Small Business Bill: How Does it Fare?

Obama bizCongress passed the small business bill Tuesday that President Obama had requested earlier this year and the legislation was not without controversy. Senate Majority Leader Harry Reid (D-Nev) said the bill was “far from perfect,” but added that it would “help capital formation.” The question is at what expense?

The bill removes some “Washington red tape” that has apparently hampered many small businesses in opening an IPO, or initial public offering, for investors that are interested in purchasing new stock issues. That federal “red tape” was registration with the Securities and Exchange Commission and exemption for companies with an annual gross sales of less than $1 billion from providing an audit and pertinent information necessary for investors to make informed decisions.

Also allowing companies of up to as many as 2,000 shareholders to avoid disclosure, a provision of the legislation returns the exemption for corporations to follow the nonbinding votes of shareholders in approval of the company CEO pay package. This requirement had just been established in the last Congress with implementation of Dodd-Frank and Congress has already reversed that ethical component of this previous legislation which entices company CEOs to overstate sales records and inflating stock value according to the quarterly forecast.

The bill passed by an overwhelming 380-41 in the House of Representatives. The Senate passed the bill last week. The legislation is now on its way to President Obama’s desk for his signature, which is already assured. The bill brought immediate criticism from several concerned groups including several unions, consumer groups, investment groups, and the AARP. Even the Securities and Exchange Commission director suggested it set the stage for massive fraud because over 80% of the companies offering an IPO will be in exempt status due to the $1 billion sales threshold.

The lack of informational requirements will be problematic for those assessing risk for a potential investment. Even larger investment groups will be restricted from necessary data. Council of Institutional Investors general counsel Jeff Mahoney was highly critical of the law. “A company (with $1 billion revenues) has the resources to comply with disclosures.” Implementation of this legislation is poised to make many investors suspicious of risky investments in companies that will not provide adequate information in association with any IPO offering.