A bill backed by President Obama and largely drafted by some of his Silicon Valley donors is causing an embarrassing rift in his party's ranks and creating an awkward situation as Democratic leaders in the Senate try to make last-minute changes today before sending it to the White House.
Proponents of the bill say it will drive capital to startups by reducing the barriers to going public. Opponents say it invites potential fraud and reduces transparency for most business seeking an IPO—not just small ones.
On Wednesday, one day after the Democrats failed to pass their own version of the bill, designed to scale back some of the provisions of the House version, Majority Leader Harry Reid, D-Nev., scheduled votes on two proposed amendments that would assuage some of the bill's critics—such as labor unions and public interest groups. If either of the two new amendments pass Thursday, the bill would be sent back to the House of Representatives before being signed by President Obama.
The maneuver by Reid, a skilled legislative infighter, was "unexpected" and "unusual," said Don Stewart, a spokesman for Minority Leader Mitch McConnell, R-Ky., because new amendments usually can't be offered after the Senate votes to cut off debate on a measure and set it on a path towards final passage—which the Senate did Tuesday. One of the amendments, sponsored by Sen. Jeff Merkley, D-Ore., adds investor protections to the bill by requiring that companies disclose financial information to investors. The House bill allows companies to solicit $1 million in funding on the Internet without providing financial information to the SEC. The other, which is less likely to pass and is sponsored by Jack Reed, D-R.I., changes the definition of a shareholder to clarify that one shareholder must equal one person; the House bill lets companies have 2,000 shareholders before they have to issue public financial reports.
That bill, which passed the House with overwhelming bipartisan support two weeks ago and the blessing of the president, is being touted by supporters as a jobs creator because it would make it easier for small startup companies to raise capital by going public. But critics, who include deputy Democratic Senate Leader Dick Durbin, D-Ill., contend it rolls back important investor protections put in place after the Enron scandal.
Opponents include SEC chairwoman Mary Schapiro, who says that it opens the door for fraudulent investment schemes. Because it allows IPOs to raise some of its capital from Internet crowd-sourcing, Durbin has likened it to "Internet gambling." But Reid, despite calling the bill "imperfect," intends to move it towards final passage.
The bill is an "on-ramp" for companies with up to $1 billion to go public, rolling back some regulations put in place by the landmark Sarbanes-Oxley law in 2002 that dealt with the Enron scandal. If their annual revenue is under $1 billion, and their publicly traded shares are less than $700 million, companies can avoid having to hire an outside auditor for the first five years after going public and escape certain SEC disclosures related to executive pay.
Much of the bill originated with the IPO Task Force, an unofficial group of venture capitalists, securities lawyers, investors and others that was formed after a March 2011 Department of Treasury conference. Its chair, venture capitalist Kate Mitchell, has donated exclusively to Democrats — $37,000 since 2008, including $16,000 to the DNC and Barack Obama. The manging director of Scale Venture Partners, Mitchell has donated nearly $10,000 to Reid's campaign and leadership PAC in 2010.
The biggest political donor on the task force, Mark Gorenberg, another was a top-level bundler to Obama ($500,000) in 2008 and has contributed a host of Senate Democrats, according to Influence Explorer. Gorenberg has contributed more than $40,000 to the Democratic Senatorial Campaign Committee over the years. In all, the managing director of Hummer Windblad Venture Partners has given nearly $600,000 to federal candidates, almost exclusively Democrats. Those recipients include the sponsors of the Senate amendment to scale back the House bill, Sens. Mary Landrieu, D-La., Reed, and Carl Levin, D-Mich. Landrieu received $5,600 from Gorenberg; Reed and Levin got $2,000 each.
Of the other 16 members of the task force, many have not contributed to campaigns or have given to only a handful of them. Four members have given more than a handful of times: Henry Ellenbogen, a portfolio manager at T. Rowe Price, gave mostly to Democrats; Paul Deninger, a senior manager director at Evercore, gave mostly to Republicans but also to some Democrats; Kevin McClelland, an investment banker at JMP Securities, gave exclusively to Democrats; Magid Abraham, president of ComScore, has contributed only to Republicans, according to Influence Explorer.
The IPO Task Force issued its report in October, and many of its recommendations ended up in two nearly identical bills in the House and Senate in December. The Senate bill was introduced by the Wall Street-friendly Sens. Chuck Schumer, D-N.Y., Mark Warner, D-Va., and two Republicans.
Many interest groups and companies now lobbying for the bill were either represented on the IPO Task Force or lent their expertise to the effort. That list includes the National Venture Capital Association (NVCA), NASDAQ and NYSE EuroNext, and Silicon Valley Bank. The three venture capitalists on the committee, Mitchell, Gorenberg and Tom Crotty of Battery Ventures, are all members of the NVCA. Executives from the other three companies assisted with the task force report.
Proponents of the IPO bill have echoed the IPO Task Force, which argued that over-regulation has helped curb companies from going public. The group argued that more IPOs mean more jobs, since its research shows that 92 percent of job growth for a company that has gone public occurs after the IPO.
But after the House bill passed with overwhelming bipartisan support two weeks ago, some Senate Democrats raised opposition to it, and three senators offered an amendment that would narrow the scope of the bill. The White House later added that it supported the Senate's changes to it, the New York Times reported.
On the Senate floor yesterday, Landrieu tried unsuccessfully to amend the House bill, saying it "is less about job creation than it is about rolling back key protections for investors." After the procedural motion to take up the amendment failed, Reid said "it takes a lot of gall to call this a jobs bill."
Opponents admitted they had been caught flat-footed. "You know we’re all busy around here," said Sen. Tom Harkin, D-Iowa on the Senate floor Tuesday. "You know I hadn’t really paid attention to this until the senator from Lousiana brought it up last week."
Though groups including Americans for Financial Reform, labor unions, and other public interest groups, including the powerful AARP, banded together to send many letters to Congress to oppose the bill in recent weeks, leaders admitted it was too little, too late.
“We failed to act quickly enough to sound the alarm on this legislation,” said Barbara Roper, the director of investor protection at the Consumer Federation of America.
House Majority Leader Eric Cantor, R-Va., who shepherded the House bill, issued a statement this week that the Senate Democrats are "making 11th hour claims about phantom investor protection."