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The coalition argued that expensive and outdated rules were keeping companies from going public and creating jobs.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.
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.”
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.
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.’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, 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 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.
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. 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.
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.
“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., Apple Inc. and Microsoft Corp. 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.
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.
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.
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. 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.
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