HFS Subcommittee Hearing on the JOBS Act
House Financial Services Subcommittee on Capital Markets and Government Sponsored Enterprises
“The JOBS Act at Four: Examining its Impact and Proposals to Further Enhance Capital Formation”
Thursday, April 14, 2016
Key Topics & Takeaways
- Investor Protection: Rep. Carney noted Grigg’s testimony where he said that all companies should be able to file with the SEC confidentially. Beatty commented that allowing confidential filings will present challenges from a regulatory and transparency aspect, but that if done properly, it should not impact investor protection.
- Reg A+: Chairman Garrett commented that the SEC is working on finalizing Reg. A+ and asked what the effect on the Reg. A market will be should state challenges prevail. Keating answered that Reg. A+ has worked because it provides various reliefs from regulation, adding that entrepreneurs are finding funding where they have not been able to before.
- Crowdfunding: Reps. Garrett, Maloney, and Scott asked if the subcommittee should hold off on crowdfunding rules until the SEC’s rules take effect next month. Keating stressed that they should not wait on the SEC, and more growth is “desperately” needed in the country. He added that if there is an opportunity to raise the limit of crowdfunding in Title III, “it is a great idea.” Laws added that online fundraising for accredited investors has been legal since the passing of the JOBS Act.
- Funding Portals: Rep. Hill asked how funding portals may be treated under anti-money laundering (AML). Keating noted his concern with applying AML to funding portals, adding that the Financial Industry Regulatory Authority (FINRA) “said no” but that the Treasury Department is “kicking it around.” He continued that it would be “catastrophic” to apply it to funding portals.
Speakers
- The Honorable Paul S. Atkins, Chief Executive Officer, Patomak Global Partners
- William Beatty, Director, Division of Securities, Washington State Department of Financial Institutions, on behalf of the North American Securities Administrators Association
- Nelson Griggs, Executive Vice President, Global Listing Services, NASDAQ
- Raymond Keating, Chief Economist, Small Business & Entrepreneurship Council
- Kevin Laws, Chief Operating Officer, AngelList
Opening Statements
In his opening statement, Subcommittee Chairman Scott Garrett (R-N.J.) said that the Jumpstart Our Business Startups (JOBS) Act has been a “resounding” success for the U.S. economy and future innovation by empowering entrepreneurs. He continued that while Reg. A+ is only a year old, businesses are already issuing securities under the rule and that companies have raised $50 billion under Reg. D provisions.
Garrett commented that while the JOBS Act has been successful, it “needs a little bit of fixing,” which is why the subcommittee is discussing four proposed bills: H.R. 4850, the Micro Offering Safe Harbor Act; H.R. 4852, the Private Placement Improvement Act of 2016; H.R. 4854, the Supporting America’s Innovators Act of 2016; and H.R. 4855, the Fix Crowdfunding Act.
In her opening statement, Subcommittee Ranking Member Carolyn Maloney (D-N.Y.) noted her concern with H.R. 4850 because it creates three new exemptions on the requirements for registering securities, which she said “blows a hole” in securities law. She continued that securities are being sold with fewer investor protections and questioned whether investors are able to bear the risks of such securities prior to purchasing them. Maloney then questioned why H.R. 4854 raises the threshold for venture capital funds and asked what problem is being solved by the proposed bill.
In his opening statement, Subcommittee Vice Chairman Robert Hurt (R-Va.) stressed that capital formation for small businesses is “critical” to the success of the U.S. economy and how small businesses currently incur obstacles in receiving funding, adding that the four bills up for discussion are a “step in the right direction.”
Testimony
The Honorable Paul S. Atkins, Chief Executive Officer, Patomak Global Partners
In his testimony, Atkins explained that rather than increasing taxes or government spending to spur economic growth, all that is needed is a regulatory environment where small businesses and entrepreneurs can succeed. He continued that while the JOBS Act has helped modernize the regulatory environment, “the job is not done,” adding that the “tragedy” of the Dodd-Frank Act is that it harms consumers, investors and small businesses more than anyone else.
Regarding the proposed bills being discussed, he noted his support for H.R. 4852, as it is “critically important” in removing regulatory uncertainty that holds issuers back from using general solicitation under Rule 506(c), as well as the fact that it contains additional reforms enhancing private securities offerings under this rule. He also expressed his support for H.R. 4855, H.R. 4854, and H.R. 4850. He concluded that the SEC has issued a rule proposal amending Reg. D that undermines the JOBS Act and that the Commission has continued to focus on rules in Dodd-Frank that do not address the causes of the financial crisis, but only add regulatory burden to the economy.
William Beatty, Director, Division of Securities, Washington State Department of Financial Institutions, on behalf of the North American Securities Administrators Association
In his testimony, Beatty discussed his views on the proposed bills and expressed his “serious concerns” with H.R. 4852, which he said limits the SEC from amending Reg. D, adding that Form D is “crucial” to state securities regulators. He also expressed concern over H.R. 4850, claiming that it “is not limited to just micro offerings” and does not disqualify “bad actors” or permit notice of filings to state or federal regulators. Regarding H.R. 4854, Beatty explained that expanding the exemptions in the proposed bill would “undermine important investor protections by allowing more firms to avoid regulatory scrutiny.” Lastly, he explained that there is no data available yet regarding federal crowdfunding or how crowdfunding will work at the state level, adding that there will be data from both the federal and state level in a few years. Beatty concluded by urging Congress “not to mess with” Title III of the JOBS Act, as there will soon be information as to how crowdfunding will be used.
Nelson Griggs, Executive Vice President, Global Listing Services, NASDAQ
In his testimony, Griggs explained that investors are interested in having access to companies during earlier stages of the growth cycle and added that the success of the JOBS Act has helped companies go public. He continued that Congress needs to go “one step further” and allow all companies to file registration statements to the SEC confidentially, as this is the “most successful provision” of the Act. Griggs then explained challenges facing public companies today, to include a “lack of transparency” that inhibits the ability of investors to make investment decisions, in addition to the market not operating in a “fully efficient and fair manner.” Regarding proxy advisory firms, he noted his concern that they do not always conduct standards in a fair manner, and “much more work needs to be done here.” Griggs concluded by supporting the four bills being discussed.
Raymond Keating, Chief Economist, Small Business & Entrepreneurship Council
In his testimony, Keating noted that a challenge for many small businesses continues to be accessing capital, and that there has not been much growth of small business loans over the last decade, stressing that angel investment is a “critical” source of funding for such businesses. He continued that due to Title I of the JOBS Act, emerging growth companies accounted for 86 percent of initial public offerings (IPOs) last year, and that in the first two years of Title II, over 6,000 offerings were conducted. Regarding Title III, Keating explained that since it goes into effect next month, its impact has yet to be seen, but it is estimated the impact on entrepreneurs “will be significant.” He noted his support for each of the four proposed bills, adding that they will “make further headway” in expanding economic opportunities for small businesses and entrepreneurs.
Kevin Laws, Chief Operating Officer, AngelList
In his testimony, Laws discussed his support for the proposed bills, including H.R. 4854, as the increase in the investor cap would help capital formation while maintaining “reasonable” limits. He continued that H.R. 4855 “takes experience from the real world” and adds additional measure to ensure crowdfunding does not become onerous, to include portals having increased leeway as to who can be included. Regarding H.R. 4852, Laws concluded that changes to Reg. D made by the SEC would be “very impractical for startups,” and that the proposed bill clarifies the methods the SEC can use to update the regulation.
Question & Answer
Investor Protections
Garrett asked the panel if the proposed bills will enhance investor protection. Atkins replied that the SEC has shown that there has been no fraud coming out of the JOBS Act or Rule 506, adding that the bills are not advancing investor protection. Griggs noted that NASDAQ has not been involved in Reg. D Rule 506 offerings and that he has not found that investor protection has been harmed by the bills.
Maloney asked if investor protections are onerous for companies and preventing them from raising capital. Beatty explained that one of the features of H.R. 4852 is requiring only one filing of Form D, adding that state securities regulators look at the data provided on Form D and that investors already contact them if they are solicited.
Rep. John Carney (D-Del.) noted Grigg’s testimony where he said that all companies should be able to file with the SEC confidentially. Beatty commented that allowing confidential filings will present challenges from a regulatory and transparency aspect, but that if done properly, it should not impact investor protection.
Rep. Stephen Lynch (D-Mass.) asked if there is a penalty for not filing Form D, to which Beatty answered that it is not widely regarded as an essential form to file and often not filed, but added that Rule 506 comes up as the second most frequently reported fraudulent scheme by securities regulators.
Rep. Brad Sherman (D-Calif.) noted that Reg. D “made sense” back in 1982, therefore it “cannot make sense now,” and asked what limits there should be today. Beatty explained that he has “long advocated” for indexing the amounts for inflation, as well as other ideas, such as questioning whether income or net worth is an appropriate standard.
Reg. A+
Garrett commented that the SEC is working on finalizing Reg. A+ and asked what the effect on the Reg. A market will be should state challenges prevail. Keating answered that Reg. A+ has worked because it provides various reliefs from regulation, adding that entrepreneurs are finding funding where they have not been able to before.
Rep. Luke Messer (R-Ind.) asked if the new threshold has been enough to entice companies to use Reg. A offerings, and what increasing access to Reg. A offerings would mean for companies looking to raise capital. Keating noted that he has seen “positive results” with Reg. A+. Atkins added that the main impact on the regulations and cost is ultimately on consumers and employees of the U.S.
Messer then noted that the SEC is required to review the Reg. A+ threshold every few years, and asked what the most appropriate threshold is. Atkins replied that SEC Chair Mary Jo White spoke on Reg. A+ at the end of 2015 regarding the increasing number of registrations under it, but “there is a long way to go.”
Crowdfunding
Garrett, Maloney, and Rep. David Scott (D-Ga.) asked if the subcommittee should hold off on crowdfunding rules until the SEC’s rules take effect next month. Keating stressed that they should not wait on the SEC, and more growth is “desperately” needed in the country. He added that if there is an opportunity to raise the limit of crowdfunding in Title III, “it is a great idea.” Laws added that online fundraising for accredited investors has been legal since the passing of the JOBS Act.
Rep. Randy Neugebauer (R-Texas) asked whether crowdfunding is appropriate for investors, to which Keating replied that investors are warned of the risks involved with crowdfunding.
Micro Offering
Maloney asked Beatty if his view on H.R. 4850 would change if a company had to comply with all three requirements found in the bill in order to take advantage of the relief. Beatty replied that Rule 504 “has been around for decades” and already accomplishes the task, adding that the majority of states have specific small offering exemptions for raising capital.
Rep. Ed Royce (R-Calif.) explained that H.R. 4850 appropriately scales federal rules and regulatory compliance to small businesses pursuing capital, and asked how it will help startups looking for investments. Keating replied that “it all comes down to cost,” and that whenever an avenue is opened through reduced costs for entrepreneurs to access capital, it is a “positive development.”
Angel Investment
Rep. Patrick McHenry (R-N.C.) asked what dynamics are causing angel investment to continue to be “sluggish.” Keating replied that issues on the public policy front and regulations must be looked at, as well as how much uncertainty and costs are created by such issues.
Initial Public Offerings
Rep. Ann Wagner (R-Mo.) asked what the most important steps that should be taken to build on the success of IPOs. Griggs stressed the importance of focusing on the challenges faced once a company goes public, as well as additional transparency on proxy firms, as companies need to understand who their investors are.
Funding Portals
Rep. French Hill (R-Ark.) asked how funding portals may be treated under anti-money laundering (AML). Keating noted his concern with applying AML to funding portals, adding that the Financial Industry Regulatory Authority (FINRA) “said no” but that the Treasury Department is “kicking it around.” He continued that it would be “catastrophic” to apply it to funding portals.
Regulatory Burdens
Messer asked how regulatory burden impacts small businesses looking for capital and who receives the greatest compliance costs within the current regulatory regime. Atkins replied that community banks are “being squeezed” by regulations and that Main Street businesses and investors will receive the greatest compliance costs.
For more information on this hearing, please click here.
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House Financial Services Subcommittee on Capital Markets and Government Sponsored Enterprises
“The JOBS Act at Four: Examining its Impact and Proposals to Further Enhance Capital Formation”
Thursday, April 14, 2016
Key Topics & Takeaways
- Investor Protection: Rep. Carney noted Grigg’s testimony where he said that all companies should be able to file with the SEC confidentially. Beatty commented that allowing confidential filings will present challenges from a regulatory and transparency aspect, but that if done properly, it should not impact investor protection.
- Reg A+: Chairman Garrett commented that the SEC is working on finalizing Reg. A+ and asked what the effect on the Reg. A market will be should state challenges prevail. Keating answered that Reg. A+ has worked because it provides various reliefs from regulation, adding that entrepreneurs are finding funding where they have not been able to before.
- Crowdfunding: Reps. Garrett, Maloney, and Scott asked if the subcommittee should hold off on crowdfunding rules until the SEC’s rules take effect next month. Keating stressed that they should not wait on the SEC, and more growth is “desperately” needed in the country. He added that if there is an opportunity to raise the limit of crowdfunding in Title III, “it is a great idea.” Laws added that online fundraising for accredited investors has been legal since the passing of the JOBS Act.
- Funding Portals: Rep. Hill asked how funding portals may be treated under anti-money laundering (AML). Keating noted his concern with applying AML to funding portals, adding that the Financial Industry Regulatory Authority (FINRA) “said no” but that the Treasury Department is “kicking it around.” He continued that it would be “catastrophic” to apply it to funding portals.
Speakers
- The Honorable Paul S. Atkins, Chief Executive Officer, Patomak Global Partners
- William Beatty, Director, Division of Securities, Washington State Department of Financial Institutions, on behalf of the North American Securities Administrators Association
- Nelson Griggs, Executive Vice President, Global Listing Services, NASDAQ
- Raymond Keating, Chief Economist, Small Business & Entrepreneurship Council
- Kevin Laws, Chief Operating Officer, AngelList
Opening Statements
In his opening statement, Subcommittee Chairman Scott Garrett (R-N.J.) said that the Jumpstart Our Business Startups (JOBS) Act has been a “resounding” success for the U.S. economy and future innovation by empowering entrepreneurs. He continued that while Reg. A+ is only a year old, businesses are already issuing securities under the rule and that companies have raised $50 billion under Reg. D provisions.
Garrett commented that while the JOBS Act has been successful, it “needs a little bit of fixing,” which is why the subcommittee is discussing four proposed bills: H.R. 4850, the Micro Offering Safe Harbor Act; H.R. 4852, the Private Placement Improvement Act of 2016; H.R. 4854, the Supporting America’s Innovators Act of 2016; and H.R. 4855, the Fix Crowdfunding Act.
In her opening statement, Subcommittee Ranking Member Carolyn Maloney (D-N.Y.) noted her concern with H.R. 4850 because it creates three new exemptions on the requirements for registering securities, which she said “blows a hole” in securities law. She continued that securities are being sold with fewer investor protections and questioned whether investors are able to bear the risks of such securities prior to purchasing them. Maloney then questioned why H.R. 4854 raises the threshold for venture capital funds and asked what problem is being solved by the proposed bill.
In his opening statement, Subcommittee Vice Chairman Robert Hurt (R-Va.) stressed that capital formation for small businesses is “critical” to the success of the U.S. economy and how small businesses currently incur obstacles in receiving funding, adding that the four bills up for discussion are a “step in the right direction.”
Testimony
The Honorable Paul S. Atkins, Chief Executive Officer, Patomak Global Partners
In his testimony, Atkins explained that rather than increasing taxes or government spending to spur economic growth, all that is needed is a regulatory environment where small businesses and entrepreneurs can succeed. He continued that while the JOBS Act has helped modernize the regulatory environment, “the job is not done,” adding that the “tragedy” of the Dodd-Frank Act is that it harms consumers, investors and small businesses more than anyone else.
Regarding the proposed bills being discussed, he noted his support for H.R. 4852, as it is “critically important” in removing regulatory uncertainty that holds issuers back from using general solicitation under Rule 506(c), as well as the fact that it contains additional reforms enhancing private securities offerings under this rule. He also expressed his support for H.R. 4855, H.R. 4854, and H.R. 4850. He concluded that the SEC has issued a rule proposal amending Reg. D that undermines the JOBS Act and that the Commission has continued to focus on rules in Dodd-Frank that do not address the causes of the financial crisis, but only add regulatory burden to the economy.
William Beatty, Director, Division of Securities, Washington State Department of Financial Institutions, on behalf of the North American Securities Administrators Association
In his testimony, Beatty discussed his views on the proposed bills and expressed his “serious concerns” with H.R. 4852, which he said limits the SEC from amending Reg. D, adding that Form D is “crucial” to state securities regulators. He also expressed concern over H.R. 4850, claiming that it “is not limited to just micro offerings” and does not disqualify “bad actors” or permit notice of filings to state or federal regulators. Regarding H.R. 4854, Beatty explained that expanding the exemptions in the proposed bill would “undermine important investor protections by allowing more firms to avoid regulatory scrutiny.” Lastly, he explained that there is no data available yet regarding federal crowdfunding or how crowdfunding will work at the state level, adding that there will be data from both the federal and state level in a few years. Beatty concluded by urging Congress “not to mess with” Title III of the JOBS Act, as there will soon be information as to how crowdfunding will be used.
Nelson Griggs, Executive Vice President, Global Listing Services, NASDAQ
In his testimony, Griggs explained that investors are interested in having access to companies during earlier stages of the growth cycle and added that the success of the JOBS Act has helped companies go public. He continued that Congress needs to go “one step further” and allow all companies to file registration statements to the SEC confidentially, as this is the “most successful provision” of the Act. Griggs then explained challenges facing public companies today, to include a “lack of transparency” that inhibits the ability of investors to make investment decisions, in addition to the market not operating in a “fully efficient and fair manner.” Regarding proxy advisory firms, he noted his concern that they do not always conduct standards in a fair manner, and “much more work needs to be done here.” Griggs concluded by supporting the four bills being discussed.
Raymond Keating, Chief Economist, Small Business & Entrepreneurship Council
In his testimony, Keating noted that a challenge for many small businesses continues to be accessing capital, and that there has not been much growth of small business loans over the last decade, stressing that angel investment is a “critical” source of funding for such businesses. He continued that due to Title I of the JOBS Act, emerging growth companies accounted for 86 percent of initial public offerings (IPOs) last year, and that in the first two years of Title II, over 6,000 offerings were conducted. Regarding Title III, Keating explained that since it goes into effect next month, its impact has yet to be seen, but it is estimated the impact on entrepreneurs “will be significant.” He noted his support for each of the four proposed bills, adding that they will “make further headway” in expanding economic opportunities for small businesses and entrepreneurs.
Kevin Laws, Chief Operating Officer, AngelList
In his testimony, Laws discussed his support for the proposed bills, including H.R. 4854, as the increase in the investor cap would help capital formation while maintaining “reasonable” limits. He continued that H.R. 4855 “takes experience from the real world” and adds additional measure to ensure crowdfunding does not become onerous, to include portals having increased leeway as to who can be included. Regarding H.R. 4852, Laws concluded that changes to Reg. D made by the SEC would be “very impractical for startups,” and that the proposed bill clarifies the methods the SEC can use to update the regulation.
Question & Answer
Investor Protections
Garrett asked the panel if the proposed bills will enhance investor protection. Atkins replied that the SEC has shown that there has been no fraud coming out of the JOBS Act or Rule 506, adding that the bills are not advancing investor protection. Griggs noted that NASDAQ has not been involved in Reg. D Rule 506 offerings and that he has not found that investor protection has been harmed by the bills.
Maloney asked if investor protections are onerous for companies and preventing them from raising capital. Beatty explained that one of the features of H.R. 4852 is requiring only one filing of Form D, adding that state securities regulators look at the data provided on Form D and that investors already contact them if they are solicited.
Rep. John Carney (D-Del.) noted Grigg’s testimony where he said that all companies should be able to file with the SEC confidentially. Beatty commented that allowing confidential filings will present challenges from a regulatory and transparency aspect, but that if done properly, it should not impact investor protection.
Rep. Stephen Lynch (D-Mass.) asked if there is a penalty for not filing Form D, to which Beatty answered that it is not widely regarded as an essential form to file and often not filed, but added that Rule 506 comes up as the second most frequently reported fraudulent scheme by securities regulators.
Rep. Brad Sherman (D-Calif.) noted that Reg. D “made sense” back in 1982, therefore it “cannot make sense now,” and asked what limits there should be today. Beatty explained that he has “long advocated” for indexing the amounts for inflation, as well as other ideas, such as questioning whether income or net worth is an appropriate standard.
Reg. A+
Garrett commented that the SEC is working on finalizing Reg. A+ and asked what the effect on the Reg. A market will be should state challenges prevail. Keating answered that Reg. A+ has worked because it provides various reliefs from regulation, adding that entrepreneurs are finding funding where they have not been able to before.
Rep. Luke Messer (R-Ind.) asked if the new threshold has been enough to entice companies to use Reg. A offerings, and what increasing access to Reg. A offerings would mean for companies looking to raise capital. Keating noted that he has seen “positive results” with Reg. A+. Atkins added that the main impact on the regulations and cost is ultimately on consumers and employees of the U.S.
Messer then noted that the SEC is required to review the Reg. A+ threshold every few years, and asked what the most appropriate threshold is. Atkins replied that SEC Chair Mary Jo White spoke on Reg. A+ at the end of 2015 regarding the increasing number of registrations under it, but “there is a long way to go.”
Crowdfunding
Garrett, Maloney, and Rep. David Scott (D-Ga.) asked if the subcommittee should hold off on crowdfunding rules until the SEC’s rules take effect next month. Keating stressed that they should not wait on the SEC, and more growth is “desperately” needed in the country. He added that if there is an opportunity to raise the limit of crowdfunding in Title III, “it is a great idea.” Laws added that online fundraising for accredited investors has been legal since the passing of the JOBS Act.
Rep. Randy Neugebauer (R-Texas) asked whether crowdfunding is appropriate for investors, to which Keating replied that investors are warned of the risks involved with crowdfunding.
Micro Offering
Maloney asked Beatty if his view on H.R. 4850 would change if a company had to comply with all three requirements found in the bill in order to take advantage of the relief. Beatty replied that Rule 504 “has been around for decades” and already accomplishes the task, adding that the majority of states have specific small offering exemptions for raising capital.
Rep. Ed Royce (R-Calif.) explained that H.R. 4850 appropriately scales federal rules and regulatory compliance to small businesses pursuing capital, and asked how it will help startups looking for investments. Keating replied that “it all comes down to cost,” and that whenever an avenue is opened through reduced costs for entrepreneurs to access capital, it is a “positive development.”
Angel Investment
Rep. Patrick McHenry (R-N.C.) asked what dynamics are causing angel investment to continue to be “sluggish.” Keating replied that issues on the public policy front and regulations must be looked at, as well as how much uncertainty and costs are created by such issues.
Initial Public Offerings
Rep. Ann Wagner (R-Mo.) asked what the most important steps that should be taken to build on the success of IPOs. Griggs stressed the importance of focusing on the challenges faced once a company goes public, as well as additional transparency on proxy firms, as companies need to understand who their investors are.
Funding Portals
Rep. French Hill (R-Ark.) asked how funding portals may be treated under anti-money laundering (AML). Keating noted his concern with applying AML to funding portals, adding that the Financial Industry Regulatory Authority (FINRA) “said no” but that the Treasury Department is “kicking it around.” He continued that it would be “catastrophic” to apply it to funding portals.
Regulatory Burdens
Messer asked how regulatory burden impacts small businesses looking for capital and who receives the greatest compliance costs within the current regulatory regime. Atkins replied that community banks are “being squeezed” by regulations and that Main Street businesses and investors will receive the greatest compliance costs.
For more information on this hearing, please click here.