Tuesday, January 21, 2014

House Panel Examines Proposed SEC Regulations Implementing JOBS Act Crowdfunding Provisions

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.