Senator
Jeff Merkley (D-OR), the author of the JOBS Act crowdfunding Title said that
the SEC proposed regulations implementing the crowdfunding provisions are
seriously flawed and do not properly carry out legislative intent in a number
of areas. In a letter
to SEC Chair Mary Jo White, he said that in some instances the Commission is ignoring
the plain intent of the JOBS Act and proposing the least investor protective
approach possible. For example, the Senator said that permitting a funding
portal to rely on the investor's representations concerning compliance with
investment limits above $2,000 is a recipe for disaster for vulnerable
investors and must be changed.
Self-certification
would permit a single investor to be easily over-exposed to crowdfunding, he
noted, an inherently high risk investment, through what could easily be
check-the-box style agreements. A self-certification approach opens the door to
investors being defrauded across one or more platforms, he cautioned, which is
an especially serious risk in affinity fraud cases. Again, these are precisely
the risks that the Act was intended to prevent.
By
specifically applying the investment caps across all platforms, continued
Senator Merkley, the JOBS Act contemplates the development of a central data
repository, perhaps located at the relevant national securities association,
where platforms can check whether investors are safely within the scope set out
in the Act across the marketplace. He noted that the proposal does not
establish such a repository or set forth any path towards its establishment;
and thus fails to implement the plain meaning of the statutory language.
Testing, supervisory oversight, and other mechanisms to ensure investors are
protected should also be more fully considered.
The SEC’s
approach with respect to net worth and annual income is similarly unacceptable,
said the Senator, since it would put the most vulnerable investors at risk. The
Act was designed to favor investor protections, he pointed out, and the
statutory language gives the Commission a choice of how to interpret it.
Unfortunately, the proposal has chosen to interpret the statute in the least
investor friendly approach, meaning that investors may choose between the
greater of their net worth or annual income for their cap calculation. That is
not consistent with the overall approach of the Act, emphasized Senator
Merkley, who urged the Commission to reconsider its interpretations regarding
investment caps. One of the worst things that could happen to the crowdfunding marketplace,
he posited, would be if ordinary investors lost large amounts on
securities-based crowdfunding in its early days.
The
Senator is also very concerned regarding the lack of robust mandatory corporate
governance provisions. The Commission must do more to ensure fairness, and not
simply the timeliness of financial statements. Under the proposal, an issuer
may use financial statements for the year prior to the most recently completed
fiscal year, provided that the issuer was not otherwise already required to
update the financial statements and updated financial statements are not
otherwise available.
If
more than 120 days have passed since the end of the issuer's most recently
completed fiscal year, the issuer must use financial statements for its most
recently completed fiscal year. While the issuer would be required to include a
discussion of any material changes in the its financial condition of the
issuer, Senator Merkly fears that this could allow issuers to submit financial
statements that are more than a year out of date and that cover only a very
limited portion of the issuer's existence, leaving out what could be critical
information for investors.
The
proposal permits a funding portal to rely on the representations of the issuer
concerning compliance with the Act's requirements unless the intermediary has
reason to question the reliability of those representations. In his view,
permitting a funding portal to rely on the representations of an issuer upends
the statutory design, and in doing so potentially exposes small businesses and
start-ups to increased costs of having to figure out how to comply and also
potentially exposes investors to serious risks from the failure of those small
businesses and start-ups to adequately comply. Such an approach also exposes
the entire crowdfunding marketplace if a reputation for weak compliance or
fraud develops. Instead, the senator urged the Commission to adopt standards
and guidance for what funding portals must do to ensure that an issuer has
satisfied the fairly simple requirements of the Act with respect to the rights
investors have in securities.