House Committee on Oversight and Government Reform Examines the JOBS Act
AT THIS AFTERNOON’S OVERSIGHT AND GOVERNMENT REFORM COMMITTEE HEARING, members discussed the crowdfunding provisions of the Jumpstart Our Business Startups (JOBS) Act with industry experts, specifically discussing the potential for fraud and exploring ways to stop bad actors.
In his opening statement, Brian Cartwright, Scholar-in-Residence at the University of Southern California, praised Congress for its quick, bipartisan approval of the JOBS Act despite vocal opposition from the Securities and Exchange Commission (SEC). He highlighted recent data that showed the number of publicly traded companies has declined “dramatically” because of a steady decline in initial public offerings (IPOs), and said the JOBS Act could stop this trend. In closing, Cartwright noted that the ultimate success of the legislation depends on the SEC’s rulemakings, and expressed concern about the SEC’s delay in issuing the guidelines set forth by Titles II, III, IV, and VII.
In his opening statement, C. Steven Bradford, Professor of Law, University of Nebraska, praised the crowdfunding provisions in the JOBS Act as an “important first step” in bridging the “small business capital gap.” However, he warned that unless the SEC eases the regulatory burdens of the crowdfunding exemption, small business will be unable to take advantage of its opportunities. In closing, Bradford also said the crowdfunding exemption must be simplified so that small business entrepreneurs can understand it “without hiring an expensive attorney.”
In his opening statement, John Coffee, Jr., Professor of Law at Columbia University Law School, explained how the recent loss of investor confidence could affect the implementation of the JOBS Act. He said retail investor distrust of the IPO process could worsen with an increase in issuers that are allowed to lawfully engage in selective disclosure under the JOBS Act. He also warned members that entrepreneurs may still seek private placement over crowdfunding due to the amount of required disclosures, funding portal registration requirements, and restrictions on compensation and ownership. In closing, Coffee said the implementation of JOBS Act’s rules is likely to be “halting, slow, and punctuated by judicial reversals from time to time.”
In his opening statement, Alon Hillel-Tuch, CEO of RocketHub, praised Title III of the JOBS Act for permitting crowdfunding entrepreneurs to sell stock to their supporters. Despite his support for the legislation, he identified three areas that he hoped the SEC would address as they implement the legislation’s crowdfunding provisions. First, Hillel-Tuch believes that the $500,000 fundraising threshold for requiring audited financial statements should be raised to $1 million because the statements impose a “significant” cost on the entrepreneur. Second, he said the SEC should preserve the current crowdfunding platform fee structure that only seeks payment for successful projects. He also asked that Congress raise the crowdfunding exemption to $5 million to “allow more small businesses who need capital to utilize the cost-effective crowdfunding method.” In closing, Hillel-Tuch dismissed concerns that crowdfunding will lead to fraud, touting the transparency inherent to the process.
Question and Answer
McHenry asked Hillel-Tuch how the “power of the crowd” will prevent crowdfunding fraud. Hillel-Tuch said crowdfunding is “very transparent,” noting the participants’ ability to identify bad actors. He added that because crowdfunding is centralized through a web portal, potential investors can analyze and share their views on offerings, and regulators can provide risk disclosures and investor education, which also reduces the likelihood of fraud. Hillel-Tuch also said that his company expects its portal operators to act as “gatekeepers,” authenticating identities and requiring minimum standards, but noted that access to resources via the internet adequately informs potential investors.
Following up, McHenry asked Bradford why imposing more layers of mandatory disclosures is not the best way to eliminate fraud. Bradford said because crowdfunding offerings are relatively small, and the entrepreneurs are usually inexperienced, extra disclosures become a costly burden that could require the services of a securities lawyer.
McHenry asked the panelists if the SEC holds “too much” discretion over the JOBS Act. All of the panelists agreed that it did, pointing to the SEC’s complete control of the legislation’s rulemaking mandates.
McHenry asked Bradford if this amount of discretion places the viability of crowdfunding at risk. Bradford said the SEC has the potential to write onerous rules that increase costs for smaller companies, making crowdfunding impractical. However, Bradford said he was more concerned with the financial statement disclosure requirements because they place unreasonable demands on smaller companies.
McHenry asked Coffee to explain the consequences if the SEC fails to deregulate general solicitation in a timely manner. Coffee said if solicitation deregulation is delayed, entrepreneurs will continue to opt for private placement instead of the legislation’s more regulated “3b exemption” because most issuers would choose the “way they cannot get sued.” Cartwright added that if the general solicitation rules are not written, the existing system will continue.
McHenry also asked how the crowdfunding section of the JOBS Act could be improved. Cartwright said a simplified version of the crowdfunding title would help, and stressed the importance of cost-benefit analysis in the SEC’s rulemaking process. Hillel-Tuch recommended a transition to a web-based platform and more widespread education about the details of crowdfunding. Bradford said several ambiguities and drafting errors need to be cleared up, and the regulatory burden on smaller offerings needs to be reduced.
Ranking Member Mike Quigley (D-Ill.) noted that many retail investors in the crowdfunding market are less practiced and asked about crowdfunding’s investor protections. Hillel-Tuch said centralized portals encourage standardization of requirements and stressed the importance of investor education. Bradford said some additional regulation, such as a limit on total investment and disclosure requirements, could be beneficial. Cartwright, noting the “alarming amount of low-level fraud,” warned the committee about pre-existing fraud in the market and said the SEC does not have the ability to police these smaller fraud cases.
Rep. Frank Guinta (R-N.H.) asked Coffee if the SEC’s recently instituted cost-benefit analysis techniques will reduce the risk of arbitrary and capricious findings by the courts. Coffee said communication between the SEC and the D.C. Court of Appeals will reduce the high rate of overturned findings. Guinta asked if the SEC has put enough “effort and energy” into economic analysis. Coffee said that while they have “sometimes,” the SEC has “too big of a regulatory burden with too little time to resolve it.”
Guinta also asked about the effects of increasing the IPO shareholder threshold to 2,000. Cartwright said there are “many disadvantages to going public today,” but increasing the threshold could allow companies to strategize IPOs more extensively. Guinta asked if the problem with going public is investor confidence or over-regulation. Cartwright said companies are remaining private as long as they can because they cannot swallow the regulatory costs of becoming publicly traded.
For testimony and a webcast of the hearing, please click here.
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AT THIS AFTERNOON’S OVERSIGHT AND GOVERNMENT REFORM COMMITTEE HEARING, members discussed the crowdfunding provisions of the Jumpstart Our Business Startups (JOBS) Act with industry experts, specifically discussing the potential for fraud and exploring ways to stop bad actors.
In his opening statement, Brian Cartwright, Scholar-in-Residence at the University of Southern California, praised Congress for its quick, bipartisan approval of the JOBS Act despite vocal opposition from the Securities and Exchange Commission (SEC). He highlighted recent data that showed the number of publicly traded companies has declined “dramatically” because of a steady decline in initial public offerings (IPOs), and said the JOBS Act could stop this trend. In closing, Cartwright noted that the ultimate success of the legislation depends on the SEC’s rulemakings, and expressed concern about the SEC’s delay in issuing the guidelines set forth by Titles II, III, IV, and VII.
In his opening statement, C. Steven Bradford, Professor of Law, University of Nebraska, praised the crowdfunding provisions in the JOBS Act as an “important first step” in bridging the “small business capital gap.” However, he warned that unless the SEC eases the regulatory burdens of the crowdfunding exemption, small business will be unable to take advantage of its opportunities. In closing, Bradford also said the crowdfunding exemption must be simplified so that small business entrepreneurs can understand it “without hiring an expensive attorney.”
In his opening statement, John Coffee, Jr., Professor of Law at Columbia University Law School, explained how the recent loss of investor confidence could affect the implementation of the JOBS Act. He said retail investor distrust of the IPO process could worsen with an increase in issuers that are allowed to lawfully engage in selective disclosure under the JOBS Act. He also warned members that entrepreneurs may still seek private placement over crowdfunding due to the amount of required disclosures, funding portal registration requirements, and restrictions on compensation and ownership. In closing, Coffee said the implementation of JOBS Act’s rules is likely to be “halting, slow, and punctuated by judicial reversals from time to time.”
In his opening statement, Alon Hillel-Tuch, CEO of RocketHub, praised Title III of the JOBS Act for permitting crowdfunding entrepreneurs to sell stock to their supporters. Despite his support for the legislation, he identified three areas that he hoped the SEC would address as they implement the legislation’s crowdfunding provisions. First, Hillel-Tuch believes that the $500,000 fundraising threshold for requiring audited financial statements should be raised to $1 million because the statements impose a “significant” cost on the entrepreneur. Second, he said the SEC should preserve the current crowdfunding platform fee structure that only seeks payment for successful projects. He also asked that Congress raise the crowdfunding exemption to $5 million to “allow more small businesses who need capital to utilize the cost-effective crowdfunding method.” In closing, Hillel-Tuch dismissed concerns that crowdfunding will lead to fraud, touting the transparency inherent to the process.
Question and Answer
McHenry asked Hillel-Tuch how the “power of the crowd” will prevent crowdfunding fraud. Hillel-Tuch said crowdfunding is “very transparent,” noting the participants’ ability to identify bad actors. He added that because crowdfunding is centralized through a web portal, potential investors can analyze and share their views on offerings, and regulators can provide risk disclosures and investor education, which also reduces the likelihood of fraud. Hillel-Tuch also said that his company expects its portal operators to act as “gatekeepers,” authenticating identities and requiring minimum standards, but noted that access to resources via the internet adequately informs potential investors.
Following up, McHenry asked Bradford why imposing more layers of mandatory disclosures is not the best way to eliminate fraud. Bradford said because crowdfunding offerings are relatively small, and the entrepreneurs are usually inexperienced, extra disclosures become a costly burden that could require the services of a securities lawyer.
McHenry asked the panelists if the SEC holds “too much” discretion over the JOBS Act. All of the panelists agreed that it did, pointing to the SEC’s complete control of the legislation’s rulemaking mandates.
McHenry asked Bradford if this amount of discretion places the viability of crowdfunding at risk. Bradford said the SEC has the potential to write onerous rules that increase costs for smaller companies, making crowdfunding impractical. However, Bradford said he was more concerned with the financial statement disclosure requirements because they place unreasonable demands on smaller companies.
McHenry asked Coffee to explain the consequences if the SEC fails to deregulate general solicitation in a timely manner. Coffee said if solicitation deregulation is delayed, entrepreneurs will continue to opt for private placement instead of the legislation’s more regulated “3b exemption” because most issuers would choose the “way they cannot get sued.” Cartwright added that if the general solicitation rules are not written, the existing system will continue.
McHenry also asked how the crowdfunding section of the JOBS Act could be improved. Cartwright said a simplified version of the crowdfunding title would help, and stressed the importance of cost-benefit analysis in the SEC’s rulemaking process. Hillel-Tuch recommended a transition to a web-based platform and more widespread education about the details of crowdfunding. Bradford said several ambiguities and drafting errors need to be cleared up, and the regulatory burden on smaller offerings needs to be reduced.
Ranking Member Mike Quigley (D-Ill.) noted that many retail investors in the crowdfunding market are less practiced and asked about crowdfunding’s investor protections. Hillel-Tuch said centralized portals encourage standardization of requirements and stressed the importance of investor education. Bradford said some additional regulation, such as a limit on total investment and disclosure requirements, could be beneficial. Cartwright, noting the “alarming amount of low-level fraud,” warned the committee about pre-existing fraud in the market and said the SEC does not have the ability to police these smaller fraud cases.
Rep. Frank Guinta (R-N.H.) asked Coffee if the SEC’s recently instituted cost-benefit analysis techniques will reduce the risk of arbitrary and capricious findings by the courts. Coffee said communication between the SEC and the D.C. Court of Appeals will reduce the high rate of overturned findings. Guinta asked if the SEC has put enough “effort and energy” into economic analysis. Coffee said that while they have “sometimes,” the SEC has “too big of a regulatory burden with too little time to resolve it.”
Guinta also asked about the effects of increasing the IPO shareholder threshold to 2,000. Cartwright said there are “many disadvantages to going public today,” but increasing the threshold could allow companies to strategize IPOs more extensively. Guinta asked if the problem with going public is investor confidence or over-regulation. Cartwright said companies are remaining private as long as they can because they cannot swallow the regulatory costs of becoming publicly traded.
For testimony and a webcast of the hearing, please click here.