Wednesday, March 28, 2012

House Agreed to Senate Crowdfunding Amendment But May Try to Change It Later

In concurring with the Senate amendment to the Jumpstart Our Business Startups (JOBS) Act HR 3606, the House accepted the Merkley Amendment replacing the House version of crowdfunding with the Senate version, which added a number of investor protections, including a requirement for SEC registration. However, there were indications that some prominent House members will later make an effort to change the Senate crowdfunding provisions. Rep. David Schweikert, a primary author of parts of the legislation, said that the Senate amendment does great damage to the goal of a much more egalitarian, technologically advanced, using-the-Internet way for people to invest, for being able to reach out and gain that capital for very small companies. Rep. Schweikert added that he favored fixing what the Senate did in future legislation. (Cong Rec. (March 27, 2012) p. H1590).

Similarly, Rep. Patrick McHenry (R-NC), the author of the House crowdfunding provisions, said that, while the essential House framework is preserved for crowdfunding, the Senate did not recognize that crowdfunding could create new markets and opportunities for small businesses and start-ups. Rather, the Senate was misguided in simply seeing crowdfunding as unregulated activities. This misperception caused the Senate to design a crowdfunding title that is riddled with burdens on issuers, investors, and intermediaries and limits general solicitation and enhances SEC rulemaking authority. Noting the Senate changes to the House crowdfunding provisions were ill-conceived and burdensome, Rep. McHenry is committed to working in a bi-partisan way to ensure that Congress fixes this after the President signs the bill. (Cong Rec. (March 27, 2012) p. 1592)

Defending the Senate amendment, Rep. Jim Himes (D-CT), a strong supporter of the legislation, emphasized that the Senate changes to the crowdfunding provisions added more protection to small investors who might be subject to being fooled by an Internet predator. These are retail investors, he noted, who are not necessarily financially sophisticated. They are not the big financial players who get labeled accredited investors or institutional investors and who have the capability to take care of themselves. Rep. Himes said that crowdfunding, which sits at the nexus of potentially unsophisticated investors and people who see an opportunity, is open to retail investors who might be subject to the temptations of a deal that in fact is too good to be true offered on the Internet. This is a concern both for Congress and for the SEC, which must ultimately write the regulations around crowdfunding. (Cong Rec. (March 27, 2012), pps. 1590 and 1592).

Senator Merkley has defended the investor protections that the Senate added to crowdfunding. Title III now provides within the 21 days prior to the first day on which securities are sold to any investor, or such other period as the SEC may establish, the intermediary must make available to the Commission and to potential investors any information provided by the issuer pursuant to Section 4A(b) of the Securities Act.

Senator Merkley said the 21-day period allows for the opportunity for the sort of oversight that a portal can provide or the SEC can provide to stop known bad actors fraudsters. (Cong Rec. (March 20, 2012) p. S1829) He said the provision is a key distinction from the House version of Title III, under which one could have listed their offering and closed their offering within a single day, providing no feedback loop to detect deception. In contrast, the Act now has a 21-day period from one’s listing to their closing. In his view, this will provide time for a feedback loop regarding any sort of fraudulent activity. (Cong Rec. (March 21, 2012) p. S1887)

The crowdfunding provisions also set out basic rules of the road to protect investors
and ensure the accuracy of information companies post, companies participating in this marketplace must disclose their basic financial information, a business plan, a target offering amount, and the intended use. The web sites are subject to oversight by the SEC. There are also aggregate annual caps, which Senator Merkley said are a key predatory protection to prevent pump-and-dump schemes. (Cong. Rec. (Mar 20. 2012) S1829).

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