Starting Up the Startup Act
It has been two years this week since the Kauffman Foundation took extensive research and data analysis around new firm formation, crafted a single document, and labeled it “The Startup Act.” Renaming the conversation that PDE had started earlier around how policymakers can make it easier for startups to emerge, create jobs and grow, was very effective in getting policymakers in Washington to take a look at entrepreneurship through the lens of helping new and young firms. But how far has America come in getting something done on their behalf?
The original proposals captured in the Kauffman Foundation’s “Startup Act” document took quite divisive issues and set them in the context of job creation, a non-partisan topic. They included:
- Immigration: Welcoming immigrants capable of building high-growth companies to the United States by providing "entrepreneurs’ visas" and green cards for those with degrees in STEM fields (science, technology, engineering and math).
- Fiscal policy and financial regulation: Providing new firms with better access to early-stage financing, creating capital gains tax exemptions for long-held startup investments, providing tax incentives for startup operating capital, facilitating access to public markets, and allowing shareholders of companies with market cap below $1 billion to opt-in under the Sarbanes-Oxley Act.
- IP management: Accelerating the formation and commercialization of new ideas by creating differential patent fees to reduce the patent backlog and providing licensing freedom for academic innovators.
- Regulatory review: Removing barriers to the formation and growth of businesses through the introduction of automatic 10-year sunsets for all major rules, establishing common-sense and cost-effective standards for regulations, and making assessments of state and local startup and business policies.
Many of the ideas raised above got picked up by policymakers that same year (2011), as shown in bills that were introduced, such as the America Invents Act (H.R. 1249) and the Startup Expansion and Investment Act (H.R. 2941). Unfortunately, they failed to position the “aggressive” changes needed to unleash startups in the context of job creation.
Then early in 2012, under intense economic pressure, the JOBS (Jumpstart Our Business Startups) Act passed and immediately became one the most important victories of bipartisan policymaking. Despite being an election year, the House and Senate drafted a legislative package in only a couple of weeks that combined measures in six different bills, all of them aiming at making it easier for young companies to raise money to grow. The legislation borrowed some of the research from the Kauffman “Startup Act” paper in terms of financial regulatory review, and achieved the following major changes:
- The JOBS Act exempted companies with up to $1 billion in annual revenue from certain Sarbanes-Oxley regulations governing financial disclosure and governance requirements for up to five years.
- The JOBS Act expanded the threshold of shareholders for private firms from a maximum of 500 to 2,000, before they are required to file with the U.S. Securities and Exchange Commission (SEC).
- The JOBS Act went even further than expected in reviewing regulations by removing a SEC regulatory ban on solicitation—allowing startups to advertise for investment and accept capital from “small investors.” Startups theoretically will now be able to solicit equity investments through the Internet, social media or elsewhere, and accept up to $1 million annually without having to register the shares for public trading with the SEC. In other words, crowdfunding became institutionalized. You can read more about this, as well as the reactions it created, in this article I posted at the time.
However, the proof of the pudding was clearly in the details and the full effect of these measures will now depend on detailed SEC rules. For example, this month the SEC finalized two rulings to lift the long-time ban on public solicitation and create a new type of offering called 506(c), and to guide how issuers take “reasonable steps to verify” that all investors are accredited. Concerns have already arisen around what are apparently tougher checks on the accreditation of investors (see the Angel Capital Association’s comments on the new rules). The process will continue to unfold but I hope cooler heads prevail and we do not end up killing the intent of the JOBS Act. The Kauffman Foundation’s 2013 State of Entrepreneurship Address provides helpful guidelines that might be worth looking at again in an effort to avoid suffocating capital formation for entrepreneurial growth while protecting investors.
In the meantime, Congress continues to work on the remaining roadblocks to entrepreneurial growth—immigration, R&D commercialization and fiscal policy. The Startup Act 2.0, and more recently, the Startup Act 3.0 have not yet passed of course, but have gained support and momentum—and remain a priority for entrepreneurs and investors. The Startup Act 3.0 measures cover several policy areas much in the spirit of the Kauffman Startup Act document: making visas available for current holders of H-1B and F-1 visas who start companies; creating a five-year exemption from capital gains taxes on investments in startups; introducing a limited R&D tax credit for young startups less than five years old and with less than $5 million in annual receipts; and requiring cost-benefit analyses on federal regulations that have an economic impact of $100 million or more.
Recent attention to comprehensive immigration reform has left the Startup Act 3.0 on the backburner although entrepreneurs’ visas remain a less controversial element of the massive immigration overhaul bill. As a February 2012 Kauffman Foundation report shows, making 75,000 Startup Visas available for current holders of H-1B and F-1 visas who start companies could create as much as 1.6 million U.S. jobs in the next 10 years. I hope during times when we need to create jobs, such an important provision does not fall victim to the House of Representatives and the President being unable to agree on a broader package.
The economic cost of these policy delays cannot be underestimated. If America could pass the JOBS Act in a hotly contested presidential election year, surely, we can come together in the name of economic recovery and job creation to finish the job for America’s risk-takers, doers and makers of things.