What Small Business Is the Next Facebook?
As the financial markets anticipate the initial public offering of social networking megasite Facebook this week, let us take a step back to admire this success story and the entrepreneurial free market system overall.
The Facebook IPO is expected to bring in $100 billion dollars — an astronomical amount for most people. While we congratulate Facebook’s creators in producing a multibillion dollar business concept from an idea developed in a dorm room, we should remember that there are thousands of innovative small firms who have great products but continue to struggle to raise capital.
Congress recently passed, and the president signed into law, the Jumpstart Our Business Startups (JOBS) Act, which will provide greater opportunities for small businesses to raise capital and expand. This law is an example of what government can do when we work in a bipartisan way and actually focus on job creation and the needs of small companies. As Chairman of the House Small Business Committee, I’d like to see more of this.
In the midst of an unemployment crisis, we need to do more to help companies that have the greatest potential to create jobs. Generally, 60 to 80 percent of all new jobs come from small businesses.
The JOBS Act will particularly boost the so called "gazelle" firms (ages three to five years), which comprise less than one percent of all companies, yet generate roughly 10 percent of new jobs in any given year. According to the Kauffman Foundation, those gazelle firms contribute about 88 jobs per year per firm.
Since 2007, we've seen a 23 percent drop in new business creation, according to the Bureau of Labor Statistics; and October’s annual World Bank's Doing Business report found that the United States fell to No. 13 for ease of starting a business, down from No. 3 in 2007. The JOBS Act will help address our recently declining entrepreneurial track record by making capital formation more attainable and paving the way for more small scale businesses to go public and create more jobs. The JOBS Act encourages IPOs by lowering the regulatory burden and cost associated with IPOs.
The JOBS Act eases securities laws, originally crafted in the 1930s, to take advantage of technology for small businesses to raise money. Specifically, the law makes soliciting investments through the Internet legal, called crowdfunding. Just as Facebook and other social media websites have changed the way that small businesses communicate with customers, new innovations like crowdfunding have the potential to change the way that small businesses solicit investors.
Now that the JOBS Act has become law, the SEC regulators are responsible for the details about how the policy is actually implemented. They have the ability to add compliance requirements that may discourage people from using the program. It is critical that securities regulators not create excessive requirements that effectively kill this source of new capital for small firms.
The Small Business Subcommittee recently held a hearing where investors testified about the potential impact that crowdfunding will have on small business capital. The consistent message that these investors conveyed to regulators is that their rules can both protect investors and allow markets to work. Jason Best, co-founder of Startup Exemption in San Francisco said, “[W]e need to make sure we create a process that does protect investors really well, but also doesn’t create so much friction on the process of making these small investments, these modest investments, that it kills the market.”
This is a common sense message about the proper role of regulations, and I hope that regulators will adhere to it as the process moves forward. As we observe Facebook’s IPO process this week, America must remember that our entrepreneurial free market system will be the primary driver of job creation and innovation, and policies like the JOBS Act will pave the way for more small businesses to go public and create jobs.
Rep. Sam Graves (R - MO) is the chairman of the House Small Business committee.