The House Small Business Committee subcommittee on oversight and
regulations examined the SEC proposed regulations implementing the JOBS Act
provisions creating a regulated system for equity-based crowdfunding from
non-accredited investors. Through this Act, said Subcommittee Chair David
Schweikert (R-AZ), Congress intended to lower regulatory barriers in order to
give small companies and startups a larger pool of investors from which to
raise capital. However, continued the Chair, the SEC did not follow this path.
Rather, the SEC issued complicated proposed rules that impose new
compliance, disclosure, and reporting requirements on both small businesses and
the online intermediaries that connect investors and entrepreneurs. Some of
these provisions are extremely costly for small businesses seeking capital from
the crowd, added the Chair. For a startup that has little capital but a
promising idea, he noted, the type of businesses for which crowdfunding was
designed, having to pay tens of thousands of dollars in compliance costs in
order to access capital is an immediate deal-breaker.
Fund Democracy President Mercer Bullard testified that there are
many instances in which the Commission proposes something different from the very specific requirements of the JOBS Act. In some cases,
the Commission asserts the authority
to dilute investor protections,
while in other cases to impose additional burdens on small businesses, and in
each case its approach would contravene specific
directions from Congress.
In his testimony, Daniel Gorfine, Director, Financial Markets
Policy at the Milken Institute urged the
SEC to minimize non-statutory disclosure requirements in order to decrease
costs and allow the development of crowd-driven vetting mechanisms and
criteria. The SEC proposed a number of additional disclosures that go beyond
those required by the JOBS Act. While each one in and of itself appears
reasonable and intended to provide investors with more information, there are
two potential unintended effects.
The first is that in aggregate, together with the statutory
disclosure requirements, and a substantial ongoing annual filing requirement
regardless of the size of the offering, the overall disclosure and compliance
burden for issuers begins to look
significant, especially in light of the relatively small sums of capital
that can be raised under Title III crowdfunding. Given the potentially small
marginal benefit to investors of requiring startup issuers to provide
traditional disclosures required of more mature companies, the additional costs
of more disclosure, and significant ongoing reporting, may not be justified.
The second concern is that
too many requirements will inadvertently give unsophisticated investors an
artificial sense of comfort with an offering and may blunt the development of
crowd-driven investment methods and criteria. Unlike a Reg A filing or a formal
public offering registration, Form C will not be reviewed and approved by the
SEC, and accordingly should not give investors a false sense that the offering
is somehow less risky or not in need of careful vetting.