizona, his Republican opponent, according to the
Center for Responsive Politics. In this election year, both the
president and Republican opponent Mitt Romney have been making
fund-raising trips to northern California.
These firms, “are creating jobs and bringing cool
technologies to the marketplace” making them “appeal to both
sides of the aisle,” said Klein, of the Podesta Group.
While the largest technology companies weren’t the prime
movers behind the act, Facebook Inc. (FB) (FB)’s brush with some of the
regulations helped propel the campaign. Lawmakers took notice in
January 2011 when Goldman Sachs Group Inc., which planned to
sell $1.5 billion in private Facebook shares to U.S. investors,
dropped the idea after saying that publicity about the offering
could violate SEC rules on marketing private securities.
Facebook Delay
Facebook, which went public May 18, had started the IPO
process months earlier in part because it had been bumping up
against the SEC’s 500-shareholder limit for closely held firms.
One top executive told Cantor that the company wouldn’t have
gone public so soon if the new law had been in place, the
majority leader said in an interview.
Support from Silicon Valley wasn’t the only reason the JOBS
measure was approved. Another player was the Pennsylvania-based
convenience store chain Wawa Inc., a closely held firm that also
wanted the shareholder limit increased. In addition, Wall Street
lobbyists got involved at the eleventh hour.
Still, Case and Mitchell were instrumental. They began
working separately on the idea after Democrats lost control of
the House and the White House, smarting from being labeled anti-
business, moved to refocus on jobs by streamlining regulations
and stoking entrepreneurship.
White House Councils
Case, whose Revolution LLC has backed start-ups including
Zipcar and LivingSocial, joined Obama’s new Council on Jobs and
Competitiveness in early 2011. He also agreed to serve as
chairman of the Startup America Partnership, an independent
group that kicked off with a White House press conference.
Case was careful to keep contact with Republicans as well,
advising Cantor, the House majority leader, on proposals aimed
at reducing rules and taxes on technology and start-up firms.
The competitiveness council, headed by General Electric (GE) (GE) Co.
Chief Executive Officer Jeffrey Immelt, gave recommendations to
Obama last year that called for removing some regulations
imposed by Sarbanes-Oxley and rescinding other securities rules
for closely-held firms.
Case met with Cantor the next day. He said, “Why don’t you
just take what we’re doing, since it already has the imprimatur
of the White House behind it, and take it up?” Cantor recalled
in an interview.
Geithner Conference
Mitchell, co-founder of investing firm Scale Venture
Partners in Foster City, California was at work on her own plan.
She began developing recommendations during a March 2011
small-business conference convened by Treasury Secretary Timothy Geithner. During a break, Mitchell and other Silicon Valley
attendees grabbed an empty conference room. Among them were Greg Becker, CEO of Santa Clara, California-based Silicon Valley
Bank; Steven Bochner, a partner at the Wilson Sonsini Goodrich
Rosati law firm in Palo Alto, California; and Carter Mack,
president of investment bank JMP Group Inc. (JMP) (JMP) of San Francisco.
The ad-hoc group decided to gather entrepreneurs, bankers,
accountants, academics and investors to research possible
changes in federal policy. They also invited lobbyists for NYSE
Euronext and the National Venture Capital Association to offer
advice. The 17-member committee ultimately called for a
“regulatory on-ramp” to encourage start-ups to go public.
Among the proposals was the audit exemption later attacked by
opponents of the bill.
Republican Outreach
In the House, Cantor was encouraging Republicans to
strengthen their ties to technology firms. He and his top policy
adviser, Mike Ference, contacted venture capital and private
equity funds in Silicon Valley, Boston, the research triangle in
North Carolina and in Cantor’s home state of Virginia. They
asked the companies for ideas and support.
“This is critical to how we’re going to regain the growth
prospects in the economy,” Cantor said.
Silicon Valley, a Democratic stronghold, has been a
challenge for Republicans because many of the industry’s
employees don’t align with the party’s stand on social issues
such as gay marriage and abortion, Representative Kevin
McCarthy, who represents a southern California district and is
the third-ranked House Republican, said in an interview.
Republicans saw the sluggish economy as offering an
opportunity to make inroads, McCarthy said.
‘Ignore Us’
“When the times are good they ignore us,” McCarthy said.
“When the times are bad, they come to us because they like what
we stand for.”
Cantor, McCarthy and Republican Representative Paul Ryan of
Wisconsin worked as a trio to make Silicon Valley connections.
In September, they held an interactive town hall at Facebook’s
Menlo Park headquarters. Meetings with Google Inc. (GOOG) (GOOG), Apple Inc. (AAPL) (AAPL)
and Microsoft Corp. (MSFT) (MSFT) dotted their calendars.
A joint campaign account set up by the three pulled in
$248,000 exclusively from northern California, including $15,000
each from Mary Meeker and Floyd Kvamme of Kleiner Perkins
Caufield Byers, a Silicon Valley venture capital firm, and
$7,500 from Kurt Wheeler, managing director at Clarus Ventures
LLC in San Francisco.
Matt Lira, head of digital communications for Cantor,
noticed a streaming Twitter feed mounted on a wall during a
visit to Quora Inc. in Palo Alto, California. Cantor soon had a
similar screen installed in his Capitol Hill office.
Joint Session
Obama went public with his de-regulatory stance in a speech
to a joint session of Congress Sept. 8. He announced that the
administration supported the removal of “red tape” for start-
ups and businesses trying to raise capital.
Case attended, sitting a row behind Michelle Obama as a
guest of the White House.
“I certainly recognized that the odds were long to get
something actually turned into law, but at minimum we could
create some momentum and visibility around the issue,” Case
said in an interview.
But within a month, the House’s Republican-controlled
Financial Services panel began voting on bills. By the beginning
of November, with little attention from the news media, the
House had passed four separate measures that would later be
consolidated into the JOBS Act.
In the Senate, support had been gathering too, thanks in
part to a decidedly low-tech business. Closely held Wawa, which
runs more than 590 convenience stores in states including
Pennsylvania, Delaware and Virginia, was bumping up against the
500-shareholder limit and wanted the ceiling raised.
Empty Room
Wawa found receptive ears on both sides of the aisle.
Senator Pat Toomey, a Pennsylvania Republican, and Senator Tom Carper, a Delaware Democrat, agreed to take on the issue,
according to two congressional aides. Toomey’s top banking aide,
Dina Ellis, began working with Jonah Crane, the legislative
counsel for Senator Charles Schumer, a New York Democrat, to
draft a bill modeled on the proposals from venture capitalist
Mitchell’s IPO task force.
When Schumer and Toomey held a press conference Dec. 1 to
unveil their legislation, the room was nearly empty. In the
House, though, Cantor was paying attention and Obama was about
to provide the momentum for a final push.
“Most new jobs are created in start-ups and small
businesses, so let’s pass an agenda that helps them succeed,”
Obama told lawmakers in his State of the Union address Jan. 25.
“Tear down regulations that prevent aspiring entrepreneurs from
getting the financing to grow.”
Shortly after, Cantor and Bachus, the financial services
committee chairman, decided to take the bills the House had
already passed, add some language from the Senate proposal and
offer it as one piece of legislation.
White House Backing
They tapped Representative Stephen Fincher, a freshman
Tennessee Republican who had introduced the Schumer-Toomey
legislation in the House, to serve as the face of the measure.
Representative John Carney, a Delaware Democrat who also had
heard from Wawa, was a co-sponsor.
For emphasis, the White House put out a statement strongly
backing the bill two days before the March 8 House vote. While
some Democrats publicly and privately expressed misgivings about
the loss of investor protections, Obama’s support diluted the
opposition. All but 23 Democrats voted in favor.
Next up was the Senate, where Democrats were still in
control and opponents to the measure were waking up. Schapiro,
the SEC chairman, sent a six-page letter to lawmakers March 13,
criticizing the House bill and raising the Enron collapse as the
kind of fraud that existing rules were meant to prevent. SEC
spokesman John Nester didn’t respond to requests for comment.
Democratic Alternative
The letter was wielded by the bill’s opponents, led by
Democrats Jack Reed of Rhode Island and Carl Levin of Michigan.
The senators wanted a chance to craft their own version of the
House bill — one with a higher level of investor protection,
they told Senate Majority Leader Harry Reid of Nevada, according
to three people familiar with the conversations.
When the majority leader said no, Reed and Levin drafted an
alternative bill anyway.
To beat back the opposition, the legislation’s Silicon
Valley backers resorted to their own social media tools.
AngelList, a platform that connects investors with start-ups,
initiated an online movement via Twitter asking supporters to
sign a petition urging Reid and Senate Minority Leader Mitch McConnell of Kentucky to pass the House bill.
Within two days, more than 5,000 had signed, including Biz
Stone, co-founder of Twitter Inc., Max Levchin, co-founder of
PayPal Inc., Justin Waldron, co-founder of Zynga Inc. and Mitch Kapor, the founder of Lotus Development Corp.
“We clearly recognized there was an opening and it was
time to push hard,” said Case, who also signed the petition.
Wall Street Lobby
The Senate defeated the Democrats’ alternative bill. Reed
made one last attempt to slow the train, introducing an
amendment that would, in effect, have sent the bill to a House-
Senate conference for more work.
For the first time, Wall Street lobbyists and major
business groups including the U.S. Chamber of Commerce got
involved. Goldman Sachs and JPMorgan Chase Co. (JPM) (JPM) saw the
amendment, which would have required the SEC to use a broader
method for counting shareholders in a fund, as a threat to much
of their investment management work.
Lobbyists and lawyers from the banks flooded Senate offices
with calls and analysis papers, according to two aides with
knowledge of the efforts who spoke on condition of anonymity
because the talks were private.
Small Victory
The Reed amendment failed. Opponents did have one small
victory — an amendment by Democratic Senators Michael Bennet of
Colorado and Jeff Merkley of Oregon, and Scott Brown, a
Massachusetts Republican, to increase SEC oversight of Internet
crowd-funding.
On a sunny afternoon two weeks later, Obama signed the
measure into law. One person was missing: Fincher, the Tennessee
congressman who had been listed as the bill’s prime sponsor. He
was back home addressing his local chamber of commerce. The
bipartisan spirit had already faded from his discussion as he
spoke of Obama.
“Anything that creates division is what he’s using to
win,” Fincher told his constituents. He didn’t respond to
requests for comment.
In the aftermath of its initial success in Washington, the
technology coalition is looking to get its way on other issues
including visas for high-tech workers and an exemption from
capital gains taxes for investments in start-ups that are held
for at least five years.
“There was a real sense in the entrepreneurial community
that they had started a constructive dialogue with the
policymakers,” Mitchell said.
– Editors: Lawrence Roberts, Maura Reynolds
To contact the reporters on this story:
Phil Mattingly in Washington at
pmattingly@bloomberg.net;
Robert Schmidt in Washington at
rschmidt5@bloomberg.net
To contact the editor responsible for this story:
Maura Reynolds at
mreynolds34@bloomberg.net
Article source: http://www.businessweek.com/news/2012-05-31/startup-act-shows-silicon-valley-clout-growing-in-dc
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